Acca Ma f2 Exam Kit

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ACCA MA F2 Exam kit
Management Accounting (Association of Chartered Certified Accountants)
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Question Bank
ACCA
Management Accounting (MA)
From September 2020

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ii I n t ro d u c t i on A C C A MA Q ue s t ion Ba nk
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© First Intuition Ltd, 2020
ARPIL 2020 RELEASE

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A C C A MA Q ue s t ion Ba nk I n t ro d u c t i on iii
How to use this Question Bank
1 QUESTION PRACTICE IS KEY TO SUCCESS

This Question Bank has been written to help you pass Paper MA Management Accounting.
Targeted question practice
In the first section there are banks of questions based around each chapter of the Course Notes. The
number of questions reflects the weighting of the topic to the syllabus. You should attempt to do all
the questions before attempting the mock assessments at the end.
Do the practice exam and the mock assessments
The importance of question practice cannot be underestimated and you should attempt the mocks
under assessment conditions. For this paper you have two hours to answer 35 questions in section A
and all three questions in section B. It is vital you stick to the time allocation and answer every question.
The types of question that may be included are as follows:
OT MTQ
Multiple Choice You are required to choose one answer from a list of options by  
clicking on the appropriate radio button
Multiple Response You are required to select more than one response from the  
options provided by clicking the appropriate tick boxes
Multiple Response You are required to select a response to a number of related  
Matching statements by clicking on the radio button which corresponds
to the appropriate response for each statement
Number Entry You are required to key in a numerical response to the question  
Gapfill You are required to enter answers into blank areas  
Hot Spot You are required to choose one or more answers by clicking on  
the appropriate hotspot area/ areas on an image
Each of the above types of question are included in this Question Bank.

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iv I n t ro d u c t i on A C C A MA Q ue s t ion Ba nk
Contents
Number of Page ref
Topic questions Q A
Chapter 1: Management accounting and information

Objective test questions 30
Accounting for management 1-2 1 119
Planning, decision-making and control 3 1 119
Data and information 4-9 1 119
Sampling 10-12 2 120
Presenting information 13-30 3 120
Chapter 2: Statistical techniques

Statistical techniques 1-21 8 123
Chapter 3: Summarising and analysing data
Expected values 1-11 14 126
Averages and distributions 12-30 17 128
Chapter 4: Costing
Cost classification 1-19 22 133
Cost behaviour 10-27 24 134
Cost coding 28 28 136
Cost measurement 29 28 136
Management of business units 30 28 136
Chapter 5: Accounting for materials

Accounting for materials 1-30 29 137
Chapter 6: Accounting for labour

Accounting for labour 1-7 34 142
Chapter 7: Accounting for overheads

Accounting for overheads 1-30 36 144
Chapter 8: Absorption and marginal costing

Absorption and marginal costing 1-18 44 148
Chapter 9: Process costing

Process costing 1-30 48 152

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A C C A MA Q ue s t ion Ba nk I n t ro d u c t i on v
Number of Page ref

Topic questions Q A
Chapter 10: Other costing techniques

Job and batch costing 1-8 55 159
Service and operation costing 9-13 57 161
Alternative cost accounting approaches 14-19 58 161
Chapter 11: Nature and purpose of budgeting

Nature and purpose of budgeting 1-2 59 163
Budgetary control and reporting 3 59 163
Behavioural aspects of budgeting 4 59 163
Flexible budgets 5-9 59 163
Multi task questions
1 Alanowl 61 165
2 Worsley Ltd 62 165
Chapter 12: Budget preparation

Budget preparation 1-16 64 167
Capital budgeting 17 67 169
Multi task question
1 Moonstar 68 169
Chapter 13: Discounted cash flow

Discounted cash flow 1-16 70 170
Chapter 14: Investment appraisal

Investment appraisal 1-18 73 173
1 Maurice Ltd 77 176
2 Edrich Ltd 78 177
Chapter 15: Material and labour variances

Standard costing systems 1-9 80 178
Variance calculations 10-36 82 179
Causes of variances 37-40 87 182
Chapter 16: Other variances

Variance calculations 1-25 89 184
Causes of variances 26-27 94 188
Multi task question
1 Cuddlyfud 94 188

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vi I n t ro d u c t i on A C C A MA Q ue s t ion Ba nk
Number of Page ref

Topic questions Q A
Chapter 17: Variance review and control

Reconciliation of budgeted and actual profit 1 96 189
Cost control and reduction 2-3 96 189
1 Henry 97 189
2 Edted 99 190
3 Wakeuup 100 191
4 Harvey hedge 102 193
Chapter 18: Financial performance measures

Performance measurement overview 1-2 104 193
Financial measures 3-30 104 193
1 Oldted 109 198
2 Loxwood Foods 110 198
Chapter 19: Non-financial performance measures and

performance reporting
1 Objective test questions 10
Non-financial measures 1 112 200
Balanced scorecard 2 112 200
Activity, efficiency and capacity ratios 3-5 112 200
Process and job performance measurement 6 113 200
Non-profit seeking and public sector organisations 7 113 201
Manufacturing and service businesses 8 113 201
Benchmarking 9 113 201
Performance reports 10 114 201
1 Fuzzy Limited 114 201
2 Broadbridge Clinics Ltd 116 202
3 Sydney Darwin Limited 117 203
Practice exam
Full exam 205 217
Formulae and tables 227
Mock exams
Full exams to practise are provided. Question practice, under assessment conditions, is vital to
passing this exam.

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A C C A MA Q ue s t ion Ba nk I n t ro d u c t i on vii
ACCA Specimen paper

It is vital that you try the computer based specimen exam on the ACCA website. The specimen uses
the software that you will meet in your real exam and you must be familiar with it. You will find it on
the ACCA website: www.accaglobal.com
The ACCA also provide some additional constructed response questions. We strongly suggest you
attempt these.

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viii I n t ro d u c t i on A C C A MA Q ue s t ion Ba nk

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A C C A MA 1: M an ag e me n t ac c o u n ti n g a n d i n fo rmat i o n 1
Objective test questions

Accounting for management
1 The following statements relate to management accounts:
I They are used to aid planning, control and decision making
II They must be produced in a prescribed format
III There is a legal requirement for most companies to produce them annually
Which of the above statements are true?
 I only
 I and III
 I, II and III
 II and III
2 Cost accounting and management accounting are items which are interchangeable.
Is this answer TRUE or FALSE?
 True
 False
Planning, decision-making and control

3 Management accounts may be
I a historical record
II a future planning tool
III provided in non-monetary format
 II only
 II and III
 I and II
 I and II and III
Data and information

4 Figures relating to a training organisation are as follows:
% of first time students who passed final exam) 98%

Increase in % of students passing first time since last sitting 2%
Does the figure provide the training organisation with data or information?
Data Information
% of first time students who passed final exams  
Increase in % of students passing first time since last sitting  

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2 1: M an ag e me n t ac c o u n ti n g a n d i n fo rmat i o n A C C A MA
5 Which TWO of the following are limitations of management information in providing guidance
for managerial decision making?
 It is usually based on what has happened in the past
 It does not take account of external factors effecting the business
 It is not set out in a legally prescribed format
 It may be stated in monetary and non-monetary terms
6 Which of the following types of business is LEAST likely to use big data analytics to analyse the
product or service mix it offers?
 A sports equipment shop
 A travel agent
 A local bus company
 A bank
7 Are the following internal or external information sources?
Internal External
Lists of potential customers  
Current exchange rate  
Weekly sales figures  
Inflation rate  
8 Which THREE of the following are limitations of information found on the internet?
 The information may not be tailored for the exact purpose for which it is required
 There is so much information that there is a danger of information overload
 The information is cheap and easy to acquire
 The source of the information may not be reliable
9 Which of the following statements are correct?

I Strategic information is mainly used by senior management in an organisation
II Productivity measurements are examples of tactical information
III Operational information is required frequently by its main users
Select one:
 I, II and III
 I and II
 I and III
Sampling
10 A sample is acquired by taking every nth item in the sampling frame. This is an example of
 Random sampling
 Systematic sampling
 Cluster sampling
 Quota sampling

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11 Which of the following BEST describes cluster sampling?

 The sampling frame is divided into non overlapping groups and random units are selected
from each group
 The population is divided into groups and then all units within randomly selected groups
are taken
 A sample of ‘X’ units is taken from the sampling frame
 The population is divided into groups and then a number of the units within these groups
are selected at random
12 Identify the sampling method being used in each of the cases below.
Stratified
Random Multistage Systematic
A number of UK universities are selected and then all   
girls in the selected university are selected
10 children are randomly chosen from each year   
group in a School
Every 100th person to enter a supermarket is   
selected on a given day
Presenting information
13 Which section of a report sets out the purpose of the report?
 Contents
 Terms of reference
 Recommendations
 Appendices
Use the following information to answer the next six questions.

The following information relates to the free newspapers that a sample of 200 people read in the city
of Leochester.
Men surveyed Women surveyed Total
Post 23 24 47
News 41 34 75
Chronicle 13 23 36
Press 17 25 42
94 106 200
14 Which is the most popular newspaper amongst women?

 Post
 News
 Chronicle
 Press

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15 To the nearest whole per cent, what percentage of men read the Post?
16 What number of women surveyed do not read the News or the Chronicle?
17 What percentage of people does not read the Press?
18 To the nearest whole %, what percentage of the Chronicle’s readership is male?
19 For which paper does the percentage of men and women reading the paper differ the most?
 Post
 News
 Chronicle
 Press
Use this diagram to answer the next four questions.

The following graph shows the pass rates for the Tax and Law exams for an accountancy qualification:
Tax Law
20X0 36% 61%
20X1 38% 49%
20X2 51% 55%
20X3 41% 54%
70%
60%
50%
40%
Tax
30% Law
20%
10%
0%
20X0 20X1 20X2 20X3

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20 In which year was the difference in the percentage pass rate between the two papers the greatest?
 20X0
 20X1
 20X2
 20X3
21 For both papers combined, in what percentage of sittings was the pass rate over 50%?
22 In how many years did the pass rate for Law fail to reach 60%?
years
23 In which year was the pass rate for Tax the lowest?
 20X0
 20X1
 20X2
 20X3
24 On a scattergraph illustrating fixed and variable cost, what does the figure a represent?
 Total cost
 Fixed cost
 Variable cost per unit
 Production

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Use this diagram to answer the next five questions.

The following diagram illustrates the percentage of viewers for four popular television programmes
that are broadcast at 8pm on Sunday evening. Assume that the number of male and female viewers is
equal.
Women
Stir
Heward's Way
Gently Gently
Upton Castle
Men
0% 20% 40% 60% 80% 100%
25 Which programme has the largest audience?

 Stir
 Heward’s Way
 Gently Gently
 Upton Castle
26 Which programme is least popular amongst women?

 Stir
 Heward’s Way
 Gently Gently
 Upton Castle
27 The same television company broadcasts Heward’s Way and Gently Gently on different
channels. Has it achieved a greater than 50% share of the male audience?
 Yes
 No
28 Which programme has the least difference in viewer numbers between the male and female
audience?
 Stir
 Heward’s Way
 Gently Gently
 Upton Castle

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29 Advertisers who advertised in the commercial breaks in Upton Castle hoped that it would
achieve a 25% share of total audience. Did it achieve this figure?
 Yes
 No
30 What type of chart is this?
5
4.5
4
3.5
3 Aye
2.5 Bea
2 Cee
1.5
1
0.5
0
Q1 Q2 Q3 Q4
 Simple bar chart

 Multiple bar chart
 Component bar chart
 Ogive

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8 2: St at i s t i c al t e c h n i qu e s A C C A MA

Statistical techniques
1 A price index was established at 20X1 with prices at $400 and the index at 100. By 20X4 the
index stood at 110. Prices increased by 15% in 20X5 and by a further $12 in 20X6. What will be
the level of the index at the end of 20X6 to one decimal place?
2 The linear regression equation for production costs for a business is:
y = 122,000 + 5.3x, where x is the number of units
If production is expected to be 105,000 units in the next quarter the anticipated production
costs are:
3 The following data has been collected about a company’s costs (y) in relation to its output (x)
(x) (y) xy x2 y2
26 6,566 170,716 676 43,112,356
30 6,510 195,300 900 42,380,100
33 6,800 224,400 1,089 46,240,000
44 6,985 307,340 1,936 48,790,225
48 7,380 354,240 2,304 54,464,400
50 7,310 365,500 2,500 53,436,100
231 41,551 1,617,496 9,405 288,423,181
Calculate the correlation coefficient to 3 decimal places.

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A C C A MA 2: St at i s t i c al t e c h n i qu e s 9
4 The following data has been observed in a time series:

Moving
Year Quarter Sales average Centred moving average
$ $ $
1 1 60,000
2 144,000
160,500
3 198,000
163,500
4 240,000
172,500
2 1 72,000
2 180,000
Complete the two missing figures for the four-point (centred) moving averages.
5 The sales of lawnmowers over the last year have been as follows:
Q1 Q2 Q3
Actual units sold 3,180 3,530 3,140
Seasonal variation +180 +230 -460
Using an additive time series model and assuming the trend continues, the trend value for Q4
sales is closest to:
 3,267 units
 3,283 units
 3,900 units
 3,950 units
6 A company uses time series analysis and regression techniques to estimate future sales
demand. Using these techniques, it has derived the following trend equation:
y = 10,000 + 4,200x
where y is the total sales units; and x is the time period
The following seasonal variations apply for each of the quarters (using the multiplicative model):
Quarter Seasonal Variation
1 -15%
2 +20%
3 -10%
4 +5%
Calculate the forecast sales units for period 25, which is in the first quarter of year 5.
units

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7 Which of the following statements is not an accurate statement of the limitations of using time
series or regression analysis for forecasting?
 It assumes that historical trends will continue to apply.
 It assumes that the pattern of seasonal variations will continue.
 The results become less reliable for predictions that are within the range of existing
observations.
 It is less useful for longer term forecasting.
8 The following data can be used in regression analysis to calculate the value of ‘b’ in the equation
y = a + bx, where y = total cost, a = fixed cost and b = variable cost.
n=7
∑ 𝑥𝑥 = 28
∑ 𝑦𝑦 = 112
∑ 𝑥𝑥𝑦𝑦 = 532
∑ 𝑥𝑥 2 = 140
The value of ‘b’ in the equation for total costs y = a + bx is:
9 If the correlation coefficient is 0.81, the coefficient of determination is equal to:

 19.00%
 34.39%
 65.61%
 81.00%
10 A multiplicative model should be assumed. Quarterly sales of Product A in 20X0 are shown in
the following table.
Q1 Q2 Q3 Q4
Sales (units) 3,500 3,300 2,450 3,200
Seasonal variation +40% +10% -30% -20%
The trend value for Q3 sales (in units) is:
units
11 Assuming a multiplicative model, if actual sales in Quarter 1 are 30,000 units and the seasonal
variation for Quarter 1 is -25%, the trend (in units) for Quarter 1 is:
units

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12 Assuming an additive model, the trend equation for forecasting sales is:
Trend = 144,000 + 1,800Q (where Q = Quarter Number)
Quarter 2 has a seasonal adjustment factor of +1,870
The forecast sales (to the nearest thousand units) for Quarter 2 are:
 146,000 units
 147,000 units
 148,000 units
 149,000 units
13 In 20X1, the base year for a price index, the price level was $400. By 20X4 the price level had
risen to 448. What index number would represent the 20X4 level?
14 The quantity sold in a market for a commodity in 20X8 was 513,000 kg. The index number that
corresponded to this quantity was 114. What was the base level of the index (the quantity
where the index = 100)?
kg
15 A spreadsheet is least likely to be used for which of the following tasks?

 Calculation of depreciation
 Writing a memo
 Budget preparation
 Analysis of sales by product
Use the following information to answer the next two questions.

Moonstar Ltd’s results for the second quarter of 20X3 were as follows.
A B C D
1 April May June
2 Sales 68,500 71,250 75,300
3 Cost of sales 54,050 56,120 59,270
4 Gross profit 14,450 15,130 16,030
5 Other operating costs 6,230 6,610 6,920
6 Operating profit 8,220 8,520 9,110
7 Operating profit %
16 What would be the formula for May operating profit?

 =C2 – C3
 =C2 * C3
 =C4 – C5
 =C4*C5

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17 What formula would go in B7?

 =B4/B6*100
 =B6/B4*100
 =B6/B2*100
 =B6/100*B2
18 A company has recorded its total cost for different levels of activity over the last five months as
follows:
Month Activity
level Total cost
Units $
7 300 16,000
8 350 18,500
9 400 21,050
10 420 21,750
11 330 17,800
The equation for total cost is being calculated using regression analysis on the above data. The
equation for total cost is of the general form ‘y=a + bx’ and the value of ‘b’ has been calculated
correctly as $25.00. What is the value of ‘a’?
Select one:
 $9,020
 $10,020
 $11,560
 $12,560
19 If a garden pot cost $20 in 20X8. The price indices are as follows.
 20X7 85
 20X8 92
 20X9 95
 20Y0 101
How much does the pot cost in 20Y0 (to the nearest $0.01)?
20 Regression analysis is being used to find the line of best fit (y = a + bx) from ten pairs of data.
The calculations have been done and the following information is available.
∑x = 420 , ∑y = 350, ∑x2 = 18,800, ∑y2 = 12,245, ∑xy = 15,100
 What is the value of ‘a’ in the equation of the line of best fit? 18.52
 19.27
 20.52
 21.27

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21 The price of the mye was $160 in 20X5 and $189 in 20X6.
What is the simple price index for the mye in 20X6, using 20X5 as a base year?

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14 3: Su mmari s i n g a n d a n a l y s i ng d a t a A C C A MA

Expected values
Use the following data to answer the next two questions.
The matrix shows the various profit outcomes for three projects, X, Y, and Z, depending on whether
the product price is $10 or the product price is $15.
Profit
Project P = $10 P = $15
X 60 80
Y -28 160
Z 40 100
1 Using expected values, which project should be chosen?

 Project X
 Project Y
 Project Z
 It is impossible to say
2 If the two product prices are equally likely to occur, which project should be chosen?
 Project X
 Project Y
 Project Z
 Either Project X or Project Z
3 A company undertook a check of all invoices received from suppliers over a month and
discovered the following error rates:
Number of errors on invoice Number of invoices
0 80
1 65
2 30
3 15
4 10
5 or more 0
The expected number of errors per invoice is

 zero
 0.72
 1.00
 1.05

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A C C A MA 3: Su mma ri s i n g a n d a n a l y s i ng d a t a 15
4 A sandwich salesman wants to determine how many sandwiches to order from the supplier
every day. Daily customer demand could be 20 (30% probability), 30 (20% probability), 40
(35% probability) or 50 (15% probability). The salesman buys the sandwiches for $1 and sells
them for $2.50. Any sandwiches which are not sold have to be thrown away at the end of that
day.
What is the optimum level of sandwiches to order?
 20
 30
 40
 50
5 A museum counts the number of visitors to a particular exhibit over the period of a month and
the results are as follows:
Frequency
Number of visitors (Number of days)
0 – under 100 5
100 – under 200 9
200 – under 300 6
300 – under 400 7
400 – under 500 3
The expected number of visitors is:
6 The most likely value of a series of numerical outcomes is known as the:

 Expected value
 Mean
 Probability
 Standard deviation
7 JAH is planning to produce and sell product MT. It has made the following forecasts about sales
and costs. Production volume will equal sales volume and there will be no inventory.
Sales (units) 30,000 50,000 70,000
Probability 0.1 0.6 0.3
Variable cost per unit $6 $8 $10
Probability 0.2 0.3 0.5
Fixed costs will be $80,000 for the production of up to 40,000 units and $100,000 if production
is greater than 40,000 units. The selling price will be $12 per unit.
What is the expected value of profit next year to the nearest $?

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8 A project is thought to have a 0.6 probability of making a profit of $2,500 and a 0.4 probability
of making a profit of $1,000. Find the change in expected profit if the probabilities actually turn
out to be 0.55 and 0.45 respectively.
 A fall of $75
 A gain of $75
 A fall of $150
 A fall of $225
9 A broker has estimated the profits or losses for a particular investment and their respective
probabilities as follows:
Profit ($000) Probability
–1 0.1
1 0.3
3 0.4
5 0.2
The expected profit ($000) on this investment will be:
 $2,000
 $2,400
 $2,600
 $3,000
10 The results of a random test carried out on 400 boxes of glasses show the number of defective
glasses found per box of six checked.
Number of defective Number of boxes of
glasses per box checked glasses (frequency)
0 316
1 79
2 3
3 1
4 1
5 0
6 0
The expected number of defective glasses per box is (to 2 decimal places):
 0.20
 0.21
 0.22
 0.23

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11 A supermarket chain has 1,000 branches in Europe. The number of visitors to each store is
counted on a particular day and the results are as follows:
Number of visitors to Frequency
store (Number of stores)
0 – under 100 50
100 – under 200 100
200 – under 300 250
300 – under 400 550
400 – under 500 50
The expected number of visitors is:
 295
 300
 305
 310
Averages and distributions

12 Complete the blank in the following definition:
“The is the most frequently occurring item in a population.”
Select the correct option

Average
Median
Mean
Mode

The following represent the number of rejects found each week during a 10-week quality control
process:
1, 3, 5, 2, 2, 6, 1, 3, 4, 2
13 What is the median number of rejects?

 2
 2.5
 2.9
 3
14 In week 11, 1 reject is found.

The new median number of rejects is:
 1
 2
 2.5
 3

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15 The following statistics relate to daily sales of a particular product within a four-week period :
Daily sales ($) Midpoint Number of days f×x
x (f)
0 to <$50 25 2 50
$50 to < $100 75 3 225
$100 to < $150 125 7 875
$150 to < $200 175 12 2,100
$200 to < $250 225 4 900
28 4,150
What is the standard deviation?
Use the following data to answer the following two questions.

The quarterly purchases of material Z are as follows:
Quarter Purchases
(units)
1 80
2 40
3 50
4 20
190
16 What is the variance and the standard deviation?

 The variance is 47.5 and the standard deviation is 21.65
17 What is the coefficient of variation (to the nearest whole %)?
Use the following data to answer the following two questions.

The heights of adult females are normally distributed with a mean of 163 cm and a standard deviation
of 1.5 cm.
18 Clare falls within one standard deviation of the mean. What range of heights does she fall
within?
cm

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19 Jenny is extremely tall and is beyond 3 standard deviations away from the mean. What
percentage of the population is Jenny taller than (to 3 decimal places)?
 49.865%
 50.135%
 99.865%
 99.952%
20 Categorise each of the following data as discrete or continuous:
Discrete Continuous
Time taken by labour – three hours  
Materials used – 5,000 kg  
Output produced – 1,000 units  
21 Which of the following statements about the median is true?

 Some populations can have several medians.
 It gives the expected value of the population.
 It measures dispersion.
 It is the middle point of a population.
22 A charity is analysing donations received from regular donors. It has produced the following
table that shows the mean and standard deviation of donations in the most recent year (20X3)
and three years ago (20X0).
20X3 20X0
$ $
Mean $165 $155
Standard deviation $38 $41
Which of the following statements about this information is correct?
 The standard deviations show that the amounts donated were less variable in 20X3 than
in 20X0.
 The standard deviations show that the average donation has fallen.
 The means show that the average donation has fallen.
 The means show that the amounts donated were less variable in 20X3 than in 20X0.
23 Which of the following sets of data has the widest spread?

A B C D
Mean 125 150 175 200
Standard deviation 20 25 20 25
 Data A
 Data B
 Data C
 Data D

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24 The number of new orders received by five sales staff last week is as follows:
2, 4, 6, 8, 10
The standard deviation of the number of new orders received is
 1.33
 2.83
 6
 8
25 The number of daily complaints to a railway company has an average (arithmetic mean) of
12 and a standard deviation of 3 complaints. The coefficient of variation, measured as a
percentage, is therefore:
 0.25%
 4%
 25%
 400%
26 The number of rejects from 50 samples of the same size is as follows:

Number of rejects in each sample Number of samples (frequency of reject)
0 5
1 10
2 10
3 20
4 5
5 0
The arithmetic mean number of rejects per sample is:
 2.2
 2.4
 3
 20
27 The following statements relate to data analysis:

I 50% of scores are always less than the mean
II The variance measures the average spread of a population
 I only
 II only
 Both I and II
 Neither I nor II
28 Based upon evidence from a number of years, PCM’s sales revenue is believed to be normally
distributed with a mean of $50,000 and a standard deviation of $8,000. The following
calculations have been used to illustrate what these signify:
I $50,000 + (1.65 × $8,000) = $63,200
II $50,000 – (1.65 × $8,000) = $36,800

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Which of the following statements is correct?

 The probability that sales revenue will be greater than $63,200 is 10%.
 The probability that sales revenue will be greater than $36,800 is 80%.
 The probability that sales revenue will be in the range $36,800 to $63,200 is 95%.
 The probability that sales revenue will be in the range $36,800 to $63,200 is 90%.
29 The quarterly sales for Product MWR are as follows:

Quarter Sales (units)
1 500
2 400
3 800
4 200
1,900
The standard deviation is (to 2 decimal places):
30 The number of books read by a group of eight friends in one year was as follows:
2 5 0 3 5 4 4 1
The standard deviation of the number of books read, correct to 1 decimal place, is closest to:

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22 4: Co s t i n g A C C A MA
Chapter 4: Costing

Cost classification
1 An organisation manufactures cars. Are the following production or non-production costs?
Production Non Production

costs costs
Production worker salaries  
Marketing campaign  
Factory electricity bill  
Head office stationary  
2 M Co has just registered a patent and started to make a new product. Which of the following
are direct costs?
 The cost of registering the patent
 Overtime premiums paid, exceptionally, to production factory workers to begin
production
 Material components used to manufacture the new product
 Finance department costs
3 Insurance paid by a manufacturing company on its factory buildings would be classified as:
 Direct cost
 Production overhead cost
 Administration overhead cost
 Selling overhead cost
4 A garage workshop calculates the prices of repairs by adding overheads to the prime cost and
then adding 25% to total costs as a profit mark-up. The repair of the Peugeot was charged out at
$690. Overheads of $69 were incurred.
What is the prime cost of the repair?
5 A firm receives an invoice for using electricity. The invoice contains a service charge and charge
per unit of electricity used. This is an example of what type of cost?
 Semi–variable cost
 Step-cost
 High-low cost
 Fixed cost

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A C C A MA 4: Co s t i n g 23
6 The best definition of a fixed costs are costs which

 remain constant in total when output volume changes
 remain constant when measured per unit of output
 will never increase
 vary substantially in total, from month to month, when production is constant
7 Direct expenses are any expenses which are incurred on a specific product other than direct
material cost and direct labour.
Is the following statement TRUE or FALSE?
 True
 False
8 A company pays $2 per unit as a royalty to the patent holder of a product. This cost would be
classified as a
 Dividend payment
 Production overhead
 Selling overhead
 Prime cost
9 An indirect cost should be coded to:

 A cost object
 A cost unit
 A separate cost centre
 The cost centres that incur the costs

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Cost behaviour
Use the following graphs to answer the next four questions.
Total
cost
A $
Level of activity
Total
cost
$
B
Level of activity
Total
cost
$
C
Level of activity
Total
cost
D $
Level of activity
10 Which graph BEST depicts the behaviour of a variable cost?
11 Which graph BEST depicts the behaviour of a semi variable cost?

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12 Which graph BEST depicts the behaviour of a stepped fixed cost?
13 Which graph BEST depicts the behaviour of a fixed cost?
14 Which of the following statements BEST describes the behaviour of a stepped fixed cost?
 Costs do not change with the level of activity until the activity level exceeds a certain
point. They then increase, but then remain stable again until activity levels exceed
another critical point.
 Costs do not change with the level of activity i.e. they vary with time rather than
production.
 Costs consist of a fixed element plus an additional element that increases on a unit basis
as the level of activity increases.
 Costs with no fixed element which vary as the level of activity varies.
15 A factory incurred total costs at various output levels as follows:

Number of units produced Total cost ($)
9,000 50,000
12,000 59,000
15,000 72,000
19,000 89,000
24,000 110,000
Using the high-low method what is the fixed cost?
16 A factory incurred total costs at various output levels as follows:

10,000 50,000
13,000 64,000
17,000 80,000
21,000 102,000
25,000 95,000
Using the high-low method what is the fixed cost?
 $10,000
 $20,000
 $30,000
 $40,000

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17 What is represented at point K on the scattergraph below?
Cost
Activity level
 Marginal cost
 Variable cost per unit
 Fixed cost
 Step cost
18 A factory employs one supervisor for every 50 employees. What type of cost is the cost of
supervisors’ salaries?
 Fixed
 Variable
 Semi-variable
 Step
19 Which of the following statements is false?

 Variable costs are relevant for decision-making.
 Variable costs vary with a measure of activity.
 Variable costs are only variable in the short-term.
 Variable cost per unit is the same for each unit produced.
20 Which of the following is not a fixed cost?

 Salary of chief executive
 Depreciation of factory building
 Insurance of motor vehicles
 Commission received by sales staff
Use the following information to answer the next two questions

A factory incurred total costs at various output levels as follows:
7,000 58,000
14,000 81,000
18,000 91,000
23,000 104,000
27,000 128,000
Management is aware that fixed costs increase by $12,000 if the number of units produced exceeds 25,000.

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21 What are the variable costs per unit?
22 What are the fixed costs, excluding the $12,000 stepped cost?
Use the following information to answer the next two questions

A factory incurred total costs at various output levels as follows:
4,000 60,000
10,000 108,000
13,000 123,000
17,000 157,000
24,000 195,000
Management is aware that variable costs decrease by $1.50 per unit if the number of units produced
exceeds 20,000.
23 What are the variable costs per unit if production is less than 20,000 units?
24 What are the fixed costs?
25 The firm of solicitors is predicting its total costs for the next period. The past costs have been
recorded at two activity levels.
Number Total
of cases costs
$
Period 1 380 83,275
Period 2 480 92,275
The firm is expecting to have to deal with 750 cases in the next period.
Select one:
 $46,500
 $146,786
 $131,468
 $116,575
26 An organisation manufactures a single product. The total cost of making 4,000 units is $20,000
and the total cost of making 20,000 units is $40,000. Within this range of activity the total fixed
costs remain unchanged. What is the variable cost per unit?

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27 The following data relates to product XL. Expected monthly production is 40,000 units.
$
Labour cost per unit 4
Material cost per unit 3
Variable overhead per unit 2
Fixed overheads per month 10,000
What is the total cost of the budgeted monthly production of the XL?
Cost coding
28 An organisation uses the following codes to classify its costs.
Cost item Code Department Code
Stationery 100100 Head Office HO
Travel costs 100200 Customer services CS
Membership subscriptions 100300 Publishing PB
Teaching TCH
What account code would be used for a membership subscription paid in respect of a member
of the publishing team?
Cost measurement
29 Which of the following is the definition of a cost centre?
 Any activity for which management may require costs to be measured
 A function or location for which costs are ascertained
 Any activity for which cost budgets are prepared
 A unit of production or service for which costs can be measured.
Management of business units

30 Over which of the following is the manager of an investment centre likely to have control?
 Sales prices
 Capital investment
 Apportioned head office costs
 Controllable costs

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A C C A MA 5: A c c o u n t i n g f o r ma t e ri als 29

Accounting for materials
1 24,400 units of product Oh have been ordered from suppliers. There are outstanding customer
orders of 26,700 units. If 30,500 units of Product Oh are currently in inventory, what is the free
inventory?
units
2 Which of the following functions are fulfilled by a Goods Received Note?

 Provides information to update inventory records
 Allows prices charged by supplier to be checked
 Allows quantities delivered by supplier to be checked
 Provides confirmation to supplier that payment has been made for goods
3 An electrical goods retailer sells a popular make of DVD player. The retailer sells 25 DVD players
on average each day and it takes 15 days for the retailer’s supplier to deliver orders for the DVD
player. What is the reorder level for the DVD player?
DVD players
4 Greenwood uses components at the rate of 459 units a month. Greenwood is open 6 days a
week and 51 weeks per year. The supplier takes 5 days to deliver the goods having received an
order. What is the reorder level for the component?
units
5 Which of the following statements about inventories is incorrect?

 Safety inventories are maintained in case there is unexpected demand.
 LIFO is based on the assumption that the oldest units are sold first.
 Daily demand has to be constant for the reorder level to be established by the formula
Lead time in days × Daily demand
 A purchase requisition is completed when more inventory is required.
6 What is the Economic Batch Quantity used for?

 Establishing the quantity to be produced
 Establishing the inventory required for production to take place
 Establishing the reorder level
 Establishing the reorder quantity

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30 5: A c c o u n t i n g f o r mat e ri als A C C A MA
7 The demand for product Why is 600 units per month. The cost of each unit of Why is $25 and
the annual cost of holding an item in inventory is 20% of purchase price. Ordering costs are $40
per order. Calculate the Economic Order Quantity of Why to the nearest unit.
units
8 Dewie Limited uses 20,000 units of component Y during the year. The monthly cost of holding a
unit of Y in inventory is $0.50. Dewie uses the Economic Order Quantity model as a basis for
calculating its orders of Y and the Economic Order Quantity of Y is 1,200 units.
What is the annual holding cost of Y?
9 Edted Limited uses 50,000 units of component W during the year. The annual cost of holding a
unit of W in inventory during the year is $8. Edted uses the Economic Order Quantity model as a
basis for calculating its orders of W and the Economic Order Quantity of W is 1,500 units.
The cost of each order is $180.
What is the total annual cost of W?
10 The materials inventory account for Tigs Limited is as follows:

$ $
Balances b/f 12,000 Work-in-progress 14,000
Purchases 17,000 Losses 1,500
Returns 1,000 Balance c/f 14,500
30,000 30,000
Which of the following statements about this account are definitely true?
 The purchases figure represents the amount paid to suppliers.
 The losses figure includes any inventory that has been written off as obsolete.
 The returns figure is materials returned to suppliers.
 The work-in-progress figure represents materials issued to production.
11 Which of the following is not included in the Economic Order Quantity formula?
 Purchase cost of item
 Quantity demanded
 Costs of keeping item in inventory
 Costs of ordering item from suppliers
12 Which of the following documents is not a document that is sent to, or provided by, a supplier?
 Purchase requisition
 Purchase order
 Delivery note
 Invoice

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13 Could the costs of ordering and holding inventory be fixed or variable or both?
Fixed Variable
Ordering inventory  
Holding inventory  
14 Dandy Limited uses 100,000 units of component Z600 during the year. The annual cost of
holding a unit of Z600 in inventory during the year is $2. The cost of each order is $40.
What is the Economic Order Quantity of Z600?
units
What is the total annual cost of Z600?
15 Herbage Limited uses 45,000 units of component Y300 during the year. The annual cost of
holding a unit of Y300 in inventory during the year is $3. The cost of each order is $50. Herbage
has just been offered a 5% discount on the purchase price of Y300 for orders of more than 2,000
units. The purchase price of one unit is $4.
What is the optimum reorder quantity of Y300?
units
16 Loxwood Limited manufactures components at the rate of 3,000 units a month. It costs $150 to
set up the production line for a new batch. The annual demand for the product is 35,000 units.
The Economic Batch Quantity is 5,000 units.
What is the annual batch set-up cost for Loxwood Limited?
17 Leolion Limited manufactures 18,000 bookcases per annum. It sold 12,000 bookcases last year.
The annual holding cost of 1 bookcase is $10. It costs $50 to set up the machinery for a new
batch. The Economic Batch Quantity is 600 units.
What is the total annual cost for Leolion Limited?

Timted Limited manufactures 150,000 baskets per year. It sold 120,000 baskets last year. The annual
cost of holding one basket is $10. It costs $75 to set up the machinery for a new batch.
18 What is the Economic Batch Quantity for Timted Limited?
units

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19 What is the total annual cost for Timted Limited?
20 FIFO assumes that the oldest items in inventory are issued first.
 True
 False
21 Danlion made purchases and issues of raw materials during the first week of May and had
opening inventory figures on 1 May as follows.
Quantity Purchase cost per unit

$
1 May Opening inventory 200 20
5 May Purchases 600 22
7 May Issues to work-in-progress 400
Which of the following methods will show the lowest figure for cost of materials issued to
work-in-progress?
 FIFO
 LIFO
 AVCO
Use the following information to answer the next six questions.

Puppypup made the following purchases and sales of its most popular item, a large cuddly dog in
October. The value of opening inventory was
Date Quantity Cost/Revenue per unit
000 $
1 Opening inventory 20 15.00
5 Purchases 25 15.50
8 Sales 35 24.00
23 Sales 30 24.00
22 Calculate the value of closing inventory using the FIFO method.
23 Calculate profit for the month using the FIFO method.
24 Calculate the value of closing inventory using the LIFO method.

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25 Calculate profit for the month using the LIFO method.
26 Calculate the value of closing inventory using the average cost method.
27 Calculate profit for the month using the average cost method.
28 A company always determines its order quantity for a raw material by using the Economic Order
Quantity (EOQ). What would be the effect on EOQ and the Total annual holding cost of
inventory of an INCREASE in the cost of ordering a batch of materials?
Higher Lower Unchanged

EOQ   
Annual holding cost   
29 The annual demand for an inventory item is 6,000 units. The cost of placing an order is $60 and
the cost of holding an item in inventory for one year is $15. What is the EOQ to the nearest
unit?
Select one:
 219
 48,000
 75
 155
30 A Goods Received Note is matched against which TWO of the following documents?
 Purchase order
 Supplier’s invoice
 Supplier’s statement
 Stores requisition

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34 6: A c c o u n t i n g f o r l ab ou r A C C A MA

Accounting for labour
Use the following information to answer the next three questions.
In 20X2 Growler Ltd planned to make 50,000 units in 150,000 hours. In the end it made 60,000 units in
175,000 hours.
1 Calculate Growler’s labour efficiency ratio to 1 decimal place
2 Calculate Growler’s labour capacity ratio to 1 decimal place.
3 Calculate Growler’s labour production volume ratio to 1 decimal place.
4 In Furryl Limited’s factory a standard working day is 8 hours. The rate of pay is $12 per hour.
The standard time allowed to produce one unit is 6 minutes and there is a premium at basic
rate of salary of 40% of time saved.
On one day an employee produces 95 units. What is his pay for the day?
 $96.00
 $103.20
 $114.00
 $134.40
5 Which of the following might be costs validly incurred to prevent staff leaving an organisation?
 Training course costs
 Company doctor salary
 Commission to recruitment agency
 Costs of correcting poor work

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A C C A MA 6: A c c o u n t i n g f o r l ab ou r 35
6 Peter works with four other employees in a production process. As an incentive, the team can
be rewarded by a bonus scheme where the team leader receives 40% of any bonus earned in
the team scheme, and the remaining bonus is shared between Peter and the three other
employees.
On Tuesday the team worked 8 hours and produced 126 units. The standard time allowed for
the production of one unit is 5 minutes. The group bonus is payable at $9 per hour on 60% of
the time saved.
What is Peter’s share of the bonus on Tuesday to the nearest cent?
7 Fluff Limited incurred basic pay costs of $60,000 in July. The overtime payments made were
$5,000. 25% of the overtime could be allocated to specific jobs for which customers incurred
the additional costs.
What journal entries would be recorded in July in relation to these costs?
 Debit: Work in Progress Account $60,000, Overtime Premium Account $5,000
Credit: Labour $65,000
 Debit: Work in Progress Account $61,250, Overtime Premium Account $3,750
Credit: Labour $65,000
 Debit: Labour $65,000
Credit: Work in Progress Account $60,000, Overtime Premium Account $5,000
 Debit: Labour $65,000
Credit: Work in Progress Account $61,250, Overtime Premium Account $3,750

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36 7: A c c o u n t i n g f o r o v e rh e ads A C C A MA

Accounting for overheads
1 A business has two production departments (P1 and P2) and two service departments (S1 and
S2). Overhead costs have been apportioned to the departments as follows:
P1 P2 S1 S2
$80,000 $120,000 $9,300 $6,000
S1 is expected to work a total of 50,000 hours for the other departments, split as follows:
Total P1 P2 S2
50,000 hours 30,000 15,000 5,000
S2 is expected to work a total of 70,000 hours for the other departments split as follows:
Total P1 P2 S1
70,000 hours 42,000 21,000 7,000
Using the reciprocal method, what overheads are apportioned to each of the production
departments?
P1 $
P2 $
2 A factory production department budgets the following:

Overhead $80,000
Machine hours 1,000
Direct material costs $10,000
Direct labour hours 20,000
Direct labour cost $150,000
The direct labour cost includes the wages of various employees who earn differing amounts
based on their skills, grade and experience.
True False
As the department appears to be labour intensive, a direct labour  
hour rate would be an appropriate overhead absorption rate
3 A business absorbs production overheads in one of its departments on the basis of direct labour
hours. There were 5,000 budgeted labour hours for the forthcoming period. The fixed
production overhead absorption rate was $3.50 per hour.
During the period the following actual results were recorded:
Actual labour hours 4,000
Fixed production overhead $16,000

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A C C A MA 7: A c c o u n t i n g f o r o v e rh e a ds 37
Which ONE of the following statements is correct?

 Overhead was $1,500 over-absorbed
 Overhead was $2,000 under-absorbed
 Overhead was $3,500 under-absorbed
 Overhead was $3,500 over-absorbed
4 A department absorbs overheads on the basis of machine hours. The budgeted and actual
results of the department were as follows.
Budget Actual
Number of units 20,000 21,000
Machine hours 2 hours a unit 42,000 hours
Overheads $400,000 $410,000
Which of the following statements is correct?
 Overhead was neither over absorbed nor under absorbed
 Overhead was $10,000 under absorbed
 Overhead was $10,000 over absorbed
 Overhead was $20,000 over absorbed
5 A department has over absorbed fixed production overheads in the last month by $4,000. The
fixed production overhead absorption rate, based on a budgeted level of activity of 2,000 units,
was $5 per unit. Actual production was 3,000 units.
What was the actual fixed production overhead incurred in the period?
 $10,000
 $11,000
 $15,000
 $19,000
6 Indicate whether the following statements are true or false of absorption costing:
True False
Only production overheads are allocated/apportioned to cost centres  
Only variable costs are assigned to cost units whilst fixed costs are treated  
as period costs
Service department costs are reapportioned to production centres  
A production overhead associated with a cost centre should be allocated  
to that cost centre
7 Under-absorbed overheads always occurs when:

 Absorbed overheads are lower than budgeted overheads
 Actual overheads are lower than budgeted overheads
 Absorbed overheads are lower than actual overheads
 Absorbed overheads exceed actual overheads

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A production department has the following actual and budgeted data for the last period:
Actual Budgeted
Labour hours 1,000 1,250
Variable production overhead per labour hour $2 $2.50
Fixed production overhead $40,000 $38,000
Overheads are absorbed on the basis of the budgeted number of labour hours and budgeted
expenditure.
8 The fixed production overhead absorbed during the period was:

 $30,400
 $32,900
 $38,000
 $40,000
9 The fixed production overhead absorbed during the period was:

 Under-absorbed by $2,000
 Over-absorbed by $12,000
10 An architectural practice recovers overheads on the basis of chargeable hours spent on each
client. Budgeted overheads for the last period were $195,000. Actual chargeable hours were
4,000 and overheads were over-absorbed by $6,000. Actual overheads were $194,000. What
was the budgeted overhead absorption rate per hour?
 $47 per hour
 $48.50 per hour
 $48.75 per hour
 $50 per hour

A production department, which absorbs overheads on the basis of machine hours, budgeted at a
machine hour absorption rate of $20 per hour. The following data is available:
Actual overhead $410,000
Budgeted overhead $420,000
Actual machine hours 20,000
11 The number of machine hours the department had budgeted to work were:
hours

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12 Overhead was
 $10,000 over-absorbed
 $10,000 under-absorbed
 Neither over nor under-absorbed

$
Budgeted machine hours 48,000
Actual machine hours 46,000
Budgeted overhead 464,640
Actual overhead 460,000
13 What is the machine hour absorption rate?

 $9.58
 $9.68
 $10.10
 $10.00
14 What is the under-/over-absorbed overhead?

15 The following relates to a business which absorbs overhead on the basis of labour hours.
Budget Actual
Direct labour hours 50,000 49,500
Fixed overhead 100,000 98,000
Which of the following statements is true?
 Overheads are under absorbed by $1,000 due to lower than expected labour hours
 Overheads are over absorbed by $1,000 due to lower than expected labour hours
coupled with lower than expected expenditure
 Overheads are under absorbed by $2,000 due to lower than expected expenditure
 Overheads are neither over nor under absorbed

A dental practice absorbs overheads based on the expected number of patients. A rate of $8 per
patient has been calculated for absorbing fixed overheads. The following total overhead expenditure
has been estimated at two activity levels:
Number of patients Total overhead ($)

8,250 100,000
15,250 135,000

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16 What is the estimated level of variable overhead per patient, to the nearest cent?
 $5
 $8.85
 $10
 $12.12
17 What is the estimated fixed overhead?

 $35,000
 $58,750
 $66,000
 $122,000
18 What is the estimated number of patients that will be seen, to the nearest patient?
patients
19 A cost centre has calculated its overhead absorption rate at $11 per direct labour hour based on
estimated direct labour hours of 79,000.
The actual direct labour hours worked last period were 78,500 and the actual overhead incurred
was $861,000. What was the over- or under-absorbed overhead?
20 A company uses the direct method to reapportion service department costs. Use of this method
suggests:
 There are more maintenance than service departments.
 Service departments do not do any work for each other.
 The company uses a single overhead absorption rate.
 There will be no over or under-absorption of overheads.
21 Which of the following would be the most appropriate method for allocating machine
maintenance costs to departments in a factory?
 The number of machines in each department
 The floor area occupied by the machines
 The operating hours of the machines in each department
 The value of the machines in each department

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22 A product requires 5 hours of labour at $12.50 per hour and includes direct expenses of $100.
If Absorption rates are $16.50 per direct labour hour then calculate the total cost per unit.
Select one:
 $189
 $245
 $232.50
 $172.50
23 The following information is available for the two production departments (machining and
assembly) and one service department (the canteen) at a manufacturing company.
Machining Assembly Canteen
Budgeted overheads $25,000 $20,000 $11,000
Number of staff 30 20 5
After reapportionment of the service cost centre costs, what will be the overhead cost of the
assembly department cost centre?
Select one:
 $25,500
 $24,400
 $24,000
 $4,400
24 The production overhead control account for a company is as follows:

$ $
Expenses creditor 86,175 Work in progress 162,200
Wages control 69,985 Profit and loss 4,160
Inventory control 10,200
Total 166,360 Total 166,360
Which of the following statements are correct?

I Indirect materials issued from inventory was $10,200
II Overhead absorbed during the period was $86,175
III Overhead for the period was over absorbed by $4,160
IV Indirect wages cost incurred was $69,985
 I and IV
 I, II and III
 All four statements
 I, III and IV
25 A company has four cost centres:

Process 1 Process 2 Process 3 Process 4
Cost centre A B C D
No of direct employees 4 12 14 Nil
No of indirect employees 2 4 6 8
Overhead allocated $4,480 $9,150 $14,250 $4,200

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The canteen overhead of $40,640 is to be reapportioned on the basis of total number of

employees in each process cost centre. After reapportionment, what is the total overhead
allocated and apportioned to Production cost centre A.
 $2,600
 $4,480
 $4,877
 $9,357
26 A company manufactures two products, X&Y, in a factory divided into two production cost
centres, Assembly and Finishing. The following information is available:
Cost centre Assembly Finishing
Allocated fixed overhead costs $144,000 $82,500
Direct labour minutes per unit
Product X 36 31.25
Product Y 48 30
Budgeted production is 6,000 units of Product X and 7,500 units of Product Y. Fixed overhead
costs are to be absorbed on a direct labour hour’s basis. What is the budgeted fixed overhead
cost per unit for Product Y?
 $12
 $15
 $17
 $18
27 A company uses an overhead absorption rate of $3.20 per machine hour, based on 45,000
budgeted machine hours for the period. During the same period, the actual total overhead
expenditure amounted to $140,875 and 45,500 machine hours were recorded on actual
production. The overheads for the period are (choose one of the below)
 Under absorbed by $4,725
 Over absorbed by $4,725
28 A company’s packing dept has budgeted labour hours of 3,450 and budgeted overhead costs of
$41,400. If the actual hours were 3,320 and the actual overheads were $40,860, the overheads
for the period were:
 Under absorbed by $540
 Over absorbed by $540

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29 The following extract of information is available concerning the four cost centres of X plc:
Cost centre Production Production Production Service
Department Machinery Finishing Assembly Canteen
Number of direct employees 14 12 4
Number of indirect employees 6 4 2 8
Overhead allocated and
apportioned $78,400 $45,840 $25,500 $22,380
Allocation of overheads is based on the total number of employees working in each production
department. After re-apportionment, what will be the total cost of the Finishing Department (to
the nearest $)?
 $45,840
 $50,200
 $54,366
 $68,145
30 What is the journal entry for manufacturing overheads incurred?

 Debit Production Overheads Account Credit Bank and Cash Account
 Debit Bank and Cash Account Credit Production Overheads Account
 Debit Production Overheads Account Credit Work In Progress Account
 Debit Work In Progress Account Credit Production Overheads Account

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44 8: A b s o rp t i o n a nd marg i n al co s t i ng ACCA MA

Absorption and marginal costing
1 Fill in the blank in the following definition.
 is ‘sales value minus variable cost of sales’.
Select an option from the drop down box:

Gross profit
Contribution
Absorption cost profit
Variable cost profit
2 A business makes a single product and has budgeted figures for the next period as follows:
$
Revenue per unit 10
Direct material and direct labour per unit 4
Absorbed fixed overhead per unit 2
Variable overhead per unit 1
What is the budgeted contribution per unit?
 $3
 $4
 $5
 $6
3 Last month a production department had opening inventory of 3,000 units and closing
inventory of 2,500 units. The profit of the department using marginal costing was $40,000. If the
fixed overhead absorption rate was $4 per unit, the profit using absorption costing is:
 $20,000
 $30,000
 $38,000
 $42,000
4 M and Co’s budgets for the last period were

Production 10,000 units
Fixed overhead $200,000
Fixed overheads are absorbed on a per unit basis.
Opening inventory at the start of the period was 500 units and closing inventory was 200 units.
If the profit under marginal costing is $30,000 what is the profit under absorption costing?
 $24,000
 $26,000
 $34,000
 $36,000

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A C C A MA 8: A b s o rp t i o n a nd marg i n al co s t i ng 45
5 In the last period a business sold 5,000 units of product X and its profit using marginal costing
principles was $2,000. If absorption costing had been used, a loss of $10,000 would have arisen.
If the business absorbed fixed production cost was $4 per unit, how many units were produced?
 2,000
 3,000
 6,000
 8,000
6 Last month a business had an absorption costing profit of $80,000. The opening inventory was
1,000 units and the closing inventory was 1,200 units. The fixed production overhead
absorption rate was $3 a unit. What was the profit under marginal costing?
 76,400
 79,400
 80,600
 83,600
7 Last period, a business has an opening inventory of 40,000 units and a closing inventory of
42,000 units. Profits based on marginal costing were $600,000 whilst those based on absorption
costing were $620,000. What was the fixed overhead absorption rate per unit?

The data below relates to a company’s product:
$ per unit
Sales price 100
Direct material 22
Direct labour 10
Variable overhead 8
Fixed overhead absorption rate 15
Last month 9,800 units were sold. Budgeted production for the month was 10,000 units and 10,200
units were actually produced. Actual fixed overhead incurred were $140,000.
8 What is the marginal costing profit?
9 What is the absorption costing profit?

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46 8: A b s o rp t i o n a nd marg i n al co s t i ng ACCA MA

This information relates to each unit of a single business product produced by a company:
Selling price $105
Direct material and direct labour $12
Variable overheads $13
Last period opening inventory was 1,000 units, 10,000 units were produced and 10,200 units were
sold. Fixed overheads incurred were $75,000 and were absorbed over the units of production.
10 What is the marginal costing profit?
11 What is the absorption costing profit?
12 A business had an opening inventory of 1,000 units and a closing inventory of 1,500 units. The
profit using absorption costing was $50,000 and the fixed overhead absorption rate was $12 per
unit. What was the profit under marginal costing?
 $32,000
 $44,000
 $56,000
 $68,000
13 A business has the following budget:

Sales 20,000 units
Fixed production overhead $36,000
The business currently uses absorption costing. What would the effect on profit be, if it were to
use marginal costing instead?
 $4,000 lower
 $4,000 higher
 $48,000 lower
 $48,000 higher
14 K manufactures a single product. The fixed overhead absorption rate was $4 per hour and 3
labour hours were required for each unit manufactured. The opening inventory was 1,500 units
and the closing inventory was 2,000 units. The profit using absorption costing was $25,000.
What was the marginal costing profit?
 $19,000
 $23,000
 $25,000
 $31,000

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15 E Limited’s production budget for its first year of trading, during which 2,500 units are expected
to be manufactured is as follows:
$
Variable production costs 225,000
Fixed production costs 62,500
The unit selling price is $275. Actual sales for the first year were 2,200 units whereas production
was as budgeted. Comparing the profit calculated on an absorption or marginal basis,
absorption costing profit is:
Select one:
 $34,934 lower
 $34,934 higher
 $7,500 lower
 $7,500 higher
16 The following data is available for the period.

Opening inventory 13,500
Closing inventory 16,000
Absorption costing profit $32,750
What would be the profit for the period using marginal costing?
 $35,250
 $30,250
 $36,750
 Not possible to calculate
17 A company manufactures and sells a single product. For this month the budgeted fixed
production overheads are $96,000, budgeted production is 24,000 units and budgeted sales are
23,440 units. The company currently uses absorption costing.
If the company used marginal costing, what would be the EFFECT on the budgeted profit?
 $2,240 higher
 $2,240 lower
 $7,840 higher
 $7,840 lower
18 A company has opening inventory of 27,500 units and closing inventory of 24,500 units. Profits
based on marginal costing are $53,000 and $44,000 based on absorption costing.
What is the fixed overhead absorption rate per unit?

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48 9: P ro c e s s c o st i n g A C C A MA

Process costing
1
True False
Any normal loss in a process account is valued at the same rate as  
good production whilst the abnormal loss is valued at scrap value
If actual output is less than input but more than expected output, an  
abnormal gain occurs
2 M & Co’s production of a single product in a single process results in a 10% normal loss. This loss
can be sold for scrap at $1 per kg. The following information is available for the last period:
Direct materials 50,000 kg $120,000
Direct labour $60,000
Overheads absorbed $20,000
Output 45,000 kg
There was no opening or closing inventory.
What is the value per unit of the output, to the nearest cent?
 $3.90
 $4
 $4.33
 $4.44

M & Co’s production of a single product in a single process results in a 10% normal loss. Without any
further processing, this loss can be sold for scrap at $1.50 per kg. The following information is available
for the last period:
Materials 20,000 kg $40,000
Direct Labour $6,000
Overheads 250% of labour
Output 16,000 kg
There was no opening or closing work in progress.
3 What is the value credited to the process account, to the nearest $, for the scrap value of the
normal loss?
4 What is the value of the abnormal loss, to the nearest $, for the above period?

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A C C A MA 9: P ro c e s s c o st i n g 49
5 What is the value of the output for period, to the nearest $?
6 6,000 kg of material costing $40 a kg were input into a process last period. The normal loss for
the process is 10% and scrapped output can be sold for $10 a kg. 4,000 labour hours were
worked at $10 an hour and there were 5,600 kg of good output. There was no opening or
closing work in progress. What was the value of the good output per unit (to the nearest cent)?
 $49.29
 $50.74
 $51.11
 $51.85

A product goes through two processes. Last month’s data for process two was as follows:
Material transferred from process one 3,200 litres at $5 a litre
Conversion costs 8,500
Output transferred to finished goods 2,800 litres
Closing work in progress 100 litres
Normal loss is 5% of input. All losses are fully processed and have a scrap value of $3 a litre. Closing
work in progress is fully complete for material but is only 20% processed.
7 What is the value of the completed output?
8 What is the value of the closing work in progress (to the nearest cent)?
9 A product passes through two processes. The last period’s details for process two are:
Opening WIP Nil
Materials transferred in from process one 15,000 kg valued at $60,000
Labour and overheads $26,000
Output transferred to finished goods 12,000 kg
Closing WIP 1,000 kg
Normal losses are 10% of input and have a scrap value of $1 per kg.
Closing work in progress is 100% complete for material and 50% complete for labour and
overheads. What was the value of the closing work in progress?
 $4,797
 $4,897
 $5,300
 $5,400

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Product X is made in a single process, The following data relates to the last period:
Opening WIP Closing WIP Units added and costs incurred during
400 units 200 units the period
Material $4,000 100% complete 1,600 units at a cost of $16,000
Labour $5,000 50% complete $18,000
Overhead $1,000 20% complete $4,000
There were no losses during the period. The weighted average method of inventory valuation is used.
10 What is the number of equivalent units to be used when calculating the labour cost per unit?
 1,600
 1,700
 1,900
 2,000
11 What was the value of the units transferred to finished goods?
Use the following information to answer the next five questions.

A product passes through two processes.
Details of the first process were as follows.
Input 12,000 kg
Cost of materials $30,000
Output transferred to Process 2 10,000 kg
Normal loss is 10% of input and has nil scrap value.
Details of the second process for the last period were:
Input transferred from Process 1 10,000 kg
Output transferred to finished goods 8,000 kg
Closing work in progress 1,000kg
Normal loss is 5% of input and has a scrap value of $3 a kg. Closing work in progress is 100% complete
for materials and 50% complete for labour and overheads.
There was no opening work in progress for either process and no closing work in progress for Process 1.
12 What is the quantity of abnormal loss for Process 1?
kg
13 What is the value of the output from Process 1 transferred to Process 2?

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14 What is the monetary value of the output from Process 2 for the period?
15 What is the monetary amount of the abnormal loss for Process 2?
16 What is the monetary value of the closing work in progress?
17 T produces a single product that passes through one process. The details for the process are as
follows:
Material input 25,000 kg @ $3 per kg
Direct labour $29,250
Production overhead $15,125
Normal losses 5% of input
In Period 1 the output was 23,400 kg. Losses can be sold for scrap for $0.50 per kg. There was
no opening and closing work-in-progress.
What is the value of the abnormal loss that would be shown in the process account for Period 1?
 $175
 $1,575
 $1,750
 $1,925
18 A company produces a single product that passes through two processes. The details for
Process 1 are as follows:
Material input 15,000 kg @ $4 per kg
Direct labour 27,400
Production overhead 14,600
Normal losses 10% of input, sold at $0.50 per kg
In period 1 the output from Process 1 was 13,250 kg. There was no opening and closing work-in-
progress.
What is the value of the output to Process 2?
 $99,375
 $100,111
 $100,847
 $101,125

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Use the following information to answer the next four questions.

FT Limited bought 26,000 units of material and produced two joint products, the pye and the mye, and
one by-product, the tye. The tye is produced regularly when material goes through the process.
The materials cost $88,000. The labour costs were $50,000 and the other overheads $39,000.
The process produced 15,000 units of the pye that were sold at $20 per unit and 10,000 units of the
mye that were sold for S40 per unit. The 1,000 units of the tye that were produced are sold for S2
scrap value per unit.
19 What were the costs of the pye, apportioning joint costs using number of units?
20 What were the costs of the mye, apportioning joint costs using number of units?
21 What were the costs of the pye, apportioning joint costs using sales value?
22 What were the costs of the mye, apportioning joint costs using sales value?
23 Which of the following statements is incorrect?

 By-products are sometimes sold as scrap.
 By-products are equivalent to abnormal losses.
 Any proceeds of one-off by-products should be credited to the statement of profit or
loss.
 By-products have relatively low volume compared with other products that are produced
at the same time.
Use the following information to answer the next four questions.

Tomtig Limited produces cleaning fluid using two processes.
At the start of May 20X4 the first process had opening Work-In-Progress of 1,500 units. The materials
included within these units were complete and valued at $50,000. 40% of the conversion costs
consisting of labour and overheads valued at $9,000 had also been charged to these units.
During May 20X4 6,400 units were transferred to the second process. There were no process losses.
$330,000 was spent on materials and $54,000 on conversion costs. At the end of the period closing
Work-In-Progress was 1,100 units. The materials within these units were complete. 30% of the
conversion work had been undertaken.

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24 What is the value of the units transferred out using the weighted average method?
25 What is the value of closing Work-In-Progress using the weighted average method?
26 What is the value of the units transferred out using the FIFO method?
27 What is the value of closing Work-In-Progress using the FIFO method?
28 A company operates a process costing system using the FIFO method. No losses occur in the
process. The following data relates to this month.
Degree of
Units completion
Opening WIP 150 70%
Completed in month 1,000 100%
Closing WIP 200 30%
The cost per equivalent unit of production for this month was $11.00.
What is the value of closing work in progress?
 $495
 $660
 $1,650
 $2,200
29 Two products G and H are created from a joint process. G can be sold immediately after split-
off. H requires further processing before it is in a saleable condition. There are no opening
inventory and no work in progress. The following data are available for the last period.
Total joint production costs $384,000
Further processing costs (Product H) $159,600
Selling Closing
price per Sales inventory
Product unit units units
G $0.84 400,000 12,000
H $1.82 200,000 28,000
Using the physical unit method of apportioning joint production costs, what was the cost value
at arriving at the closing inventory of Product H for the last period?

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Select one:
 $36,400
 $37,530
 $40,264
 $45,181
30 A company which operates a process costing system had work in progress at the start of last
month of 400 units (valued at $1,800) which were 60% complete in respect of all costs.
Last month, a total of 2,500 units were completed and transferred to the finished goods
warehouse. The cost per equivalent unit for cost arising last month was $10. The company uses
the FIFO method of cost allocation.
What was the total value of the 2,500 units transferred as good output to the finished goods
warehouse last month?
 $22,600
 $22,800
 $24,400
 $26,600

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A C C A MA 10: O t h e r c o s t i ng t e c hn i q u e s 55

Job and batch costing
1 A business operates a job costing system. The standard net profit margin for the business is 25%
of sales. The estimated costs for job 200 are as follows:
Direct Materials 2 kg at $5 per kg
Direct Labour 3 hours at $8 per hour
Selling, administration and distribution overheads are budgeted to be $100,000 for the period.
They are recovered on the basis of the period’s total production cost of $500,000.The
production overheads, which are recovered on the basis of a total of 30,000 labour hours are
budgeted to be $200,000.
What price will be quoted to the nearest cent for job 200?
2 The following details relate to job ZX during April. The job was completed at the end of April and
a mark-up of 20% was charged on the costs of the job.
$
Direct costs brought forward 20,000
April transactions
Materials transferred from stores 14,000
Materials transferred from job WW 8,000
Materials transferred to job XV 6,000
Costs of labour 9,000
Costs of production overheads 1,400
What price will be charged at the end of April for job ZX?
 $50,880
 $53,000
 $55,680
 $58,000
3 Which of the following are advantages of adopting a job costing system for the work of internal
service departments?
 Costs will be borne by user departments that incurred them.
 User departments may use service departments more carefully.
 It means that the efficiency of service departments can be measured.
 Budgeting service department expenditure should become easier.

Batch costing is a form of specific order costing where costs are attributed to batches of product
(unit costs can be calculated by dividing by  .)

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56 10: O t h e r c o s t i ng t e c hn i q u e s A C C A MA

the number of batches a batch the number of products in the batch a product

A printing firm is going to offer a flier service to charities in its area. The following costs have been
estimated for a batch of 5,000 leaflets.
Machine set up costs $80
Artwork $25 per order
Paper $22.50 per 1,000 leaflets
Other printing materials $18
Labour 4 hours at $8 per hour
Fixed overheads are $4,500 per annum. They are allocated on the basis of orders received, with the
number of orders received each year expected to be 150.
Management requires 20% profit on selling price.
5 The selling price, to the nearest cent, for an order of 5,000 leaflets, is expected to be:
6 The selling price, to the nearest cent, per 5,000 leaflets, for an order of 20,000 leaflets is
expected to be:
7 TG Co’s costs for job I14 consist of materials and labour, production and non-production
overheads. Job I14’s production overheads were absorbed at a rate of $8 per labour hour, and
non-production overheads were absorbed at a rate of 25% of prime cost. The mark-up on job
I14 was 20%.
Job I14 was billed for $9,000 and took 40 labour hours.
What was the prime cost of job I14?
8 DL Co’s costs for job K16 consist of materials and labour, production and non-production
overheads. Job K16’s production overheads were absorbed at a rate of $12 per labour hour,
and non-production overheads were absorbed at a rate of 50% of prime cost. The margin on
job K16 was 25%.
Job K16 was billed for $12,000 and took 50 labour hours, with labour charged at an hourly rate
of $44 per labour hour.
What was the cost of materials on job K16?

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Service and operation costing

9 Which of the following are characteristics of service costing?
 High levels of direct costs as a proportion of total costs
 Use of composite cost units
 Appropriate cost unit depends on the service offered
 Service offered may be of short or long duration
10 Calculate the most appropriate unit cost for a distribution function of a company using the
following information:
Miles travelled 2,037,000

Tonnes carried 8,798
Number of drivers 67
Hours worked by drivers 124,320
Tonne-kilometres carried 1,200,600
Cost incurred 2,194,900
 $1.08
 $1.83
 $17.66
 $249.48
11 Which of the following would be suitable cost units for a training company?
 Student
 Course
 Lecturer
 Lecturer hour
12 Which of the following would be problems in using a cost per patient day measure to assess the
performance of all the wards in a hospital?
 It does not indicate the quality of care provided.
 It does not include any indication of activity.
 It does not reflect the differing mixes of care required in different types of ward.
 It does not differentiate between the different sizes of wards.
13 Which of the following would be appropriate cost units for a passenger coach company?
I Vehicle cost per passenger-kilometre
II Fuel cost for each vehicle per kilometre
III Fixed cost per kilometre
Select one:
 (I) only
 (I) and (II)
 (I) and (III)
 (II) and (III)

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Alternative cost accounting approaches

14 How is target cost calculated?
 Required selling price – Actual profit margin
 Required selling price – Required profit margin
 Market price – Actual profit margin
 Market price – Required profit margin
15 Are the following statements TRUE or FALSE?

True False
Life cycle costing assesses costs on an accounting period basis.  
Life cycle costing clearly allocates development costs to individual products.  
16 Which of the following would be classified as external failure costs under total quality
management?
 Performance testing
 Re-inspection costs
 Product liability costs
 Costs of repairing items returned from customers
17 Which of the following are true of traditional costing methods?

 They fulfil financial reporting requirements by allocating costs to time periods.
 They differentiate between cost unit-based activities and product differentiating
activities.
 They are suitable for high-volume, repetitive production processes.
 They focus on product development, where the majority of costs are incurred.
18 At which stage of the Product Life Cycle does demand reach its limit and the organisation have
to market the product in order to sustain its position?
 Introduction
 Growth
 Maturity
 Decline
19 Activity based costing (ABC) in most suited to which ONE of the following situations?
 If labour costs are the most significant production cost
 If indirect costs are a high proportion of total costs
 If a company makes identical units of only one product
 If a company is operating in a manufacturing environment

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A C C A MA 11: N at u re a n d p u rp o s e o f bu d g e ti n g 59

Nature and purpose of budgeting
1 Indicate whether the following statements are TRUE or FALSE:
True False
A budget helps to control an organisation by forcing it to create a plan  
A budget helps an organisation to co-ordinate the allocation of resources  
A budget can help an organisation to motivate staff  
An organisation is legally required to prepare a master budget annually  
2 Which of the following best describes a top-down budget?

 A budget where proposed expenditure is scaled down until it matches available resources
 A budget that is compatible with the operational objectives of local management
 A budget where local budget holders do not participate in the budget-setting process
 A budget where central costs are budgeted prior to targets being set for local costs
Budgetary control and reporting

3 A centre to which both revenues and expenses are assigned is known as a:
 Cost centre
 Profit centre
 Investment centre
 Control centre
Behavioural aspects of budgeting

4 Which of the following is a disadvantage of involving staff in the budgeting process?
 Staff members’ contribution may be based on their local knowledge.
 Staff will not be motivated by helping to set targets that they can control.
 Staff suggestions may be ignored and staff may become demotivated as a result.
 Staff will include their specific resource requirements.
Flexible budgets
5 A business has the following production cost budget:
10,000 units 15,000 units
Budgeted production cost $70,000 $80,000

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60 11: N at u re a n d p u rp o s e o f bu d g e ti n g A C C A MA
The budgeted production cost for a level of activity of 12,000 units is:
6 The budgeted production overhead for a business is $200,000 at an activity level of 100,000
units and $300,000 at an activity level of 200,000 units.
If the actual activity level is 140,000 units, the flexed budget for production overhead is:
 $300,000
 $280,000
 $240,000
 $210,000
7 Which of the following is an advantage of fixed budgeting?

 It is based on assumptions that normally turn out to be true in practice.
 It is quicker to carry out than flexible budgeting.
 It provides appropriate benchmarks for cost control.
 It is useful for decision-making purposes.
8 A company has drawn up the following flexed budget for the year.
60% 70% 80%
$ $ $
Variable materials 150,000 175,000 200,000
Variable labour 60,000 70,000 80,000
Production overhead 42,000 46,000 50,000
Other overhead 30,000 30,000 30,000
What would be the total cost in a budget that is flexed at the 85% level of activity?
Select one:
 $380,800
 $374,500
 $379,500
 $668,000
9 Complete the following statement:

A fixed budget is
Select one:
 A budget for fixed costs only
 A budget for a single activity level
 A budget for all costs of production
 A budget for all possible sale volumes

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1 ALANOWL
The new management accountant at Alanowl Limited is completing a budget for Quarter 1 of next year
for its principal product. The product was launched just under five years ago and demand has steadily
increased. The accountant has modelled demand using a multiplicative time series model with the
equation Sales = 15,000 + 1,000Q, with Q = the quarter number. Quarter 1 is Quarter 20 and its
demand was expected to be 1.05 of trend. However a recent marketing campaign has been very
successful with the result that demand is expected to be 44,000 units.
The accountant has found it difficult to split the costs of this product into fixed and variable elements.
He knows costs include costs of quality inspection. Quality inspection costs are $28,000 for each
quarter, with an additional $7,200 for every 10,000 units produced, because of the additional time
required.
Other costs for the product for the fourth quarter of this year, when production and demand were
34,000 units, were $758,000. The accountant estimates that other costs for a demand level of 44,000
units will be $928,000. He believes that variable costs per unit will decrease by $0.50 per unit if
production and demand exceed 40,000 units, because of the availability of discounts from suppliers.
The accountant is assuming that production and sales for each quarter will be the same. Sales price
per unit is $35.
Required:
(a) Calculate the sales revenue that Alanowl would have received in the next quarter, had sales
continued to follow the time series model.
$
(2 marks)
(b) Complete the budget proforma, comparing the budget for Quarter 4 in the current year with
Quarter 1 next year.
Quarter 4 Quarter 1
$ $
Sales
Quality costs
Other fixed costs
Variable costs
Profit
(6 marks)
(c) The accountant is wondering whether it is still worth using a multiplicative time series model to
attempt to predict demand. Which of the following is not a disadvantage of a multiplicative
time series model?
 The model is likely to become less reliable the further into the future it is taken.
 Random variations can upset the pattern of trend and seasonal variations.
 The reliability of the forecast is very dependent on the quantity and quality of the data
supporting it.
 The model cannot cope with an increasing or decreasing trend. (2 marks)
(10 marks)

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2 WORSLEY LIMITED
The Chief Executive of Worsley Limited is angry. He has just seen the cost figures for the production of the
company’s principal product for May and wants to know why they were so much higher than budgeted.
The budgeted selling price of the product was $70. In May Worsley aimed to produce and sell 6,000
units. Each unit requires 3 kg of material at $5 per kg and 2 hours of labour at $8 per hour. Variable
overhead is $6 per unit.
The Managing Director has been reviewing the following statement. (Bracketed figures mean that
revenues were lower, or costs or resource usage were higher, than budgeted.)
Budgeted
6,000 units Actual Difference
Sales $ $ $
Sales revenue 42,000 42,000 -
Costs $ $ $
Material 90,000 136,000 (46,000)
Labour 96,000 143,000 (47,000)
Variable overhead 36,000 47,000 (11,000)
Resource usage
Material 18,000 kg 28,000 kg (10,000 kg)
Labour 12,000 hr 18,500 hr (6,500 hr)
In anticipation of marketing activity by Worsley’s competitors, Worsley’s Sales and Marketing Director
authorised a large price cut so that the average selling price during May was $42. As a result 10,000
units were produced and sold.
Required:
(a) Complete a revised statement comparing the costs and resource usage that would have been
budgeted, and also including sales revenue figures, for a production level of 10,000 units.
Budgeted
Sales $ $ $
Sales revenue 42,000
Costs $ $ $
Material 136,000
Labour 143,000
Variable overhead 47,000
Resource usage
Material kg 28,000 kg kg
Labour hr 18,500 hr hr
(6 marks)
(b) Which TWO of the following statements about fixed budgets are true?
 Fixed budgets are useful at the planning stage to establish broad objectives.
 Variance analysis using fixed budgets allows for variations in volume.
 Fixed budgets are easier to prepare than flexible budgets.
 Use of fixed budgets generally gives management realistic cost targets to achieve.
(2 marks)

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The Sales and Marketing Director has claimed that if prices had been left unchanged, sales revenues
would be affected by competitor marketing activity. A member of the Accounts Department has
reviewed these claims and has estimated that there is a correlation coefficient between marketing
expenditure by Worsley’s principal competitor and Worsley’s total sales revenue of – 0.8, and that
Worsley’s total sales revenue is the dependent variable.
(c) Which ONE of the following statements about this calculation is TRUE?
 A negative figure indicates a weak correlation between competitor marketing
expenditure and Worsley’s sales revenues.
 The coefficient of determination indicates how much of the change in total sales revenue
is due to the competitor’s marketing activity.
 The coefficient of determination is – 0.64.
 The competitor’s marketing expenditure is 80% of Worsley’s sales revenues from this
product. (2 marks)
(10 marks)

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64 12: B u d g e t p re p arat i o n A C C A MA

Budget preparation
1 Which ONE of the following is not a functional budget?
 Labour budget
 Selling and distribution cost budget
 Cash budget
 Administration cost budget
2 Which of the following costs would not be included in the cash budget of a publishing company?
 Overtime payments paid to proof-readers
 Depreciation of printing machine
 Capital cost of printing machine
 Administrative expenses
3 A business has budgeted for a greater quantity of material in its material usage budget than it
has in its material purchases budget. Which of the following statements can be inferred from
this situation?
 Finished goods inventories are budgeted to increase
 Finished goods inventories are budgeted to decrease
 Raw materials inventories are budgeted to increase
 Raw materials inventories are budgeted to decrease
4 A business has no production resource limitations. Which TWO of the following must be
available BEFORE a raw materials purchases budget can be completed.
 Sales budget
 Selling and distribution budget
 Production budget
 Direct Labour budget
 Overhead budget
5 M & Co’s sales budget shows budgeted sales of 2,500 units of product X next quarter. Budgeted
inventories are:
Opening inventory 200 units
Closing inventory 300 units
How many units of product X (to the nearest unit) should be included in the production budget
for the next quarter?
units

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A C C A MA 12: B u d g e t p re p arat i o n 65
6 Budgeted sales of product X are 19,950 units. 5% of all units of X produced are scrapped at the
end of the production process by the quality control department. Inventories, which have all
passed quality control, are budgeted to be as follows:
Product X
Opening inventory 1,000 units
Closing inventory 1,475 units
How many units need to be in the production budget for X in the above period?
 19,950 units
 20,425 units
 21,000 units
 21,500 units
7 Budgeted sales of product X next quarter are 10,000 units. Each unit of X needs 3 kg of raw
material. Budgeted inventories are as follows:
Product X Raw material
Opening inventory 1,000 units 500 kg
Closing inventory 850 units 1,200 kg
What are the budgeted purchases of raw materials for the next quarter?
 29,550 kg
 30,000 kg
 30,250 kg
 30,700 kg
8 A job needs 2,990 actual labour hours and it is anticipated that there will be 8% idle time. If the
wage rate is $9 an hour, what is the budgeted labour cost for the job?
9 M and Co produce X. Each unit of X needs 3 direct unskilled labour hours costing $8 an hour.
M and Co’s quality control department reject 5% of all units produced at the end of the
production process. All inventories of finished goods have been accepted by the quality control
department Budgets for the next period are:
Opening inventory of finished goods 5,000 units
Closing inventory of finished goods 4,000 units
Sales 40,995 units
What is the direct unskilled labour budget, to the nearest $, for the period?
 $959,880
 $1,010,400
 $1,007,880
 $1,035,663
10 M & Co’s budgeted sales figures are:

$
September 100,000
October 120,000
November 80,000

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20% of monthly sales are for cash. Remaining sales are on credit. Of the credit sales, 60% are
expected to pay in the month after sale and take a 2% discount, 38% are expected to pay in the
second month after sale, and the remaining 2% are expected to be bad debts. Budgeted cash
receipts in November are:
 $16,000
 $72,448
 $102,848
 $104,000

A business manufactures and sells a product each unit of which requires 30 minutes of direct labour
and 1 kg of raw material. The wage rate is $11 per hour and the raw material costs $2 per kg.
Budgeted figures are:
September October November
Sales units 100,000 122,000 80,000
Completed opening inventory 4,000 2,000 8,000
The product is produced one month prior to sale and wages are paid in the month of production. Raw
materials are paid for in the month following purchase and there is no raw materials inventory.
11 The figure to be included in October’s cash budget for wages is:

 $440,000
 $473,000
 $649,000
 $660,000
12 The figure to be included in October’s cash budget for raw material is:
 $160,000
 $172,000
 $240,000
 $244,000
13 M and Co invoices customers on the last day of each month. Customers paying in the following
month are entitled to a 1% settlement discount. Budgeted sales values are:
May June July
$60,000 $40,000 $45,000
M & Co anticipates the following:
Invoices paid one month after sale 75%
Invoices paid two months after sale 20%
Bad debts 5%
The receipt to be shown in the cash budget in July is:

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14 M Ltd is preparing its production budget for Product Y. Budgeted annual sales are 4,000.
Opening inventory is 750 units and M Ltd wants to increase inventories by 20% at the year end.
Calculate budgeted production for the year.
Select one:
 3,250
 4,000
 4,150
 4,750
15 A company has budgeted sales of 12,000 units. 5% are scrapped as they do not pass quality
control. Opening inventory is 1,450 and closing inventory needs to increase by 200 units. All
inventory needs to have passed quality control. The production budget will be (to the nearest
whole unit)?
Select one:
 10,500
 12,200
 12,631
 12,842
16 A retailer sells an item for $600 on which there is a mark-up of 25%. What profit did the retailer
make on this transaction?
Select one:
 $90
 $120
 $150
 $200
Capital budgeting
17 Which of the following would be part of a capital expenditure budget?
 Construction of an extension of an existing building
 Replacement of motor vehicles
 Repairs to machinery
 Refurbishment of head office-

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Multi task question
1 MOONSTAR
The accountant of Moonstar Limited is currently preparing the cash budget for the company for
January. The following information is available.
(a) The opening balance at the bank on 1 January was $378,400.
(b) Moonstar’s sales in November were $525,000 and in December were $685,000. Expected sales
revenue for January is $480,000. 10% of sales are for cash. 60% of revenue from credit sales is
received the month after the sale takes place, 35% 2 months after and 5% of credit sales are
written off as bad debts.
(c) Moonstar intends to sell off six of its fleet of vans for cash in January. The average profit on
each sale should be $2,000 and Moonstar should receive an average of $6,000 for each van.
(d) Moonstar’s purchases in December were $384,000. It originally planned to make purchases of
$366,000 in January. Moonstar normally pays suppliers the month after purchases are made.
However Moonstar’s major supplier has offered Moonstar a 2% discount provided it pays for its
purchases in the month that purchases are made and Moonstar will accept this discount. 15% of
the value of Moonstar’s planned purchases for January will be from this supplier.
(e) Employee salaries for December were $42,000 and employees are due to receive a 5% pay
increase in January. Employees will also receive a 3% bonus in January, based on annual salaries
at the end of the previous year.
(f) Moonstar took out a 10 year loan from its bank of $1 million two years ago. The loan is
repayable in ten equal annual instalments, on 1 January each year. Interest on the loan is
payable twice yearly, in June and December.
Required:
(a) Complete the cash budget for January.
$
Cash receipts
Receipts from accounts receivable
Cash sales
Sale of non-current assets
Cash payments
Payments to suppliers ( )
Payments to employees ( )
Loan repayment and interest ( )
Cash movement ( )
Opening balance 378,400
Closing balance
(8 marks)

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The forecasts for sales for the rest of the year are very favourable and the Finance Director of
Moonstar Limited anticipates having a cash surplus throughout the year.
(b) Which two of the following would be actions that Moonstar could take to make use of the
predicted surplus?
 Pay off some of the rest of the loan
 Delay payments to suppliers
 Offer more generous credit periods to customers
 Minimise inventory levels (2 marks)
(10 marks)

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70 13: Di s c o u n t e d c as h f l o w A C C A MA

Discounted cash flow
1 Timothy will receive an annual income of $4,000 for four years, with the first payment occurring
in three years’ time. Timothy’s cost of capital is 5%.
The present value of the annuity payment is:
 $12,868
 $14,184
 $16,000
 $20,304
2 An investment of $6,000 is made in a 5 year fixed term deposit account which pays interest at
the nominal rate of 7% per annum. If interest is applied in six monthly instalments, and left in
the account to accumulate, what balance will be on the account at the end of year 5 (to the
nearest $)?
 $8,464
 $8,415
 $8,100
 $7,126
3 An investor has been offered the opportunity to invest a sum of money now, at a fixed interest
rate of 7% per annum, which will be used to generate an annual year-end income of $21,000 in
perpetuity. How much needs to be invested now?
4 Jackson takes out a loan of $5,000 at an interest rate of 9% per annum. The loan is to be paid
back over 5 years in equal annual instalments. The annual instalment (to the nearest $) is:
 $703
 $1,000
 $1,285
 $1,450
5 $38,000 is invested in a bank account. The account earns compound interest at 3% per annum.
The cash value of the account, to the nearest $, at the end of eight years will be:
 $46,735
 $47,120
 $47,869
 $48,137

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A C C A MA 13: Di s c o u n t e d c a s h f l o w 71
6 $x is invested in a bank account. The account earns compound interest at 4% per annum and
after 10 years the investment is worth $14,802. The value of the original investment (to the
nearest $100) is:
7 Rental income of $800 is to be received over a period of four successive years. The tenant is
required to pay the first rental payment in advance (i.e. now). Interest rates during this four-
year period are unchanged at 5%. The present value (to the nearest $) of this rental income is:
 $2,178
 $2,478
 $2,778
 $2,978
8 $3,000 is invested for four years at a six-monthly interest rate of 5%. At the end of four years
the investment will be worth (to the nearest $):
 $3,600
 $3,647
 $4,040
 $4,432
9 Teddy is expecting to receive $9,000 starting in a year’s time and continuing indefinitely.
Interest rates are expected to remain constant at 6% in perpetuity.
What is the present value of Teddy’s perpetuity?
10 Sydney invests $2,000 with compound interest at 6%. At the end of four years he withdraws
$750 from his investment and keeps the remaining sum on investment for another two years.
What is the value of Sydney’s investment to the nearest cent at the end of six years?
11 Darwin invests $4,000 with nominal interest rate 9%, compounded monthly. What is the value
of Darwin’s investment to the nearest cent at the end of two years?

Auckland invests $8,000 for four years at a 2% quarterly interest rate.
12 What is the value of Auckland’s investment at the end of four years to the nearest cent?

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13 What is the effective annual rate of interest on Auckland’s investment to two decimal places?
14 What is the annual percentage rate (APR) if interest is compounded quarterly and the quarterly
rate is 2.5%? The answer needs to be in % to 2 decimal places.
15 Dave will receive $2,500 each year for 12 years, starting in one year’s time. What is the present
value if interest rates are 9%? Answer to the nearest $.
16 Hilda intends to take out a loan for $72,000. The loan will be paid back over six years in equal
annual instalments, with the first instalment due to be paid in 12 months’ time. The annual
interest rate on the loan is 8%.
What is the annual repayment on the loan, to the nearest $100?

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A C C A MA 14: I n v e s t me n t ap p rai s al 73

Investment appraisal
1 A project has the following cash flows:
Year $
0 (100,000)
1 20,000
2 40,000
3 70,000
Using 10% as the discount rate, calculate the net present value to the nearest $000.
2 An investment has an NPV of $24m at 5% and an NPV of -$6m at 10%.

Calculate the internal rate of return of the investment.
3 An investment project has an initial investment when it begins followed by constant annual returns.
How is the payback period calculated?
 Initial investment/Annual profit
 Initial investment/Annual cash inflow
 Annual profit/Initial investment
 Annual cash inflow/Initial investment
4 Company X needs to use two materials for a specific job. The job requires 700 kg of Material A
and 400 kg of Material B.
A is used regularly by X. There are 500 kg in inventory that were purchased for $2,000.
The scrap value of A is $1.00 per kg. A can be purchased on the open market currently for
$5 per kg.
There are 300 kg of spare inventory (not needed elsewhere in the business)of B currently in
inventory that were purchased for $450. B has no resale value. B can be purchased on the open
market currently for $2.50 per kg.
The relevant cost of materials for this job is:
 $1,250
 $3,700
 $3,750
 $4,500

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74 14: I n v e s t me n t ap p rai s al A C C A MA
5 Which of the following are problems with using the simple payback method of investment
appraisal?
 It is difficult to understand.
 It ignores the time value of money.
 It uses profits, not cash flows.
 The result by itself does not tell you whether to accept or reject a project.
6 Teddy is considering purchasing a new machine. The relevant cash flows are:
Year $
Cost 120,000
Inflows
1 45,000
2 80,000
3 100,000
Calculate the discounted payback period of the new machine in months. Teddy’s cost of capital
is 7%.
months
A  is a future incremental cash flow

Sunk cost Flexible cost Relevant cost Variable cost
8 Growler Ltd is about to invest in an operation to extract minerals from a site of natural beauty
near the coast of the country in which it is located. The cost of the investment will be
$360 million. The net cash inflows from the investment are expected to begin two years after
the investment and be $100 million in years 2 to 4, $125 million in year 5 and $115 million in
year 6. After extraction has finished at the end of six years, Growler Ltd will have to undertake
rectification work on the area. Rectification will take a year and the costs of rectification will be
$18 million, incurred at the end of the year. Growler Ltd uses a cost of capital of 9% to appraise
its investments.
What will be the net present value of this investment, to the nearest $m?
$ million
9 Dandy Ltd makes three different products. Details of the unit costs for these products are as
follows:
Alpha Beta Gamma
$ $ $
Direct costs per unit
Material 50 60 75
Labour 38 55 48
Overheads
Variable 23 28 32
Absorbed fixed 15 28 25

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Dandy can buy in units of Alpha for $145, of Beta for $170 and of Gamma for $150.
Which products should Dandy make and which products should Dandy buy in?
 Buy in all three products
 Make Alpha, buy in Beta and Gamma
 Make Alpha and Beta, buy in Gamma
 Make Alpha and Gamma, buy in Beta
10 F is currently drawing up a quote for a job that has to be completed within one week. The job
requires 50 skilled labour hours and 25 unskilled labour hours. Currently skilled workers are paid
$875 and unskilled workers $420 for a 35 hour week.
Currently skilled labour has spare capacity amounting to 30 labour hours and unskilled labour
has spare capacity amounting to 35 labour hours. If spare capacity has already been utilised and
the time spent on the job is in excess of 35 hours by either skilled or unskilled labour, then
overtime is payable by the hour at 120% of the current salary per hour for every hour that
exceeds 35 hours.
What is the total relevant cost to F of using skilled and unskilled labour on this job?
 $450
 $500
 $575
 $1,625
11 For decision-making purposes, which of the following are relevant costs?

I Unavoidable costs
II Opportunity costs
III Sunk costs
IV Absorbed costs
 I II only
 I II III only
 II IV only
 I IV only
12 A project has the following cash flows:

Year $
0 (150,000)
1 30,000
2 70,000
3 80,000
Using 5% and 10% as the rates in the calculation, calculate the internal rate of return to 1
decimal place
 5.7%
 6.5%
 8.5%
 9.3%

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13 A project has a positive NPV of $3,450 at a discount rate of 10% and a negative NPV of-$2,657 at
a discount rate of 14%. What is the project’s estimated IRR to 2 decimal places?
14 A business is looking to invest in a project which will cost $120,000 and generate the following
cash inflows at the end of Years 1 – 4.
Year Cash inflow
($)
1 15,000
2 25,000
3 35,000
4 40,000
The business’s cost of capital is 4%. The net present value of the project (to the nearest $100) is:
 $(17,100)
 $(17,200)
 $(17,300)
 $(17,400)
15 The following statements relate to net present values and internal rates of return.
I A project is worthwhile if its net present value is greater than $0
II If the cost of capital of a business is greater than the internal rate of return of a proposed
project, then the project should be accepted.
III One of the disadvantages of the net present value method of project appraisal is that is
does not show the change in shareholders’ wealth.
IV It is not possible to have more than one internal rate of return for a project that is being
appraised.
 Only Statement I
 Statements I and II
 Statements I and III
 Statements I and IV
16 The net present value of Project L at 10% was $1,200 and at 15% it was $(400).
The internal rate of return of the project (to the nearest whole percent) is:
 11%
 12%
 13%
 14%

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17 A project has an initial investment of $85,000. What will the payback period be in years (to 1
decimal place) if the project generates profit of $25,500 p.a. and is to be depreciated straight
line over 10 years to a zero residual value.
Select one:
 5.0
 3.3
 2.5
 8.5
18 If the NPV of a project at a 6% discount rate is $25,000 and the NPV at a 14% discount rate is -
$10,000, what is the best estimate of the IRR of the project?
 Below 6%
 Above 14%
 Approximately 9%
 Approximately 12%

1 MAURICE LTD
Maurice Ltd is about to make an investment in facilities to produce a new product. The following
spreadsheet will be used to appraise the investment.
A B C D E F
1 Year 0 1 2 3 4
2 $000 $000 $000 $000 $000
3 Revenues 450 550 650 700
4 Cost of investment (900)
5 Running costs (240) (295) (335) (355)
6 Net cash flow (900) 210 255 315 345
7 Discount factor 5% 1.000 0.952 0.907 0.864 0.823
8 Discount factor 10% 1.000 0.909 0.826 0.751 0.683
9 Discounted cash flow 5%
10 Discounted cash flow 10%
11 Net present value at 5%
12 Net present value at 10%
Required:
(a) Calculate the payback period for this investment in months.
months (2 marks)
(b) Calculate the discounted payback period for this investment to the nearest month, using a
discount rate of 5%.
months (2 marks)
(c) Calculate the Internal Rate of Return of this investment, using discount rates of 5% and 10%, to
the nearest 0.1%.
% (2 marks)

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(d) Which of the following formula would correctly calculate the discounted cash flow in cell C9?
 = (SUM(C3:C6))*C7
 = (SUM(C3:C6))/C7
 = C6*C7
 = C6/C9 (2 marks)
(e) Which of the following list are advantages of the discounted payback method of investment appraisal?
Advantage?
Yes No
It considers the time value of money.  
It considers cash flows over the whole life of a project.  
The answer provides a clear decision rule.  
It uses relevant cash flows.  
(2 marks)
(10 marks)
2 EDRICH LIMITED
Edrich Limited is going to convert one of its out-of-town discount outlets into a new retail outlet selling
top quality goods. The following costs and benefits relate to the change.
(a) The costs of converting the outlet will be $100,000 in total. This includes $5,000 already spent
surveying customer reactions to the proposed change.
(b) The annual light and heat costs of the building are expected to rise from $10,000 to $12,000.
(c) Depreciation on shop fixtures and fittings will rise from $12,000 to $15,000 per year.
(d) The notional rent will charged by Head Office will rise from $60,000 to $75,000 per annum.
(e) Six extra staff will be required in the shop to provide a higher standard of service. Their average
annual salary will be $30,000. Two of them will be newly recruited and four of them will be
relocated from existing shops, where they will not be replaced. Relocation costs are expected to
be $5,000, incurred during the first year the outlet is open in its new form.
(f) Current sales from the outlet are $600,000 per annum and would be expected to rise by
10% per annum after the end of the next year if the outlet was not converted. The new outlet is
expected to make sales of $800,000 per annum in its first year of trading, rising by 15% per
annum in the following two years.
Required:
(a) State the amounts that would be included in a net present value evaluation in relation to the
following expenses.
$
Costs of conversion
Light and heat Year 1
Depreciation Year 1
Notional rent Year 1
Staff salaries Year 1
Staff relocation costs
(6 marks)

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(b) Using a discount rate of 10%, calculate the net present value of the incremental sales gained
through redeveloping the outlet to the nearest $000.
$ 000 (2 marks)
(c) Which of the following are advantages of the Net Present Value method of investment appraisal
compared with the internal rate of return method?
Advantage compared with
IRR?
Yes No
It is only possible to have a single NPV figure, but it is possible to  
have more than one IRR.
It considers cash flows over the whole life of a project.  
The answer provides a clear decision rule.  
It requires a cost of capital to be estimated.  
(2 marks)
(10 marks)

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80 15: M at e ri al a nd l a b o u r v a ri a n c es A C C A MA

Standard costing systems
1 There are four types of cost standard:
 A basic standard
 A current standard
 An attainable standard
 An ideal standard
Match each of these cost standards against the correct definition below.
Definition Cost standard

This standard assumes that current efficiency and cost levels will be
maintained
This standard assumes that nothing has changed since the standard was first set
This standard assumes an optimum level of efficiency and cost and
minimisation of waste
This standard assumes that there will be some improvements in current
efficiency and cost levels
2 Nigel is a baker. Each loaf of bread baked requires 750 grams of flour. During the baking process
there is a 20% loss of flour due to spillage. The standard price of flour is $2 per 1,000 grams.
The standard cost of the flour per loaf of bread produced, to the nearest cent, is:
 $1.50
 $1.80
 $1.88
 $2
3 A business budgets for 12 labour hours to assemble its product. In addition, the business
incorporates the cost of idle time into the standard cost of products. The idle time budgeted is
15% of time paid. The wage rate is $8 an hour. The standard labour cost of one unit of product
to the nearest cent is:
 $81.60
 $96
 $110.4
 $112.94

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A C C A MA 15: M a t e ri a l a nd l a b o u r v a ri a n c es 81
4 A business assembles three types of machine. The standard labour hours per machine and the
number of machines made in the last period are shown below.
Standard hours Number produced
Machine A 12 100
Machine B 15 50
Machine C 20 90
In the last period 4,000 actual hours were worked. Employees were paid $10 per standard
labour hour produced.
What were the wages paid for the last period?
 $25,000
 $40,000
 $37,500
 $112,800
5 Indicate whether the following statements are TRUE or FALSE.

True False
A standard cost is the planned unit cost of a product  
A standard hour is any hour during which the labour force is paid at  
its basic rate of pay
6 Which of the following might management use in order to identify the standard quantities of
materials needed to make a product?
 Past experience
 Detailed product specifications
 Discussions with experts in each department
 Financial accounts
7 Jo is paid a guaranteed $1,000 dollars a month. In addition he receives a bonus per unit for each
unit in excess of 100 that he makes in the month. If he produces in excess of 110 or 120 units,
the bonus for each unit produced above those production levels increases. Last month Jo made
122 units. Bonus rates were as follows:
Monthly output Bonus per unit
$
100 to 110 units 15
111 to 120 units 20
121 to 130 units 25
What was Jo paid last month?

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8 Standard costing can be defined as:

 A technique that reports variances by comparing actual costs to predetermined
standards
 A technique that attributes overheads to products or services based on standard use of
resources
 A technique that treats fixed costs as period costs and charges them in full against profit
in the period in which they are incurred
 A technique that uses standard cost drivers to assign resources to activities and activities
to cost objects
9 Which of the following is not a type of standard that is used in standard costing?
 Current standard
 Ideal standard
 Attainable/expected standard
 Relevant standard
Variance calculations
Material variances
A business operates a standard marginal costing system. The following budget is available:
Budgeted production 1,000 units
Direct materials 5 kg at $5 per kg $25 per unit
Actual results were:
Actual production 1,200 units

Direct materials 5,100 kg $26,000
Budgeted and actual sales in the period were equal to the number of units produced.
10 What is the total direct material cost variance?

 $1,000 adverse
 Nil
 $4,000 favourable
 $5,000 adverse
11 What is the direct material price variance?

 $1,000 adverse
 $500 adverse
 $500 favourable

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12 What is the direct material usage variance?

 $4,500 adverse
 $500 adverse
 $500 favourable
13 Last period a business used 500 kg of material in the production of 600 units of product P.
This material cost $900. The standard cost card for product P shows that the standard direct
material content is 0.8 kg at $1.40 per kg.
The direct material price and usage variances are:
Material price Material usage

 $200 adverse $28 favourable
 $200 adverse $28 adverse
14 A business purchased 4,000 litres of a liquid for $38,000. The material price variance was $2,000
favourable. What was the standard price per litre of the liquid?
 $9
 $9.50
 $10
 It is not possible to calculate the standard price from the information given
15 A businesses budget shows that it expected to make 10,000 units of X using 12kg of direct
material per unit at a budgeted cost of $2.90 per kg.
9,750 units were actually produced. The direct materials cost for these units was $350,000 and
11kg per unit were used. What is the total direct material variance?
 $10,700 adverse
 $2,000 adverse

A product has a standard direct material cost of $20 per unit. The standard material cost is $10 per kg.
Last month 500 units were produced and the direct materials cost $9,800. 1,050 kg of direct materials
were used. All materials purchased in the period were used in the period.
16 What was the direct material price variance?
$  favourable/adverse
17 What was the direct materials usage variance?

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18 What was the total material variance?
19 12,000 kg of material was used in making product X. The standard cost card shows the standard
cost of this material to be $2 per kg. The material usage variance was $6,000 favourable.
What was the standard allowed weight of the material for the period?
 9,000 kg
 12,000 kg
 15,000 kg
 18,000 kg

Last month a business budgeted to produce 5,000 units of one of its products. The product standard
usage of raw material is 6 kg per unit with a standard cost of $5 per kg. Actual production was 4,900
units using 29,500 kg of raw material at a cost of $146,000.
20 What is the total direct material cost variance?

 $1,000 adverse
 $4,000 adverse
21 What is the direct material price variance?

 $1,000 adverse
 $1,500 adverse
22 What is the direct material usage variance?

 $500 adverse
 $500 favourable
 $2,500 adverse
23 Last month a business produced 12,000 units of product X using 54,000 hours of direct labour
costing $540,000. The standard cost card shows that the standard labour input for a unit of X is
4.25 hours at a rate of $10.20 an hour.
What is the labour rate variance?
 $10,800 adverse
 $50,400 adverse

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24 Last month a business reported an adverse direct labour efficiency variance of $3,000. Workers
were actually paid $10 an hour which was the same as the standard labour cost per hour.
900 units were made and total wages were $39,000. How many standard hours were included
in the production budget for each unit?
hours
25 In the last period 15,000 labour hours were worked at a standard cost of $8.50 per hour. The
labour efficiency variance was $4,250 favourable. How many standard hours were produced?
 15,500
 14,500
 15,000
 It is not possible to work this out without further information
26 A business reports an adverse labour efficiency variance of $40,000. If 44,000 hours were
worked producing 10,000 units and the standard wage rate was $10 per hour, how many
standard hours were allowed per unit?
 0.4
 4
 4.4
 4.8

Last month production of product X was 20,000 units. 50,000 hours of direct labour were used at a
cost of $400,000. The standard cost card shows that standard labour input for a unit of X is 2.75 hours
at the rate of $7.50 an hour.
27 What is the total labour cost variance?

 $12,500 adverse
 $25,000 adverse
28 What is the labour rate variance?

 $25,000 adverse
 $12,500 adverse
29 What is the labour efficiency variance?

 $37,500 adverse
 $40,000 adverse

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A business budgeted to produce 12,000 units of product X. The standard cost card shows that
each unit of X is expected to require 3 labour hours at $12 an hour. The actual results were
Labour 35,200 hours $354,000
30 What is the labour efficiency variance?
31 What is the labour rate variance?
32 What is the total labour cost variance?
33 The standard direct material cost per unit for a product is calculated as follows:
10 litres at $2.75 per litre
Last month the actual price paid for 11,000 litres of material used was 5% above standard and
the direct material usage variance was $2,200 favourable. No inventories are held.
What was the actual production last month (in units)?
 1,020
 1,180
 1,280
 1,380
34 The standard direct material cost per unit for a product is calculated as follows:
10 litres at $2.75 per litre
Last month the actual price paid for 11,000 litres of material used was 5% above standard and
the direct material usage variance was $2,200 favourable. No inventories are held.
What was the direct material price variance for last month?
 $1,512.50 fav
 $1,512.50 adv
 $1,592 fav
 $1,592 adv

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35 C Ltd used 34,500kg of material at a total standard cost of $258,750. The material usage
variance was $2,145 favourable. Calculate the standard allowed weight of material for the
actual production achieved by C Ltd in March?
 33,936 kg
 34,214 kg
 34,786 kg
 35,072 kg
36 A business has a budgeted labour cost per unit of $17.50. This month production details were as
follows:
Budget 30,000 units
Actual 29,500 units
The actual labour cost for the month was $554,250. What was the labour total variance as a
percentage of the flexed budgeted figure?
 7.4% adverse
 7.4% favourable
 6.9% adverse
 6.9% favourable
Causes of variances
37 Which of the following would explain a favourable materials usage variance?
I Industrial action which meant that there was lower production and therefore less
material used than budgeted
II Use of a higher grade material which lead to less wastage
III New machinery which provides better efficiency in materials usage
 I only
 I and III
 I, II and III
 II and III
38 Which of the following would explain an adverse direct labour efficiency variance?
I Poor supervision of the workforce
II Improved working methods were implemented during the period
III A lower grade of material was used which takes longer to process
 I only
 I and III
 I, II and III
 II and III
39 Which ONE of the following factors could explain an adverse material price variance?
 A sudden shortage of materials worldwide led to suppliers increasing their prices.
 The material usage variance was adverse.
 The closing inventory of raw materials is higher than the opening inventory.
 Problems with machinery inside the factory meant that material purchases were greater
than planned.

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40 Which one of the following would help explain a favourable materials price variance?
Select one:
 A reduction in quality control checking standards
 Using a higher quality of materials than specified in the standard
 Achieving a lower output volume than budgeted
 A discount offered by a materials supplier

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A C C A MA 16: O t h e r v a ri an c e s 89

Variable overhead variances

A business has budgeted to produce 600 units of a product. The standard cost card shows that 3,000
labour hour were budgeted and that the total variable production overhead cost was expected to be
$12,000. The actual results for the period were:
Production 610 units
Labour 3,100 hours
Variable overhead $12,300

The standard cost card for a product shows the following:
$ per unit
Direct Labour 6 hours at $10 per hour 60
Variable production overhead 6
Last period the number of direct labour hours worked to produce 1,000 units was 6,200. The variable
production overhead cost incurred was $6,100.
1 The total variable overhead expenditure variance to the nearest $ is:
Adverse Favourable
$...................  
2 The variable overhead expenditure variance to the nearest $ is:
Adverse Favourable
$...................  
3 The variable overhead efficiency variance to the nearest $ is:

Adverse Favourable
$...................  

The standard variable production cost of a product is
2 hours at $5 = $10 per unit
Last month 2,000 units were made and the workforce worked 3,600 hours. The actual variable
overhead cost was $15,000.

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90 16: O t h e r v a ri an c e s A C C A MA
4 What was the total variable overhead variance?
Adverse Favourable
$...................  
5 What was the variable overhead expenditure variance?
Adverse Favourable
$...................  
6 What was the variable overhead efficiency variance?

Adverse Favourable
$...................  
7 Last period 500 labour hours were worked and the total variable overhead cost was $5,600.
The variable overhead expenditure variance was $400 favourable.
What was the standard variable overhead cost per labour hour?
 $11.20
 $12
 $10.40
 There is insufficient information available to calculate this
Fixed overhead variances

Harvey Limited manufactures baskets. In 20X8 the planned production was 200,000 units. Fixed
overheads were absorbed on a labour hour basis at $4 per hour for 3 labour hours.
The actual production of baskets in 20X8 was 220,000 units. The baskets took 645,000 labour hours to
make. Total fixed overheads were $2,375,000.
8 What was the total fixed overhead variance?
Adverse Favourable
$...................  
9 What was the fixed overhead expenditure variance?
Adverse Favourable
$...................  
10 What was the fixed overhead volume variance?
Adverse Favourable
$...................  

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11 What was the fixed overhead capacity variance?
Adverse Favourable
$...................  
12 What was the fixed overhead efficiency variance?
Adverse Favourable
$...................  

Adam Limited manufactures containers. In 20X9 the planned production was 500,000 containers.
Budgeted fixed overheads were $7,000,000. Fixed overheads are absorbed in each container on a
material usage basis, the standard usage for each unit being 2 kg.
The actual production of containers in 20X8 was 520,000 units. 1,055,000 kg of material were used in
making the baskets. Total fixed overheads were $6,925,000.
13 What was the total fixed overhead variance?
Adverse Favourable
$...................  
14 What was the fixed overhead expenditure variance?
Adverse Favourable
$...................  
15 What was the fixed overhead volume variance?
Adverse Favourable
$...................  
16 What was the fixed overhead capacity variance?
Adverse Favourable
$...................  
17 What was the fixed overhead efficiency variance?

Adverse Favourable
$...................  

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Sales variances
The standard cost of producing one unit of a product is as follows:
$
Direct material 3.60
Direct Labour 0.60
Variable overhead cost 0.30
The standard selling price is $9 a unit. Sales of 4,600 units are budgeted each period. In the last period
4,620 units were sold for $41,500.
18 What is the sales price variance?

 $80 adverse
 $80 favourable
 $100 adverse
 $100 favourable
19 What is the sales volume variance?

 $90 adverse
 $90 favourable
 $180 favourable
 $180 adverse

Last period 20,100 units of X were sold.
$
Budgeted sales revenue 500,000
Standard selling price per unit 25
Standard contribution per unit 10
Actual sales revenue 512,500
20 What was the sales price variance?

 $10,000 adverse
 $12,500 adverse
21 What was the sales volume variance?

 $1,000 adverse
 $10,000 adverse

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22 The following information is available regarding product X:

Budgeted sales 10,000 units
Actual sales 9,800 units
Actual sales revenue $96,000
Sales price variance $2,000 (A)
What is the standard selling price per unit?
$ per unit
A business reported the following. Use these results to answer the next two questions.
Budget Actual
Output and sales (units) 20,000 18,000
Selling price per unit $50 $52
Variable cost per unit $20 $21
23 What was the sales price variance?

 $36,000 adverse
 $64,000 adverse
24 What was the sales volume variance?

 $42,000 adverse
 $60,000 adverse
25 The standard cost of producing one unit of a product is as follows:

$
Direct material 5.20
Direct labour 2.80
Variable overhead cost 1.20
Absorbed fixed overhead 1.70
The standard selling price is $16 per unit. Sales of 9,000 units are budgeted each period. In the
last period 9,200 units were sold for $145,000.
Using absorption costing principles, what is the favourable sales volume variance?

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Causes of variances
26 In the last period a machine breakdown meant fewer units than budgeted were produced. This
resulted in an adverse sales volume contribution variance. Which of the following might be an
inter-related variance?
 An adverse labour efficiency variance
 An adverse variable overhead efficiency variance
 A favourable material usage variance
 A favourable labour rate variance
27 An adverse material price variance resulted from the use of a more expensive material than
standard. Indicate which of the following might be related:
 A favourable variable overhead efficiency variance
 A favourable material usage variance
 A favourable labour rate variance
 A favourable sales volume variance
Multi task question
1 CUDDLYDUD
The standard cost card for the Cuddlydud is as follows:
Standard cost card
$
Selling price 155
Direct material 6 kg @ $6 per kg 36
Direct labour 2 hrs @ $24 per hour 48
Variable overheads 2 hrs @$4 per hour 8
Fixed overheads absorbed 2 hrs @ $7 per hour 14
15,000 units of the Cuddlydud were budgeted to be produced and sold during July, but 15,100 were
actually produced and sold. Actual labour hours were 29,700. Actual fixed overheads were $206,400.
Required:
(a) Calculate the sales volume variance using marginal costing.
 favourable/adverse (2 marks)
(b) Calculate the fixed overhead expenditure variance using marginal costing.
 favourable/adverse (1 mark)
(c) Calculate the fixed overhead expenditure variance using absorption costing.
 favourable/adverse (1 mark)
(d) Calculate the fixed overhead capacity variance using absorption costing.

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(e) Calculate the fixed overhead efficiency variance using absorption costing.
There was no opening inventory of the Cuddlydud in August, but in that month 300 units more were
produced than sold.
(f) Calculate the difference in the level of profit for August between the profit calculated using
marginal costing and the profit calculated using absorption costing.
(2 marks)
(10 marks)

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96 17: V ari an c e re v i e w and c o n t ro l A C C A MA

Reconciliation of budgeted and actual profit
1 The budgeted profit for a business was $45,000 but the following variances arose:
$
Material price variance 1,200(F)
Material usage variance 3,000(F)
Labour rate variance 2,900(F)
Labour efficiency variance 800(A)
Variable overhead expenditure variance 1,900(A)
Variable overhead efficiency variance 2,400(A)
Fixed overhead expenditure variance 1,000(A)
Fixed overhead capacity variance 700(F)
Fixed overhead efficiency variance 1,900(A)
Sales price variance 3,600(F)
Sales volume variance 4,100(A)
The actual profit was:
Cost control and reduction

2 Which TWO of the following statements in relation to value analysis are true?
 It assumes that the product design is rigid.
 It takes into account a required standard of quality.
 It seeks the lowest cost method of achieving a desired end.
 The market price that the business can charge is assumed to be fixed.
3 Which of the following is NOT considered an element of value?

Select one:
 Use value
 Marketing value
 Exchange value
 Cost value

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A C C A MA 17: V a ri an c e re v i e w and c o n t ro l 97
1 HENRY
Henry uses standard costing to control its costs and revenues. A standard cost card for its one product
is given below, along with a standard cost operating statement for the last quarter.
Standard cost card
$
Selling price 150
Direct material 3kg @ $12 per kg 36
Variable overhead 4 hrs @ $4 per hour 16
Contribution 42
Standard cost operating statement
$
Budgeted contribution 840,000
Sales volume variance 21,000
Flexed contribution 861,000
Sales price variance (4,100)
Cost variances Favourable Adverse
$ $
Material price 2,476
Material usage 4,800
Labour rate 24,360
Labour efficiency 11,200
Variable overhead expenditure 12,300
Variable overhead efficiency 3,200
Total cost variances 29,176 29,160
16
Actual contribution 856,916
Budgeted fixed overhead 480,000

Fixed overhead expenditure variance (5,600)
(474,400)
Actual profit 382,516
Required:
Fill in the gaps from the choices listed below each gap.
(a) Henry uses standard _______ costing.
 Absorption
 Marginal (1 mark)
(b) In the last month units sold were _____ budgeted.
 140 more than budgeted
 140 less than budgeted
 500 less than budgeted (2 marks)

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(c) The sales price variance indicates that average sales price was _____ than expected.
 Higher
 Lower (1 mark)
(d) Actual sales revenue was _____.
 $2,996,000
 $3,000,000
 $3,070,900
 $3,075,000 (2 marks)
(e) The reasons for the _______ variances were identical.
 Material usage and Labour efficiency
 Material usage and Variable overhead efficiency
 Labour efficiency and Variable overhead efficiency (1 mark)
(f) The decision to pay labour a bonus for greater productivity resulted in labour taking ____ hours
less than allowed for in the flexed budget.
 200
 800
 1,200
 2,800 (2 marks)
(g) The fixed overhead expenditure variance was _____ .
 Favourable
 Adverse (1 mark)
(10 marks)

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2 EDTED
Edted uses a standard costing system to control its costs and revenues. A standard cost card for its
product is given below, along with a standard cost operating statement for the last quarter.
Standard cost card
$
Selling price 180
Fixed overheads 3 hrs @ $8 per hour 24
Profit 57
$
Budgeted profit 798,000
Flexed budgeted profit 832,200
Sales price variance 73,000
$ $
Labour rate 12,921
Fixed overhead expenditure 12,140
Fixed overhead capacity 8,560
Fixed overhead efficiency 5,840
23,447
Actual profit 928,647
There was no opening and closing inventory of raw materials. There was no opening inventory of
finished goods. Edted produced 14,600 units during the year and has not yet carried out an inventory
count of closing finished goods inventory.
Required:
Fill in the gaps from the choices listed below each gap.
(a) Edted uses standard _______ costing.
 Absorption
 Marginal (1 mark)
(b) In the last month units sold were _____ budgeted.
 190 less than budgeted
 600 less than budgeted (2 marks)
(c) Actual sales revenue was _____ per unit than budgeted.
 More
 Less (1 mark)

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(d) The actual quantity of materials used was ____ kg.

 54,957
 56,870
 59,930
 61,843 (2 marks)
(e) Labour was paid ____ per hour than was budgeted for actual hours worked.
 $0.300 less
 $0.300 more
 $0.313 less
 $0.313 more (2 marks)
(f) The actual level of fixed overhead expenditure was _______.
 $323,860
 $333,740
 $338,260
 $348,140 (2 marks)
(10 marks)
3 WAKEUUP
Wakeuup processes materials for healthy breakfast cereals.
The standard costs for each tonne of processed material are as follows:
 1.2 tonnes of raw, unprocessed, materials are required at $30 per tonne.
 It takes 2 labour hours to produce 1 tonne of processed material, with labour being paid at
$22.50 per hour.
 2 hours of variable overhead at a cost of $10 per hour are budgeted for the product.
 The standard selling price is $160 per tonne.
 The standard contribution per tonne is $54 per tonne.
 Fixed costs in July were budgeted at $160,000 and budgeted production and sales were 25,400 units.
 Actual production and sales in July were 24,900 units. Sales revenue achieved was $3,996,450.
Cost details were as follows:
 30,200 tonnes of raw materials were paid for, costing $901,470.
 51,050 labour hours were paid for, costing $1,153,730.
 Variable production overhead costs were $494,000.
 Fixed overhead costs were $164,000.
Required:
(a) Complete the standard cost operating statement with the cost variances and calculate the
actual profit.

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$
Budgeted contribution 1,371,600
Sales volume variance (27,000)
Flexed contribution 1,344,600
$ $
Material price
Material usage
Labour rate
Labour efficiency
Variable overhead expenditure
Variable overhead efficiency
Total cost variances

Fixed overhead expenditure variance
Actual profit
(8 marks)
(b) Which TWO of the following could explain an adverse labour efficiency variance?
 Idle time is less than the amount allowed in the budget
 Introduction of new, better quality, equipment
 Stricter quality control procedures resulting in a lower volume of good output
 Under-estimation when budgeting of the time taken to produce individual units
(2 marks)
(10 marks)

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4 HARVEYHEDGE
The standard cost card for Harveyhedge’s main product, the Sweelin, is shown below. The expected
sales and production for June were 1,750 units.
Standard cost card
$
Selling price 200
Fixed overheads 2 hrs @ $15 per hour 30
Profit 66
The actual data for June for this product is shown below but is incomplete.
$
Sales volume variance 9,900 F
Sales price variance 1,200 A
Material usage variance 5,250 A
Material price variance 2,730 F
Labour rate variance 2,640 F
Labour efficiency variance 3,520 A
Total variable overhead variance 2,340 F
Total fixed overhead variance 1,350 A
Number of labour hours worked 4,060
Quantity produced 1,950
Required:
Calculate the following figures for Harveyhedge in June.
(a) Actual sales revenue
$ (2 marks)
(b) Actual material usage (in kg)
kg (1.5 marks)
(c) Actual labour costs incurred
$ (1 mark)
(d) Variable overheads incurred
$ (1.5 marks)
(e) Actual fixed overheads incurred
$ (2 marks)

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The board of Harveyhedge is worried about the levels of labour efficiency and would like further
information on how this can be measured.
(f) Which two of the following measures would provide information about the efficiency of
Harveyhedge’s workforce?
 Expected output for a worker week compared with the actual output
 Actual output for a worker week compared with the actual labour time
 Expected labour time for actual output produced compared with actual labour time
 Expected quality of output produced compared with actual quality of output produced
(2 marks)
(10 marks)

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104 18: Fi n an c i al p e rf o rman c e me as u res A C C A MA

Performance measurement overview
1 Which of the following elements would be included in a company’s mission statement?
 Strategy
 Profitability
 Liquidity
 Values
2 Reduction in the number of customer complaints by 20% in a year is an example of what kind of
objective?
 Fundamental
 Strategic
 Tactical
 Operational
Financial measures
Use the following information to answer the next thirteen questions.
Statement of financial position $000 $000
Non-current assets 20,000
Current assets
Inventories 6,000
Receivables 3,000
Cash 1,000
10,000
30,000
Equity 20,000
Non-current liabilities
Loan 8,000
Current liabilities
Trade payables 1,500
Taxation 500
2,000
30,000
Statement of profit or loss

$000
Revenue (all credit sales) 25,000
Cost of sales (16,000)
Gross profit 9,000
Other operating expenses (2,000)
Profit before interest and tax 7,000
Finance cost (500)
Profit before tax 6,500

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A C C A MA 18: Fi n an c i al p e rf o rman c e me as u res 105
3 What is the return on capital employed?
4 What is the gross profit margin?
5 What is the net profit margin?
6 What is the asset turnover?
7 What is the current ratio?
8 What is the quick ratio?
9 What is the inventory turnover?
10 What are inventory days?
days
11 What is the receivables collection period?
days
12 What is the payables payment period?
days
13 What is the debt to equity ratio?

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14 What is the gearing ratio?
15 What is the interest cover?
Use the following information to answer the next thirteen questions.

Current assets
Inventories 3,000
Receivables 6,000
Cash 3,000
12,000
62,000
Equity 40,000
Loan 16,000
Current liabilities
Taxation 1,000
6,000
62,000

$000
Revenue (all credit sales) 40,000
Gross profit 15,000
Finance cost (2,000)
Profit before tax 10,000
16 What is the return on capital employed?
17 What is the gross profit margin?
18 What is the net profit margin?

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19 What is the asset turnover?
20 What is the current ratio?
21 What is the quick ratio?
22 What is the inventory turnover?
23 What are inventory days?
days
24 What is the receivables collection period?
days
25 What is the payables payment period?
days
26 What is the debt to equity ratio?
27 What is the gearing ratio?
28 What is the interest cover?

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29 The rail operation serving the North-East of Earland is government-owned. The service operates
in a region with few large towns and in quite rural, sometimes difficult terrain, with a poor road
infrastructure. The prices charged by this service are capped by the government. The rail
company that serves the short-distance commuter routes into Earland’s capital city is privately-
owned and the fares it charges to commuters are not regulated by the government.
Which of the following factors should not be allowed for when comparing the Return On Capital
Employed of the two rail providers to assess the efficiency of their management?
 The prices charged
 The social need for rail transport
 The potential demand for rail services
 The remuneration of senior management
30 A company has a capital employed of $600,000. It has a cost of capital of 12% per year and a
return on investment of 15%.
What is the company’s residual income?

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1 OLDTED
Oldted has just published its financial statements for the year ended 31 August. The figures for this
year are shown with comparatives for last year.
Current year Previous year
Statement of financial position $000 $000 $000 $000
Non-current assets 29,100 28,780
Current assets
Inventories 11,410 9,580
Receivables 1,260 1,100
Cash 320 450
12,990 11,130
42,090 39,910
Equity 23,500 21,320
Loan 9,860 10,810
Current liabilities
Trade payables 8,130 7,240
Taxation 600 540
8,730 7,780
42,090 39,910
Statement of profit or loss $000 $000
Revenue 32,200 29,220
Cost of sales (25,410) (22,860)
Gross profit 6,790 6,360
Other operating expenses (3,200) (3,150)
Profit before interest and tax 3,590 3,210
Finance cost (810) (690)
Profit before tax 2,780 2,520
Taxation (600) (540)
Profit after tax 2,180 1,980
Required:
(a) Calculate the % change in gross profit, to the nearest 0.1%.
% (1 mark)
(b) Calculate the return on capital employed for this year, to the nearest 0.1%.
% (1 mark)
(c) Calculate the return on capital employed for last year, to the nearest 0.1%.
% (1 mark)
(d) Calculate the asset turnover for this year to 2 decimal places.
(1 mark)
(e) Calculate the asset turnover for last year to 2 decimal places.
(1 mark)

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(f) Calculate the inventory turnover for this year.
(1 mark)
(g) Calculate in days the change in the inventory period between this year and last year.
days (2 marks)
The directors of Oldted are concerned about the level of inventory holding and ordering costs.
(h) Which ONE of the following would be a way of minimising the total of these costs?
 More frequent inventory counts
 Use of the Economic Order Quantity model
 Making more use of supplier discounts
 Increasing buffer inventory levels (2 marks)
(10 marks)
2 LOXWOOD FOODS
Loxwood Foods is a food manufacturing and distribution based on a model of autonomous profit
making divisions.
In the year that has just ended Loxwood’s Ready Meals division made an operating profit of $1.5m. Its
non-current assets were $6.5m and it had net current assets of $1m.
Up to now, the Ready Meals division has only offered a limited selection of vegetarian meals. As
however these have been the division’s biggest revenue earner over the last two years, Loxwood’s
board wants the division to make a significant investment to expand the range very significantly. To do
this, the division will need to invest an additional $1.5m in non-current assets and an additional $0.8m
in net current assets. The expanded range is forecast to make an additional $0.45m profit for the
Ready Meals division. Loxwood uses a cost of capital of 9% to appraise the performance of its
divisions.
Required:
(a) Calculate the return on investment for the Ready Meals division for last year, to the nearest 0.1%.
% (1.5 marks)
(b) Calculate the forecast return on investment for the Ready Meals division if the expansion takes
place, to the nearest 0.1%.
% (1.5 marks)
(c) Calculate the residual income for the Ready Meals division for last year.
$ m (1.5 marks)
(d) Calculate the forecast residual income for the Ready Meals division if the expansion takes place.
$ m (1.5 marks)

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(e) Which two of the following would be disadvantages of using the Residual Income (RI) approach
to appraise the performance of the Ready Meals division?
 RI could increase every year because assets are getting older, even though profits may
remain static or fall.
 RI cannot easily be used to compare the performance of divisions of different sizes.
 RI is inflexible, since a single cost of capital has to be used to compare every division.
 RI does not provide a clear indicator that prompts managers to undertake profitable
investments. (2 marks)
The Managing Director of the Ready Meals division has commented that she believes that Loxwood
will have to offer the new range at the same prices that competitors are offering similar products.
Given that she wishes to maintain the same profit margin on the new meals as on the current
vegetarian meals, Loxwood will have to find ways to limit the costs of these products.
(f) This approach to costing is known as:
 Activity-based costing
 Process costing
 Target costing
 Job costing (2 marks)
(10 marks)

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112 19: N o n - fi n an c i al p e rf o rman c e me as u re s a n d pe rf o rman c e re p o rt i n g A C C A MA


Non-financial measures
1 Which of the following would be a suitable measure of resource utilisation in a training
business?
I Number of teaching days per tutor/trainer
II Average number of empty classrooms per day
III Material cost per student
 I only
 III only
 I and II only
 II and III only
Balanced scorecard
2 Match the following performance indicators with the perspective of the balanced scorecard that
they provide.
A Market share
B Staff absenteeism rates
C Number of deliveries made within a week of order
D Time from order to despatch from factory
I Financial
II Customer
III Innovation and Learning
IV Internal business process
Activity, efficiency and capacity ratios

Oldted Limited budgeted to produce 100,000 units in September with a standard time per unit of 3
hours. Oldted actually produced 105,000 units in September and its actual hours of production were
285,000 hours.
3 What was the activity ratio in % of Oldted, to one decimal place?
4 What was the efficiency ratio in % of Oldted to one decimal place?

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A C C A MA 19: N o n - fi n an c i al p e rf o rman c e me as u re s a n d pe rf o rman c e re p o rt i n g 113
5 What was the capacity ratio in % of Oldted to one decimal place?
Process and job performance measurement

6 Which TWO of the following methods can be used to assess resource utilisation?
 Idle time
 Expenditure on resources
 Productivity
 Customer satisfaction
Non-profit seeking and public sector organisations

7 After a number of accidents at its factory, LP’s board compelled all staff working at the factory
to attend compulsory health and safety training. The directors were pleased to see that the
number of accidents in the factory fell significantly after staff had undertaken training.
The reduction in the number of accidents is a measure of the training course’s:
 Economy
 Efficiency
 Effectiveness
 Equality
Manufacturing and service businesses

8 Which of the following performance measures would be helpful for a service industry company?
 Net profit margin
 Number of returning customers
 Staff turnover
 Comparison of actual performance with standard production times
Benchmarking
9 A manufacturing business compares the operational efficiency of all its other factories against
its best performing factory. This is an example of what type of benchmarking?
 Strategic
 Competitive
 Internal
 Functional

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Performance reports
10 Which of the following performance measures is most likely to be reported because of
government regulations?
 CO2 emissions
 Growth in customer numbers
 Cash flow
 Staff turnover
1 FUZZY LIMITED
The Finance Director of Fuzzy Limited is concerned about the performance of its Western division. He
has the following information available for last year.
$000
Revenue 18,000
Operating profit 5,500
Capital employed 80,000
Number of employees at start of year 46
Number of employees at end of year 44
Average number of employees 45
Number of staff leaving during the period 11
Budgeted employee hours 50,000 hours
Actual hours worked 49,500 hours
Standard hours produced 49,700 hours
The division’s imputed charge for the purpose of calculating performance is 10%.
Required:
(a) Calculate the return on investment in % to 2 decimal places.
% (1 mark)
(b) Calculate the residual income.
$ (1 mark)
(c) Calculate the labour turnover ratio in % to 2 decimal places.
% (1 mark)
(d) Calculate the labour efficiency ratio in % to 2 decimal places.
% (1 mark)
(e) Calculate the labour capacity ratio in % to 2 decimal places.
% (1 mark)

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(f) Calculate the labour activity ratio in % to 2 decimal places.
% (1 mark)
(g) State which of the following are advantages of the Return on Investment measure of divisional
performance.
Yes No
Divisional managers have to consider the costs of financing their  
divisions.
Divisional managers avoid dysfunctional decision-making.  
It is directly related to net present value.  
It means that managers will select projects with positive net  
present values.
It relates size of income to size of investment.  
It is an absolute measure of performance.  
It helps in comparing performance of managers who control  
divisions of different sizes.
It is easily understood by managers.  
(2 marks)
(h) Which TWO of the following reasons could explain adverse results for measurement of labour
efficiency?
 The rate of staff turnover was higher than budgeted.
 Errors were made when allocating time to jobs during planning.
 Idle time that was built into the budget was incurred at the expected level.
 There was an increase in wage rates. (2 marks)
(10 marks)

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2 BROADBRIDGE CLINICS LTD

Broadbridge Clinics Ltd is a private healthcare provider, offering rest and recuperation to patients
recovering from serious operations. Its clinics are open 365 days a year.
The following data was included in the company’s annual report last year.
$000
Revenue 3,940
Operating profit 1,356
Taxation (340)
Profit after tax 1,016
Statement of financial position summary

$000
Assets 8,765
Equity 8,345
Current liabilities 420
Staff average numbers (full-time equivalents)
Doctors 12
Nurses 38
Administration staff 7
Other staff 15
Other statistics
Number of patients 1,250
Average length of stay (nights) 20
Average number of beds 90
Required:
Calculate the following ratios and other statistics for Broadbridge Clinics.
(a) Return on capital employed to the nearest %.
% (1 mark)
(b) Net profit percentage to the nearest %.
% (1 mark)
(c) Operating profit per patient night to the nearest $.
$ (2 marks)
(d) Percentage occupation of beds to the nearest %.
% (2 marks)
(e) Revenue per member of the medical staff to the nearest $000.
$ (1 mark)
(f) Operating profit per employee to the nearest $000.
$ (1 mark)

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The Managing Director of the clinics has been concerned by complaints of the lack of flexibility in the
services provided to patients by the clinics.
(g) Which TWO of the following are indications of the flexibility of service delivery by the clinics?
 Speed of delivery of care to patients
 Number of available beds
 Staff turnover
 Care plans tailored to individual patients (2 marks)
(10 marks)
3 SYDNEY DARWIN LIMITED

The directors of Sydney Darwin Limited are worried about the company’s annual financial situation.
Sydney Darwin’s bank has expressed concern about the length of time that it has maintained an
overdraft and has asked Sydney Darwin’s directors to reduce the overdraft significantly over the next
six months. The bank is also concerned about Sydney Darwin’s ability to pay its finance costs and repay
its bank loan.
Sydney Darwin has just published its accounts for the most recent accounting year.
Current assets
Inventories 3,410
Receivables 2,340
5,750
31,850
Equity 18,800
Bank loan 8,100
Current liabilities
Bank overdraft 950
Taxation 100
4,950
31,850
Statement of profit or loss $000

Revenue 38,200
Gross profit 6,750
Finance cost (800)
Profit before tax 400
Taxation (100)
Profit after tax 300
Required:
Calculate the following ratios for Sydney Darwin Limited.
(a) Interest cover
(1 mark)

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(b) Gearing, using total capital for comparison, to the nearest %.
% (1 mark)
(c) Current ratio to 2 decimal places.
(1 mark)
(d) Quick ratio to 2 decimal places.
(1 mark)
Sydney Darwin’s directors wish to understand what these calculations mean.

(e) Which ratio gives the best indication of Sydney Darwin’s ability to pay its finance costs?
 Interest cover
 Gearing
 Current ratio
 Quick ratio (2 marks)
(f) Which ratio gives the best indication of Sydney Darwin’s ability to raise money quickly to reduce
its overdraft?
 Interest cover
 Gearing
 Current ratio
 Quick ratio (2 marks)
The Managing Director of Sydney Darwin Limited believes that the company’s management needs to
carry out a fundamental review of all the company’s operations, in order to find effective ways of
reducing costs. He believes that the company needs to have a completely fresh look at the procedures
it carries out, without being influenced by what it currently does.
(g) This approach to cost management is known as:
 Total quality management
 Activity-based costing
 Target costing
 Business process re-engineering (2 marks)
(10 marks)

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ANSWERS TO CHAPTER QUESTIONS


Accounting for management
1  I Only
There is no legal requirement to produce management accounts and they do not need to be in a
prescribed format.
2  False
Cost accounting is concerned with costing of production. Management accounting is concerned
with summarising and budgeting the financial accounts.
Planning, decision-making and control
3  I and II and III

Management accounts are both a historical record and a future planning tool. Management
accounts may be provided in monetary and non- monetary format.
Data and information
4
Data Information
% of first time students who passed final exams  
Increase in % of students passing first time since last sitting  
Data is the raw unprocessed figures that have been collected about an activity or procedure.
Information is processed data that is now in a form that makes it valuable to the user
5  It is usually based on what has happened in the past

 It does not take account of external factors effecting the business
For decision making, it is useful to have information on what might happen in the future and
this may depend on what is likely to happen in the external environment. Management
accounts do not provide this information. This is where the judgement of senior managers is
important
6  A local bus company

A local bus company is likely to be looking at a much more limited range of information than the
others to assess likely demand for its services.

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7
Internal External
Lists of potential customers  
Current exchange rate  
Weekly sales figures  
Inflation rate  
8  The information may not be tailored for the exact purpose for which it is required
 There is so much information that there is a danger of information overload
 The source of the information may not be reliable
There is as much mis-information as there is information on the internet. So although it is cheap
and easy to acquire, great care is needed.
9  I, II and III
Sampling
10  Systematic sampling
The advantage of systematic sampling is that it is cheap and easy to use
11  The population is divided into groups and then all units within randomly selected groups
are taken.
Cluster sampling is a non-random sampling method that divides the population into clusters.
Clusters are selected randomly, and then all units within selected clusters are included in the
sample. No units from non-selected clusters are included.
12
Stratified
Random Multistage Systematic
A number of UK universities are selected and then all   
girls in the selected university are selected
10 children are randomly chosen from each year   
group in a School
Evert 100th person to enter a supermarket is   
selected on a given day
Presenting information
13  Terms of reference

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14  News
15 24 %
(23/94) × 100%
16 49
106 – 34 – 23 = 49
17 79 %
(200 – 42 /200) × 100%
18 36 %
(13/36) × 100%
19  News
Men % Women % Difference %
Post 24.5 22.6 1.9
News 43.6 32.1 11.5
Chronicle 13.8 21.7 7.9
Press 18.1 23.6 5.5
100.0 100.0
20  20X0
21 50 %
(1 + 3) / 8 × 100%
22 3 years
23  20X0
24  Fixed cost

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25  Stir
26  Gently Gently
27  Yes
28  Stir
29  No
30  Multiple bar chart

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Statistical techniques
1
129.5
Prices in 20X4 = 110 × (400/100) = $440

Prices in 20X6 = ($440 × 1.15) + S12 = $518
Index in 20X6 = $518 × (100/400) = 129.5
2
$ 678,500
y = 122,000 + 5.3x therefore y = 122,000 + 5.3(105,000) = 678,500
3
0.957
r = (6 × 1,617,496) – (231 × 41,551) / √ [ (6 × 9,405) – (231 x 231)] [(6 × 288,423,181) – (41,551 × 41,551)]
= 106,695 / √ (3,069 × 4,053,485)
= 106,695/111,535
= 0.957
4
Moving
Year Quarter Sales average Centred moving average Working
$ $ $
1 1 60,000
2 144,000
160,500
162,000 (160,500 +
3 198,000
163,500) / 2
163,500
168,000 (163,500 +
4 240,000
172,500) / 2
172,500
2 1 72,000
2 180,000

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5  3,900 units
Q1 Q2 Q3
Actual units sold 3,180 3,530 3,140
Seasonal variation +180 +230 -460
Trend = Actual – Seasonal 3,000 3,300 3,600
6 97,750 units
y = 10,000 + 4,200x
Under additive model, actual sales = TxS
T = 10,000 +4200(25) = 115,000
T x S = 115,000 × 85% = 97,750 units
7  The results become less reliable for predictions that are within the range of existing
observations.
8 3
𝑛𝑛 ∑ 𝑥𝑥𝑥𝑥−(∑ 𝑥𝑥)(∑ 𝑥𝑥)
𝑏𝑏 = 2
𝑛𝑛 ∑ 𝑥𝑥 −(∑ 𝑥𝑥)2
7 ∑ 532−(28 ×112)
𝑏𝑏 =
(7 ×140)−(28)2
3,724−3,136 588
𝑏𝑏 = 980−784
= 196 = 3
9  65.61%
Coefficient of determination (𝑟𝑟 2 ) is the correlation coefficient (r) squared = 0.812 = 0.6561 =
65.61%
10 3,500 units
Q3 sales = 2,450 which is 30% less than the trend.
2,450
Therefore trend = 0.7
= 3,500
11 40,000 units
Actual sales = Trend × seasonal variation
Let trend = x
30,000 = x × 0.75
30,000
x (trend sales) = 0.75
= 40,000

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12  149,000 units
Trend sales = 144,000 + (1,800 × 2) = 144,000 + 3,600 = 147,600
Forecast sales = Trend + Seasonal variation
Forecast sales = 147,600 + 1,870 = 149,470 or 149,000 (to the nearest 1,000 units)
13
112
Index number = (448/400) × 100 = 112
14
450,000 kg
Base level = 513,000 × (100/114) = 450,000
15  Writing a memo
16  =C4 – C5
17  =B6/B2*100
18  $10,020
19 $ 21.96
$20 × 101/92 = $21.96
20  20.52
21 118.1
189/160 × 100 = 118.1

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Expected values
1  It is impossible to say
Without the probabilities to assign, it is impossible to calculate the expected value of each
project.
2  Either Project X or Project Z

If the prices are equally likely then, EV of project X = $70,Y = $66 and Z = $70
3  1.05
Number of errors on
invoice Number of invoices EV
0 80 0
1 65 65
2 30 60
3 15 45
4 10 40
5 or more 0 0
Total 210
There are 210 errors in total on 200 invoices = 210/200 = 1.05 per invoice
4  40
Level of demand
p .3 .2 .35 .15 EV
20 30 40 50
Order Qty
20 30 30 30 30 30
30 20 45 45 45 37.5
40 10 35 60 60 40
50 0 25 50 75 33.75
Ordering 40 has the highest expected profit

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5
230
Number of Midpoint Frequency (Number of

visitors (a) days) (b) (a) × (b)
0 – under 100 50 5 250
100 – under 200 150 9 1,350
200 – under 300 250 6 1,500
300 – under 400 350 7 2,450
400 – under 500 450 3 1,350
30 6,900
Expected number of visitors = 6,900/30 = 230
6  Expected value
7
$ 85600
Variable Contribution Total Fixed Joint

Demand Cost per unit Contribution Costs Profit Probability
$ $ ($’000) ($’000) ($’000)
(x) (p) (px)
30,000 6 6 180,000 80,000 100,000 0.02 2,000
8 4 120,000 80,000 40,000 0.03 1,200
10 2 60,000 80,000 (20,000) 0.05 (1,000)
50,000 6 6 300,000 100,000 200,000 0.12 24,000
8 4 200,000 100,000 100,000 0.18 18,000
10 2 100,000 100,000 Nil 0.30 Nil
70,000 6 6 420,000 100,000 320,000 0.06 19,200
8 4 280,000 100,000 180,000 0.09 16,200
10 2 140,000 100,000 40,000 0.15 6,000
1.000
EV (profit) 85,600
8  A fall of $75
Current expected value
(0.6 × 2,500) + (0.4 × 1,000) = $1,900
Revised expected value
(0.55 × 2,500) + (0.45 × 1000) = $1,825
So a fall of $75

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9  $2,400
Multiply the profit with estimated probability. Take sum of all the expected values to calculate
the final.
Profit ($000) Probability EV
–1 0.1 –0.1
1 0.3 0.3
3 0.4 1.2
5 0.2 1
2.4
10  0.23
(0 × 316) + (1 × 79) + (2 × 3) + (3 × 1) + (4 × 1) + (5 × 0) + (6 × 0)
= 0 + 79 + 6 + 3 + 4 + 0 + 0 = 92
Expected number of defects per box = 92/400 = 0.23 (to 2 decimal places)
11  295
Number of Midpoint Frequency (Number Proportion
visitors to store (a) of stores) (b) (a) × (b)
0 – under 100 50 50 0.05 2.50
100 – under 200 150 100 0.1 15.00
200 – under 300 250 250 0.25 62.50
300 – under 400 350 550 0.55 192.50
400 – under 500 450 50 0.05 22.50
295.00
Averages and distributions
12 “The mode is the most frequently occurring item in a population.”
13  2.5
Arranged in order the number of rejects are: 1, 1, 2, 2, 2, 3, 3, 4, 5, 6
The median is the average of the 5th and 6th value: (2 + 3)/2
14  2
Arranged in order the number of rejects are now: 1, 1, 1, 2, 2, 2, 3, 3, 4, 5, 6
The median is the 6th value which is now 2

lOMoARcPSD|21428003
15 54.27
Midpoint Number of f×x 𝒙𝒙𝟐𝟐 f𝒙𝒙𝟐𝟐

Daily sales ($) x days (f)
0 to < $50 25 2 50 625 1,250
$50 to < $100 75 3 225 5,625 16,875
$100 to < $150 125 7 875 15,625 109,375
$150 to < $200 175 12 2100 30,625 367,500
$200 to < $250 225 4 900 50,625 202,500
28 4,150 103,125 697,500
∑ 𝑓𝑓𝑥𝑥 $4,150
Mean daily sales = x̅ = ∑ 𝑓𝑓
= 28
=$148.21
∑𝑓𝑓 𝒙𝒙𝟐𝟐
Standard deviation, σ = � ∑ 𝑓𝑓
− ��
x2
697500 4150
=σ=� − � � 2 = �24911 − (148.21 × 148.21) = √24,911 − 21,966
28 28
= �2,945 = 54.27
16  The variance is 468.75 and the standard deviation is 21.65

𝟐𝟐
Quarter Purchases (𝒙𝒙 - �)
𝐱𝐱 (𝒙𝒙 − ��
𝐱𝐱)
(units)
1 80 32.5 1056.25
2 40 (7.5) 56.25
3 50 2.5 6.25
4 20 (27.5) 756.25
190 1875.00
190
x̅ = = 47.5
4
∑(𝑥𝑥−𝑥𝑥̅ )2
Variance = σ2 = 𝑛𝑛
= 1875/4 = 468.75
∑(𝑥𝑥−𝑥𝑥̅ )2
Standard deviation, σ = � 𝑛𝑛
= √468.75 = 21.65
17
46 %
σ 21.65
Coefficient of variation = x�
× 100 = 47.5
× 100 = 45.6%
18
161.5 ─ 164.5 cm

lOMoARcPSD|21428003
19  99.865%
3 standard deviations above mean = 0.49865
Jenny is taller than everyone below 0.49865 = 0.49865 + 0.5 = 0.99865 = 99.865%
20
Discrete Continuous
Time taken by labour – three hours  
Materials used – 5,000 kg  
Output produced – 1,000 units  
Hours or kg can take on any value – they don’t have to be whole numbers, and are therefore
continuous data. The units produced are distinct and separate and are therefore discrete.
21  It is the middle point of a population.

Populations can only have one median. The average is the expected value of the population.
The standard deviation indicates the degree of dispersion of the values in a population.
22  The standard deviations show that the amounts donated were less variable in 20X3 than
in 20X0.
Standard deviation has fallen, showing a smaller variation. The mean has risen, indicating the
average donation has risen, not fallen. The standard deviations do not indicate average
donations, the means do not indicate how variable the amounts donated were.
23  Data B
A B C D
Mean 125 150 175 200
Standard deviation 20 25 20 25
Coefficient of variation 0.16 0.167 0.114 0.125
Coefficient of variation = Standard deviation / Mean
The bigger the coefficient of variation, the wider the spread. B has the largest coefficient of
variation.
24  2.83
𝑥𝑥̅ = (2 + 4 + 6 + 8 + 10) / 5 = 6
𝑥𝑥 𝑥𝑥 − 𝑥𝑥� (𝑥𝑥 − 𝑥𝑥�)2
2 –4 16
4 –2 4
6 0 0
8 2 4
10 4 16
∑ 0 40
Standard deviation = �40/5 = 2.83

lOMoARcPSD|21428003
25  25%
Cv = Standard Deviation / Mean
3/12 = 0.25 → 25%
26  2.2
Application of the formula ∑ 𝑓𝑓𝑥𝑥/ ∑ 𝑓𝑓 = 110 / 50
Number of rejects in Number of samples fx
each sample (frequency of reject)
0 5 0
1 10 10
2 10 20
3 20 60
4 5 20
5 0 0
∑f = 50 ∑fx = 110
27  Neither I nor II
50% of scores are always less than the median. The variance is a measure of the total spread of a
population rather than average spread around the mean (which is measured by the standard
deviation).
28  The probability that sales revenue will be in the range $36,800 to $63,200 is 90%.
There is a 5% chance that sales revenue will be greater than $63,200 and a 5% chance that sales
revenue will be less than $36,800.
29
216.51
𝟐𝟐
Quarter Sales (units) (𝒙𝒙 - 𝐱𝐱
�) (𝒙𝒙 − ��
𝐱𝐱)
1 500 25 625
2 400 (75) 5,625
3 800 325 105,625
4 200 (275) 75,625
1,900 187,500
1,900
x̅ = = 475
4
∑(𝑥𝑥−𝑥𝑥̅ )2
The standard deviation, σ = � 𝑛𝑛
187,500
=� 4
= 216.51

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30
1.7
24
x̅ = 8
=3
Number of books read (𝒙𝒙 - 𝐱𝐱
�) ��𝟐𝟐
(𝒙𝒙 − 𝐱𝐱)
2 -1 1
5 2 4
0 -3 9
3 0 0
5 2 4
4 1 1
4 1 1
1 -2 4
24
(𝑥𝑥−𝑥𝑥̅ )2 24
Standard deviation = � = � 8 = √3 = 1.7
𝑛𝑛

lOMoARcPSD|21428003
Chapter 4: Costing

Cost classification
1
Production Non Production
costs costs
Production worker salaries  
Marketing campaign  
Factory electricity bills  
Head office stationary  
2  Material components used to manufacture the new product

The material is directly traceable to each unit of production, hence they are direct costs.
The cost of registering the patent is an overhead. The cost is linked to the production of the
product, but is not traceable to the individual units of production (the cost is not an incremental
cost for each additional unit produced).
The finance department costs cannot be traced directly to a product so they are indirect costs.
Overheads are always classed as factory overheads unless the overtime is worked at the specific
request of the customer to get his order completed or the overtime is worked regularly in the
normal course of operations in which case it is incorporated into the direct labour hourly rate.
3  Production overhead cost
4 $ 483
Selling price of the repair $690

Less profit mark-up ($138)
Cost of repair $552
Less overhead cost ($69)
Prime cost $483
5  Semi–variable cost
A fixed and variable element as per the electricity example is a semi-variable cost
Step-cost –This is a fixed cost which increases once operating capacity is surpassed
High-low cost –This is a method to split a semi variable cost into fixed and variable elements
Fixed cost –This is cost which remains constant as output rises

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6  remain constant in total when output volume changes

TOTAL fixed costs remain constant as OUTPUT varies. The Fixed cost PER UNIT, would fall as
output increases as the fixed cost is spread over a great number of units.
7  True
Only direct materials and direct labour are separately identified in the prime cost. All other
direct costs are grouped together as direct expenses.
8  Prime cost
The royalty per unit can be directly allocated to a particular unit of production. This can be
allocated as a DIRECT expense and so is a prime cost.
9  A separate cost centre
Cost behaviour
10 C
11 D
12 B
13 A
14  Costs do not change with the level of activity until the activity level exceeds a certain
point. They then increase, but then remain stable again until activity levels exceed
another critical point.
15
$ 14,000
Output Cost ($)

Highest output 24,000 110,000
Lowest output 9,000 50,000
Difference 15,000 60,000
60,000
Variable cost = 15,000 = $4 per unit.
Total cost = Fixed cost + Variable cost

$110,000 = Fixed cost + $4 × 24,000
Fixed cost = $110,000 ─ $96,000 = $14,000

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16  $20,000
Output Cost ($)
Highest output 25,000 95,000
Lowest output 10,000 50,000
45,000
Variable cost = 15,000 = $3 per unit.
Total cost = Fixed cost + Variable cost

$95,000 = Fixed cost + $3 × 25,000
Fixed cost = $95,000 ─ $75,000 = $20,000
17  Fixed cost
18  Step
The cost of supervisors increases at intervals when a certain number of employees work for the
factory.
19  Variable costs are only variable in the short-term.

Variable costs can be variable in the long-term as well.
20  Commission received by sales staff.

This will vary with sales levels.
21
$ 2.90
Highest activity level is 27,000 and lowest activity level is 7,000

Adjusted highest activity level cost = $128,000 – $12,000 = $116,000
Variable cost per unit = ($116,000 – $58,000/27,000 – 7,000) = $2.90
22
$ 37,700
Fixed cost at lowest level = $58,000 – (7,000 × $2.90) = $37,700

lOMoARcPSD|21428003
23
$ 8.55
Highest activity level is 24,000 and lowest activity level is 4,000

Adjusted highest activity level cost = $195,000 + (24,000 × 1.50) = $231,000
Variable cost per unit at lowest level = ($231,000 – $60,000)/(24,000 – 4,000) = $8.55
24
$ 25,800
Fixed cost at lowest level = $60,000 – (4,000 × 8.55) = $25,800
25  $116,575
26 $ 1.25
27 $ 370000
$
Labour cost per unit (40,000 × $4) 160,000
Material cost per unit (40,000 × $3) 120,000
Variable overhead per unit (40,000 × $2) 80,000
Fixed overheads per month 10,000
Total cost 370,000
Cost coding
28 100300 PB
Cost measurement
29  A function or location for which costs are ascertained
Management of business units
30  Sales prices
 Capital investment
 Controllable costs

lOMoARcPSD|21428003

Accounting for materials
1
28,200 units
Free inventory = Materials currently in inventory + Materials ordered from suppliers – Materials
allocated to customers
Free inventory = 30,500 + 24,400 – 26,700
Free inventory = 28,200
2  Provides information to update inventory records

 Allows quantities delivered by supplier to be checked
3
375 DVD players
Reorder level = Lead time in days × Daily demand
Reorder level = 15 × 25 = 375
4
90 units
Reorder level = Lead time in days × Daily demand
Reorder level = 5 × (459 × 12)/(51 × 6) = 90 units
5  LIFO is based on the assumption that the oldest units are sold first.
6  Establishing the quantity to be produced.
7
339 units
2CoD
EOQ =
Ch
EOQ = √ (2 × 40 × 600 × 12/25 × 0.2) = 339 units

lOMoARcPSD|21428003
$ 3,600
Annual holding cost = Ch(Q/2)

Annual holding cost = 0.50 × 12 × (1,200/2) = $3,600
9
$ 12,000
Total annual cost = Co(D/Q) + Ch(Q/2)

Total annual cost = (180 × 50,000/1,500) + (8 × 1,500/2) = $12,000
10  The losses figure includes any inventory that has been written off as obsolete.
 The work-in-progress figure represents materials issued to production.
The supplier was not necessarily paid for purchases during the month. The returns figure
represents returns from production to inventory.
11  Purchase cost of item
12  Purchase requisition
This is an internal document, sent by Stores to the Purchasing Department
13
Fixed Variable
Ordering inventory  
Holding inventory  
14
2,000 units
2CoD
EOQ =
Ch
EOQ =√ (2 × 40 × 100,000/2)= 2,000 units
$ 4,000
Total annual cost = 40 × (100,000/2,000) + 2 × (2,000/2) = $4,000

lOMoARcPSD|21428003
15
2,000 units
Ordering EOQ units
2CoD
EOQ =
Ch
EOQ =√ (2 × 50 × 45,000/3) = 1,225 units
Total annual cost = 50 × (45,000/1,225) + 3 × (1,225/2) + 45,000 × 4 = $183,674
Using 2,000 units
Total annual cost = 50 × (45,000/2,000) + 3 × (2,000/2) + 45,000 × 4 × 0.95 = $175,125
Ordering 2,000 units is cheaper.
16
$ 1,050
Annual batch set-up cost = CoD/Q = 150 × 35,000/5,000 = $1,050
17
$ 2,000
Total annual cost

= CoD/Q + Ch(1 – (D/R))Q/2
= 50 × 12,000/600 + 10(1 – 12,000/18,000) × 600/2
= 1,000 + 1,000
= $2,000
18
3,000 units
2C 0D
Economic Batch Quantity =
CH (1 - D / R)
Economic Batch Quantity = √ (2 × 75 × 120,000/10 (1 – 120,000/150,000)) = 3,000 units
19
$ 6,000
Total annual cost

= CoD/Q + Ch(1 – (D/R))Q/2
= 75 × 120,000/3,000 + 10(1 – 120,000/150,000) × 3,000/2
= 3,000 + 3,000
= $6,000

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20  True
21  FIFO
FIFO will assume that the oldest, and here the cheapest, inventory is issued first.
22
$ 776,250
Date No of units Cost per unit Value

000 $ $
Opening 20 15.00 300,000
5 25 15.50 387,500
8 (20) 15.00 (300,000)
8 (15) 15.50 (232,500)
11 40 17.25 690,000
23 (10) 15.50 (155,000)
23 (20) 17.25 (345,000)
30 25 17.25 431,250
Closing 45 776,250
23
$ 527,500
$
Sales (65,000 × $24) 1,560,000
Cost of Sales (as above) (1,032,500)
Profit 527,500
24
$ 753,750

000 $ $
Opening 20 15.00 300,000
5 25 15.50 387,500
8 (25) (15.50) (387,500)
8 (10) (15.00) (150,000)
11 40 17.25 690,000
23 (30) 17.25 (517,500)
30 25 17.25 431,250
Closing 45 753,750

lOMoARcPSD|21428003
25
$ 505,000
$
Sales (65,000 × $24) 1,560,000
Profit 505,000
26
$ 768,450

000 $ $
Opening 20 15.00 300,000
5 25 15.50 387,500
45 15.28 687,500
8 (35) 15.28 (534,800)
11 40 17.25 690,000
50 16.85 842,700
23 (30) 16.85 (505,500)
30 25 17.25 431,250
Closing 45 768,450
27
$ 519,700
$000
Sales (65,000 × $24) 1,560,000
Profit 519,700
28
Higher Lower Unchanged
EOQ   
Annual holding cost   
If the Ordering cost per batch (Co) increased, this would raise the EOQ (see formula)
As Ch = % × (Purchase cost + Order cost), then any increase in Order Cost will increase in the
Annual Holding cost
29  219
30  Purchase order
 Supplier’s invoice

lOMoARcPSD|21428003
142 6: A c c o u n t i n g f o r l ab ou r A C C A MA

Accounting for labour
1
102.9 %
Expected hours = 60,000 × (150,000/50,000) = 180,000 hours
Labour efficiency ratio
= (Expected hours/Actual hours) × 100%
= (180,000/175,000) × 100%
= 102.9%
2
116.7 %
Labour capacity ratio

= (Actual hours/Planned hours) × 100%
= (175,000/150,000) × 100%
= 116.7%
3
120.0 %
Labour production volume ratio
= (Expected hours/Planned hours) × 100%
= (180,000/150,000) × 100%
= 120.0%
4  $103.20
Basic salary = $12 × 8 hours = $96
Time that should have been taken to produce 95 units = 95 × (6/60) = 9.5 hours
Time saved = 9.5 hours – 8 hours = 1.5 hours
Bonus = 1.5 × 40% × $12 = $7.20
Pay = $96 + $7.20 = $103.20
5  Training course costs

 Company doctor salary
Better training opportunities may be a means of motivating staff to stay. Replacement costs
would also include costs of training, of staff who had joined the organisation.

lOMoARcPSD|21428003
A C C A MA 6: A c c o u n t i n g f o r l ab ou r 143
6
$ 2.03
Time that should be taken to produce 126 units = 126 × (5/60) = 10.5 hours
Time saved = 10.5 hours – 8 hours = 2.5 hours
Total bonus = 9 × 2.5 × 60% = $13.50
Peter’s share = $13.50 × (100% - 40%) /4 = $2.03
7  Debit: Work in Progress Account $61,250, Overtime Premium Account $3,750

Credit: Labour Account $65,000

lOMoARcPSD|21428003

Accounting for overheads
1
P1 $ 90,200
P2 $ $125,100
Equations can be formulated as:

S1 = 9,300 + (7/70)S2
S2 = 6,000 + (5/50)S1
S1 = 9,300 + 0.1 (6,000 + 0.1S1)
0.99S1 = 9,900
S1 = 10,000
S2 = 6,000 + (0.1 × 10,000)
S2 = 7,000
P1 P2 S1 S2
$ $ $ $
Costs 80,000 120,000 9,300 6,000
S1 6,000 3,000 (10,000) 1,000
S2 4,200 2,100 700 (7,000)
90,200 125,100 Nil Nil
2
True False
As the department appears to be labour intensive a direct labour  
hour rate would be an appropriate overhead absorption rate
3  Overhead was $2,000 under-absorbed

Absorption was $3.50 × 4,000 = $14,000 compared with actual overheads of $16,000.
4  Overhead was $10,000 over-absorbed

Absorption 2 × 21,000 × $10 = $420,000 compared with the actual overhead of $410,000.
5  $11,000
Overhead absorbed in the period was $5 × 3,000 = $15,000. This is an over-absorption of
$4,000, so actual overheads are $11,000.

lOMoARcPSD|21428003
A C C A MA 7: A c c o u n t i n g f o r o v e rh e ads 145
6
True False
Only production overheads are allocated/apportioned to cost  
centres
Only variable costs are assigned to cost units whilst fixed costs are  
treated as period costs
Service department costs are reapportioned to production centres  
A production overhead associated with a cost centre should be  
allocated to that cost centre
7  Absorbed overheads are lower than actual overheads
8  $30,400
Fixed production overheads were absorbed at the rate of $30.40 per labour hour. 1,000 labour
hours were worked so fixed overheads absorbed were $30.40 × 1,000 = $30,400.
9  Under absorbed by $9,600

Actual overheads were $40,000 compared with the $30,400 absorbed.
10  $50 per hour

Overheads of $200,000 ($194,000 + $6,000) were absorbed in 4,000 actual labour hours.
11
21,000 hours
12  $10,000 under-absorbed
13  $9.68
Budgeted overhead 464,640
Budgeted machine hours
= 48,000 =$9.68 per machine hour.
14  $14,720 under absorbed

$9.68 × 46,000 = $445,280 which is less than the actual overhead of $460,000.
15  Overheads will be over absorbed by $1,000 due to lower than expected labour hours
coupled with lower than expected expenditure.

lOMoARcPSD|21428003
16  $5
Patients Cost ($)
Highest number of patients 15,250 135,000
Lowest number of patients 8,250 100,000
35,000
Variable overhead = 7,000
= $5 per patient
17  $58,750
The variable cost for 8,250 patients at $5 per patient is $41,250. The fixed cost must be $58,750
(100,000 – 41,250).
18
7,344 patients
58,750
8
= 7,344
19  $2,500 over-absorbed
The actual overhead ( $861,000) is compared with the overhead actually absorbed $863,500
($11 × 78,500).
20  Service departments do not do any work for each other.

Therefore there is no need to take account of time spent on work for other service
departments.
21  The operating hours of the machines in each department
22  $245
23  $24,400
24  I and IV
Statements I and IV are correct.
II Indirect materials issued from inventory was $10,200 - correct
III Overhead absorbed during the period was $86,175 – No, overhead absorbed was
$162,200.
IV Overhead for the period was over absorbed by $4,160 – No, overhead was under
absorbed – $4,160 has been debited to the income statement.
V Indirect wages cost incurred was $69,985 - correct

lOMoARcPSD|21428003
A C C A MA 7: A c c o u n t i n g f o r o v e rh e ads 147
25  $9,357
26  $18
Assembly
Total minutes are X (36 × 6,000) and Y (48 × 7,500) = 576,000
OAR = $144,000 / 576,000 = $0.25 per minute
Finishing
Total minutes are X (31.25 × 6,000) and Y (30 × 7,500) = 412,500
OAR = $82,500 / 412,500 = $0.20 per minute
Y (48 × $0.25) + (30 × $0.20) = $18
27  Over absorbed by $4,725

Actual overhead = $140,875
Absorption (Activity × OAR) = $145,600 (45,500 units $3.20 per unit)
Over absorption = $4,725 (the actual cost was over estimated)
28  Under absorbed by $1,020
29  $54,366
30  Debit Production Overheads Account Credit Bank and Cash Account

lOMoARcPSD|21428003
148 8: A b s o rp t i o n a nd marg i n al co s t i ng A C C A MA

Absorption and marginal costing compared
1 Contribution is ‘sales value minus variable cost of sales’.
2  $5
The direct costs and the variable overheads are deducted in computing the contribution.
However, the absorbed fixed overhead is not deducted.
3  $38,000
As closing inventory has fallen by 500 units, the profit under absorption costing is lower than
the marginal costing profit by $2,000 ($4 × 500).
4  $24,000
Closing inventory has fallen by 300 so the profit under absorption costing is lower than the
marginal costing profit. Overheads are absorbed at the rate of 200,000�10,000 = $20 per unit
so the profit is lower by $20 × 300= $6,000.
5  2,000
The absorption costing loss is $12,000 lower than the marginal costing profit so with a fixed
overhead absorption rate of $4 a unit, closing inventory has fallen by 3,000 units. This means
that production in the period was 2,000 units (5,000 – 3,000).
6  79,400
Closing inventory increased by 200 units, so the absorption costing profit is higher than the
marginal costing profit. With a fixed overhead absorption rate of $3 a unit, the absorption
costing profit is $600 higher.
7
$ 10
The absorption costing profit was $20,000 higher than the marginal costing profit and the
closing inventory was 2,000 units higher than the opening inventory. Therefore the fixed
overhead absorption rate was $10 per unit.

lOMoARcPSD|21428003
8
$ 448,000
$
Contribution for month (9,800 × $60*****) 588,000
Less actual fixed overhead incurred (140,000)
Marginal costing profit 448,000
*****Contribution per unit (100 – 40) $60
9
$ 454,000
$
Sales (9,800 × $100) 980,000
Less variable costs ( 9,800 × $40) (392,000)
588,000
Less: fixed overhead absorbed (9,800 × 15) (147,000)
Add: over-absorbed overhead (10,200 × $15) ─ $140,000 13,000
Absorption costing profit 454,000
EXAM SMART
For learning purposes, we have shown how to calculate the absorption costing profit.
However, given the marginal costing profit calculated in above, you could more quickly
calculate the absorption costing profit by adding the $15 × 400 =$6,000 to the marginal cost
profit. The $6,000 is the amount of overhead absorbed into the increased closing inventory.
10
$ 741,000
The unit cost for marginal costing purposes is $25 ( $12 + $13)
$ $
Sales ($105 × 10,200) 1,071,000
Opening inventory (1,000 × 25) 25,000
Production (10,000 × 25) 250,000
Less: Closing inventory ( 800 × 25) (20,000)
(255,000)
Contribution 816,000
Less: Fixed costs (75,000)
Marginal costing profit 741,000

lOMoARcPSD|21428003
150 8: A b s o rp t i o n a nd marg i n al co s t i ng A C C A MA
11
$ 739500
75,000
The fixed overhead absorption rate was 10,000 = $7.50 making the unit cost for absorption
costing purposes $32.50 (25 + 7.5)
$ $
Sales ($105 × 10,200) 1,071,000
Opening inventory (1,000 × 32.50) 32,500
Production (10,000 × 32.50) 325,000
Less: Closing inventory (800 × 32.50) (26,000)
(331,500)
Absorption costing profit 739,500
EXAM SMART
Again, the absorption costing profit could have been arrived at more quickly by looking at
the fixed overhead that had been absorbed in the decreased inventory (200× $7.50) and
deducting it from the marginal costing profit.
12  $44,000z
Closing inventory has risen by 500 units so the absorption costing profit will be $6,000 higher
than the marginal costing profit.
13  $4,000 higher
Closing inventory is budgeted to fall by 2,000 units and so the absorption costing profit will be
36,000
lower than the marginal costing profit. The fixed overhead absorption rate is = $2 a unit,
18,000
so the marginal costing profit is $ 4,000 higher than the absorption costing profit.
14  $19,000
Marginal costing profit = Absorption costing profit – (Increase in inventory × overhead
absorbed)
Marginal costing profit = $25,000 – ((2,000 – 1,500) × $4 × 3) = $19,000
15  $7,500 higher
16  Not possible to calculate

A cost of a stores (warehouse) assistant cannot be directly attributed to a particular cost unit
and so is classified as indirect labour. All the others can be considered a direct cost.

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17  $2,240 lower
As production is greater than sales, this increases closing inventory. As closing inventory is
greater than opening inventory then a greater value of fixed overheads is held in the inventory
valuation, so absorption profit is greater than marginal profit.
OAR unit =- budget overhead / budget units = $96,000/24,000 units = $4 per unit
Difference in profit = Change in inventory levels x OAR unit
= (24,000 – 23,440) × $4 = $2,240
Therefore marginal costing profit would be $2,240 lower than absorption costing profit.
18 $ 3
Difference in profit = Change in inventory levels × OAR unit

($37,000 – $28,000) = (78,500 units – 75,500 unit) × OAR unit
OAR unit = $9,000/3,000 units = $3 per unit

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Process costing
1
True False
Any normal loss in a process account is valued at the same rate as  
good production whilst the abnormal loss is valued at scrap value
If actual output is less than input but more than expected output, an  
abnormal gain occurs
It is true that abnormal losses are treated differently from normal losses. However, the above
statement is the wrong way round. It is normal losses that are valued at their scrap value and
abnormal losses that are valued at the same rate as good production.
2  $4.33
Costs – Scrap value 200,000−5,000
Expected output
= 45,000
3
$ 3,000
The 10% normal loss is 2,000 kg which are sold for $1.50 a kg.
4
$ 6,444
The total costs of inputs are $61,000. This needs to be adjusted for the value of the normal loss.
This is allocated across the expected output of 18,000 kg so the cost of the 2,000 kg of abnormal
61,000−3000
loss is
20,000−2000
× 2,000 = $6,444.
5
$ 51,556
The total costs of inputs are $61,000. This needs to be adjusted for the value of the normal loss.
This is allocated across the expected output of 18,000 kg so the cost of the 16,000 kg of output
61,000−3000
is 18,000 × 16,000 = $51,556.

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6  $50.74
The total costs are $240,000 + $40,000 = $280,000.
Total costs - Scrap value of normal loss 280,000−6,000
Output value per unit = = = $50.74
Expected output 5,400
7
$ 22,344
Materials- Conversion costs-

Output Litres equivalent units equivalent units
Finished goods 2,800 2,800 2,800
Normal loss 160
Abnormal loss 140 140 140
Closing inventory 100 100 20
3,200 3,040 2,960
Cost per
Cost Equivalent units equivalent unit
Materials (3,200 × $5 – 160 × $3) 15,520 3,040 $5.11
Conversion costs 8,500 2,960 $2.87
$7.98
Cost of completed production 2,800 litres at $7.98 = $22,344.
EXAM SMART
Hint: Don’t forget the abnormal loss!
8
$ 568.40
$511
Materials (100 equivalent units at 5.11)
Conversion costs ( 20 equivalent units at 2.87) $57.40
$568.40
9  $5,300
Materials Labour and overhead -
Output Kg equivalent units equivalent units
Output 12,000 12,000 12,000
Normal loss 1,500
Abnormal loss (bal) 500 500 500
Closing WIP 1,000 1,000 500
15,000 13,500 13,000

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Cost Equivalent units Cost per EU

Materials ($60,000 – $1,500) 58,500 13,500 $4.3
Labour and overhead 26,000 13,000 $2
Value of WIP
$
Materials ( 1,000 × 4.30) 4,300
Labour and overhead (500 × 2) 1,000
5,300
10  1,900
Material Labour Overhead
Output Units Equivalent units Equivalent units Equivalent units
Finished goods 1,800 1,800 1,800 1,800
Closing WIP 200 200 (100%) 100 (50%) 40 (20%)
2,000 2,000 1,900 1,840
11
$ 44,694
Material Labour Overhead

Opening WIP 4,000 5,000 1,000
Added 16,000 18,000 4,000
Total cost 20,000 23,000 5,000
Equivalent units ( above) 2,000 1,900 1,840

Cost per equivalent unit $10 $12.11 2.72
The value of the units transferred to finished goods is 1,800 × 24.83 = $44,694
12
800 kg
Abnormal loss = 12,000 – (10% × 12,000) – 10,000 = 800 kg
13
$ 60,000
Cost per kg = (30,000 + 34,800)/(12,000 – 1,200) = $6

Cost of output transferred = 10,000 × $6 = $60,000

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14
$ 73,280
Material Labour and overhead

Output Kg Equivalent units Equivalent units
Finished goods 8,000 8,000 8,000
Normal loss 500
Abnormal loss 500 500 500
Closing WIP 1,000 1,000 (100%) 500 (50%)
10,000 9,500 9,000

Total cost $58,500 (60,000 – 1,500) $27,000
Equivalent units (above) 9,500 9,000
Cost per equivalent unit $6.16 $3
Value of output is $9.16 × 8,000 = $73,280
15
$ 4,580
The abnormal loss is 500 × $9.16 (above) = $4,580
16
$ 7,660

Costs per equivalent unit (above) $6.16 $3
Equivalent units in WIP ( above) 1,000 500
Value in WIP $6,160 $1,500
The total value of the closing WIP is $7,660
17  $1,750
Kg $ Kg $
Materials 25,000 75,000 Output 23,400 117,000
Direct labour 29,250 Normal loss 1,250 625
Production overhead 15,125 Abnormal loss 350 1,750
119,375 25,000 119,375
Abnormal loss = 25,000 – (25,000 × 5%) – 23,400 = 350 kg

Costs per kg = (75,000 + 29,250 + 15,125 – 625)/(25,000 – 1,250) = $5

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18  $99,375
Kg $ Kg $
Materials 15,000 60,000 Output 13,250 99,375
Direct labour 27,400 Normal loss 1,500 750
Production overhead 14,600 Abnormal loss 250 1,875
102,000 15,000 102,000
Abnormal loss = 15,000 – (15,000 × 10%) – 13,250 = 250 kg

Costs per kg = (60,000 + 27,400 + 14,600 – 750)/(15,000 – 1,500) = $7.50
19
$ 105000
Total costs = 88,000 + 50,000 + 39,000 – (1,000 × 2) = $175,000

Volume Unit price Sales value
$ $
Pye 15,000 20 300,000
Mye 10,000 40 400,000
25,000 700,000
Costs of pye = $175,000 × (15,000/25,000) = $105,000
20
$ 70,000
Costs of mye = $175,000 × (10,000/25,000) = $70,000
21
$ 75,000
Costs of pye = $175,000 × (300,000/700,000) = $75,000
22
$ 100,000
Costs of mye = $175,000 × (400,000/700,000) = $100,000
23  By-products are equivalent to abnormal losses.

By-products are equivalent to normal losses.

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24
$ 384,192
Process account
Units $ Units $
Opening WIP 1,500 59,000 Transfer to process 2 6,400 ?
Raw materials 330,000
Conversion cost 54,000 Closing WIP 1,100 ?
443,000
Statement of equivalent units

Raw Conversion
Total materials costs
Costs $ $ $
Opening WIP 59,000 50,000 9,000
Inputs 384,000 330,000 54,000
Total 443,000 380,000 63,000
Equivalent units Units Units Units

Transfer to Process 2 6,400 6,400 6,400
Closing WIP 1,100 1,100 330
Total 7,500 7,500 6,730
Cost per equivalent unit $50.67 $9.36

Transfers to Process 2 = 6,400 × ($50.67 + $9.36) = $384,192
25
$ 58,826
Closing WIP = (1,100 × $50.67) + (330 × $9.36) = $58,826
26
$ 379,598
Statement of equivalent units

Raw Conversion
Total materials costs
Costs $ $ $
Inputs 384,000 330,000 54,000
Equivalent units Units Units Units
Finishing opening WIP 1,500 - 900
Starting and finishing 4,900 4,900 4,900
Closing WIP 1,100 1,100 330
Total 9,000 6,000 6,130
Cost per equivalent unit $55.00 $8.81

Value of transferred Opening WIP = $59,000 + (900 × $8.81) = $66,929
Value of Started and Finished units = 4,900 × ($55.00 + $8.81) = $312,669
Total value transferred = $379,598

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27
$ 63,407
Closing WIP = (1,100 × $55.00) + (330 × $8.81) = $63,407
28  $660
Value = 200 × $11 × 30% = $660
29  $36,400
Physical units are used to apportion joint production costs so this will be based on production
units (sales + closing inventory as no opening inventory)
G 412,000 units
H 228,000 units
Total 640,000
Costs relating to H are therefore $136,800 (228/640 × $384,000) + $159,600 (further processing
costs of H) = $296,400
This relates to the 228,000 production units so $1.30 per unit giving a closing inventory value of
$36,400 (28,000 units × $1.30).
30  $24,400
Value = Value of units started and finished in month + Value of completed units in opening WIP
Value = ((2,500 – 400) × $10) + ($1,800 + (400 × 40% × $10)) = $24,400

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Job and batch costing
1 $ 86.40
$
Direct material (2 kg × $5) 10.00
Direct labour (3hr × $8) 24.00
Prime cost 34.00
Production overhead ($200,000 × 3/30,000) 20.00
Cost of production 54.00
Sales overhead ($100,000 × 54/500,000) 10.80
Cost of job 64.80
Profit margin ($64.80 × 25/75) 21.60
Price quoted 86.40
2  $55,680
A T account is the best way to review the transactions.
$ $
Costs b/f 20,000 Materials to XV 6,000
Materials from stores 14,000
Materials from WW 8,000
Labour 9,000
Overheads 1,400 Cost of sales (bal fig) 46,400
52,400 52,400
$46,400 × 120% = $55,680
3  Costs will be borne by user departments who incurred them.

 User departments may use service departments more carefully.
 The efficiency of service departments can be measured.
 Budgeting service department expenditure should become easier.
4 Batch costing is a form of specific order costing where costs are attributed to batches of
product (unit costs can be calculated by dividing by the number of products in the
batch).

lOMoARcPSD|21428003
5 $ 371.88
$
Machine set up costs 80.00
Artwork 25.00
Paper ($22.50 × 5) 112.50
Other printing materials 18.00
Labour (S8 × 4) 32.00
Fixed overheads absorbed ($4,500/150) 30.00
297.50
Margin (× 20/80) 74.38
371.88
6 $ 245.31
$
Machine set up costs 80.00
Artwork 25.00
Paper ($22.50 × 5 × 4) 450.00
Other printing materials ($18 × 4) 72.00
Labour ($8 × 4 × 4) 128.00
Fixed overheads absorbed ($4,500/150) 30.00
785.00
Margin (× 20/80) 196.25
981.25
Per 5,000 leaflets 245.31
7 $ 5744
Total costs = $9,000/(1 + mark-up) = $9,000/(1 + 0.2) = $7,500

Production overheads = 40 × 8 = $320
Prime cost + Non-production overheads = $7,500 – $320 = $7,180
Prime cost + 0.25 Prime cost = $7,180
Prime cost = $5,744
8 $ 3400
Total costs = $12,000 × (1 – margin) = $12,000(1 – 0.25) = $9,000

Production overheads = 50 × $12 = $600
Prime cost + Non-production overheads = $9,000 – $600 = $8,400
Prime cost + 0.5 Prime cost = $8,400
Prime cost = $5,600
Prime cost – Labour cost = Materials cost
Materials cost = $5,600 – (50 × $44) = $3,400

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Service and operation costing
9  Use of composite cost units

 Appropriate cost unit depends on the service offered
 Services offered may be of short or long duration
10  $1.83
Tonne-kilometre is the most appropriate unit, so cost per unit = ($2,194,900/1,200,600) = $1.83.
11  Student
 Course
 Lecturer hour
Number of lecturers does not necessarily provide a measure of activity.
12  It does not tell us about the quality of care provided.

 It does not reflect the differing mixes of care required in different types of ward.
13  (I) and (II)
Alternative cost accounting approaches
14  Market price – Required profit margin
15
True False
Life cycle costing assesses costs on an accounting period basis.  
Life cycle costing clearly allocates development costs to individual products.  
16  Product liability costs

 Costs of repairing items returned from customers
These relate to costs incurred when the products have gone outside the company and the
company is dealing with the consequences of faults that have been discovered.
17  They fulfil financial reporting requirements by allocating costs to time periods.

 They are suitable for high-volume, repetitive production processes.
18  Maturity

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19  If indirect costs are a high proportion of total costs

ABC is designed to better cope with situations where overheads area large proportion of
production costs.

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Nature and purpose of budgeting
1
True False
A budget helps to control an organisation by forcing it to create a plan  
A budget helps an organisation to co-ordinate the allocation of resources  
A budget can help an organisation to motivate staff  
An organisation is legally required to present a master budget annually to external  
stakeholders
2  A budget where local budget holders do not participate in the budget-setting process
Budgetary control and reporting
3  Profit centre
Behavioural aspects of budgeting
4  Staff suggestions may be ignored and staff may become demotivated as a result.
Flexible budgets
5
$ 74,000
Production cost is a semi variable cost. Using the high-low method the variable element is:
Units $
15,000 80,000
10,000 70,000
5,000 10,000
The variable cost is $2 per unit. The fixed cost is $50,000 so for 12,000 units the cost is $50,000
+ 12,000 × $2 = $74,000.
6  $240,000
300,000−200,000
The variable cost element is = $1 per unit. So the fixed cost must be $100,000
200,000−100,000
and the cost of 140,000 units is $100,000 + 140,000 × $1 = $240,000.

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7  It is quicker to carry out than flexible budgeting.
8  $379,500
Flexed budget (85,000 units) $
Variable materials 150 × 85/60 $212,500
Variable labour 60 × 85/60 $85,000
Mixed cost – (see working 1) $18,000 + 85 × $400 = $52,000
Other overhead (fixed) $30,000
Total $379,500
Working 1
Units $
Highest Output 80% $50,000
Lowest Output 60% $42,000
Difference 20% $8,000
Variable Cost 1% = $8,000/20 = $400
Total Cost = Fixed cost + Variable cost per unit x Output
Using the High point
$50,000 = Fixed costs + $400 × 80
$50,000 = Fixed costs + $32,000
Therefore Fixed costs = $50,000 – $32,000 = $18,000
9  A budget for a single activity level

A budget for fixed costs – incorrect – a fixed budget includes revenue
A budget for a single activity level – correct – a budget for the units the business expects to
produce and sell
A budget for fixed (non-current) assets – incorrect – a fixed budget is a budgeted income
statement, statement of financial position and cash flow.
A budget for multiple activity levels - no, this is a flexible budget which is used for planning and
decision making.

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1 ALANOWL
(a) $ 1,286,250
Sales revenue = $35 × 1.05 × (15,000 + (1,000 × 20)) = $1,286,250

(b)
Quarter 4 Quarter 1
$ $
Sales 1,190,000 1,540,000
Quality costs (49,600) (56,800)
Other fixed costs (105,200) (105,200)
Variable costs (652,800) (822,800)
Profit 382,400 555,200
Quality costs = $28,000 + (3 × 7,200 (Q4)) or (4 × 7,200 (Q1))

Other costs: At higher activity level, 44,000 units, adjusted other costs are
$928,000 + (44,000 × $0.50) = $950,000
Variable cost per unit at 34,000 units will be
($950,000 - $758,000)/(44,000 – 34,000) = $19.20
so variable costs = 34,000 × $19.20 = $652,800
Variable costs per unit at 44,000 units will be $19.20 - $0.50 = $18.70 per unit
so variable costs = 44,000 × $18.70 = $822,800
Fixed costs = $758,000 - $652,800 = $105,200
(c)  The model cannot cope with an increasing or decreasing trend.
The model can cope with a changing trend, and is better than the additive model in that
respect.
2 WORSLEY LIMITED
(a)
Budgeted
Sales $ $ $
Sales revenue 70,000 42,000 (28,000)
Costs $ $ $
Material 150,000 136,000 14,000
Labour 160,000 143,000 17,000
Variable overhead 60,000 47,000 13,000
Resource usage
Material 30,000 kg 28,000 kg 2,000 kg
Labour 20,000 hr 18,500 hr 1,500 hr

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(b)  Fixed budgets are useful at the planning stage to establish broad objectives.
 Fixed budgets are easier to prepare than flexible budgets.
Fixed budgets do not adjust for variations in volume, with the result that there can be
large variances. Fixed budgets will not result in realistic cost targets, if, as here, actual
activity differs significantly from budgeted activity.
(c)  The coefficient of determination indicates how much of the change in total sales revenue
is due to competitor’s marketing activity.
A negative figure indicates an inverse, not necessarily a weak, relationship. A negative
figure close to 1 will indicate a strong inverse relationship. The coefficient of
determination is + 0.64. The correlation coefficient is not a measurement of simple
proportion.

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Budget preparation
1  Cash budget
A functional budget is a budget prepared for a particular department or function. All of these
budgets feed into the master budget. The cash budget is part of the master budget.
2  Depreciation of printing machine

Depreciation is not a cash flow so it is not included in the cash budget. However, capital costs
are cash flows so they are included.
3  Raw materials inventories are budgeted to decrease

A change in the levels of finished goods would be allowed for in the production budget and
hence the materials usage budget. If more materials are being used than are being purchased,
it must be because the raw materials inventories are budgeted to decrease.
4  Sales budget
 Production budget
As there are no production limitations, sales is the principal budget factor. Before the raw
materials budget can be compiled the business must budget for sales quantity and the level of
production (which may be more or less than sales quantity due to changes in budgeted
inventories).
5
2,600 units
The business must budget for sales and also for the increase in the inventory level.
6  21,500 units
20,425 units need to be produced to meet sales and the increase in the inventory level. This is
100
95% of total production so total production needs to be 20,425 × = 21,500.
95
7  30,250 kg
Production this quarter is 9,850 units and 29,550kg of raw material is needed. In addition,
700 kg are needed to increase raw material inventory levels.

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8
$ 29,250
100
2,990 × = 3,250 hours are needed to allow for idle time. The cost at $9 an hour is $3,250.
92
9  $1,010,400
The important thing here is to work out the number of units that need to be produced, 40,995 –
100
1,000 = 39,995 × 95 = 42,100 units at the cost of $24 a unit.
10  $102,848
$
November cash sales (20%) 16,000
October credit sales (80% ×60% × 98%) 56,448
September credit sales (80% × 38%) 30,400
102,848
11  $473,000
In October the 80,000 units sold in November plus the increase in the November opening
inventory was produced. 43,000 hours of labour at $11 an hour were paid for in October.
12  $240,000
In October the raw materials paid for were the ones used in September’s production, as raw
materials are paid for in the month following purchase. September’s production relates to
October’s sales with an adjustment for completed inventory. Therefore, 120,000 units were
paid for.
13
$ 41,700
20% of sales value from May and 75% of sales value from June.
14  4,150
15  12,842
16  $120
Selling Price 125% $600
Cost 100%
Mark up 25% $600 × 25/125 = $120

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Capital budgeting
17  Construction of an existing building

 Replacement of motor vehicles
 Refurbishment of Head Office
Multi task question
1 MOONSTAR
(a)
$
Cash receipts
Receipts from accounts receivable 535,275
Cash sales 48,000
Sale of non-current assets 36,000
Cash payments
Payments to suppliers (437,802)
Payments to employees (59,220)
Loan repayment and interest (100,000)
Cash movement 22,253
Opening balance 378,400
Closing balance 400,653
Receipts from accounts receivable
$
Nov sales $525,000 × 90% × 35% 165,375
Dec sales $685,000 × 90% × 60% 369,900
535,275
Cash sales = 10% × $480,000 = $48,000

Sale of non-current assets = 6 × $6,000 = $36,000
Payments to suppliers = December purchases + payment to supplier in January
= $384,000 + ($366,000 × 15% × 98%) = $437,802
Payments to employees = Monthly salaries + Bonus
= ($42,000 × 1.05) + ($42,000 × 12 × 0.03) = $59,220
Loan is repayment only. Interest is not paid in January.
(b)  Pay off some of the rest of the loan
 Offer more generous credit periods to customers
Delaying payments to suppliers and minimising inventory levels are actions that would be
taken if Moonstar faced a cash shortage.

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1  $12,868
Year $ Discount factor 5% $
3 4,000 0.864 3,456
4 4,000 0.823 3,292
5 4,000 0.784 3,136
6 4,000 0.746 2,984
12,868
An alternative method is to multiply the amount by the cumulative discount factor for years 1 to
6 minus the cumulative discount factor for year 2.
4,000 × (5.076 – 1.859) = $12,868
2  $8,464
6 monthly interest rate = 3.5% (7% × 6/12), applied for 10 six month periods
$6,000 × 1.03510 = $8,463.59
3 $ 300,000
21,000
0.07
= $300,000
4  $1,285
Annual instalment × 𝐴𝐴𝐴𝐴1−5 @ 9% = $5,000
Annual instalment = $5000/ 𝐴𝐴𝐴𝐴1−5 @ 9%
= $5,000 / 3.890 =$1,285.34
5  $48,137
$38,000 × (1.03)8 = $48,137
6
$ 10,000
Let x = original investment

x × (1.04)10 = $14,802
$14,802
x = (1.04)10 = $9,999.70 = $10,000 (to the nearest $100)

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A C C A MA 13: Di s c o u n t e d c a s h f l o w 171
7  $2,978
From cumulative present value tables, 5% for three years = 2.723
Present value of rental income = $800 × (1 + 2.723) = $800 × 3.723 = $2,978.40 = $2,978 (to the
nearest $)
8  $4,432
Future value of investment = $3,000 × (1 + 𝑟𝑟)𝑛𝑛 where n is the number of six-monthly periods =
8 and r = interest rate = 5%
Future value of investment = $3,000 × (1 + 0.05)8 = $4,432 (to the nearest $)
9
$ 150,000
9,000/0.06 = $150,000
10
$ 1994.33
Value of investment after four years = $2,000 × (1.06)4 = $2,524.95

Value of investment after six years = ($2,524.95 – $750) × (1.06)2 = $1,994.33
11
$ 4,785.65
Monthly interest rate = 9%/12 = 0.75%

Value of investment = $4,000 × (1.0075)24 = $4,785.65
12
$ 10,982.29
Value of investment = $8,000 × (1.02)16 = $10,982.29
13
8.24 %
Effective annual rate = (1.02)4 – 1 = 8.24%

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14 10.38 %
APR = 1.0254 – 1 = 0.1038

APR = 10.38%
15 $ 17903
PV = $2,500 × 7.161 = $17,903
16 $ 15600
Annual repayment = Amount of loan/ Year 6 8% annuity factor = $72,000/4.623 = $15,574,

$15,600 to the nearest $100

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A C C A MA 14: I n v e s t me n t a p p rai s a l 173

Investment Appraisal
1 $ 4,000
Year $ Discount factor 10% $

0 (100,000) 1.000 (100,000)
1 20,000 0.909 18,180
2 40,000 0.826 33,040
3 70,000 0.751 52,570
3,790
2 9 %
24
IRR = 5 +
24− −6
(10 − 5) = 9%
3  Initial investment/Annual cash inflow
4  $3,750
As A is used regularly, the 500 kg will have to be replaced and an extra 200 kg purchased at $5
per kg. The relevant cost of A is thus $5 × 700 = $3,500
The relevant cost of B is the cost only of purchasing the 100 extra kg as the 300 kg currently in
inventory are surplus and have no scrap value. The relevant cost of B is thus $2.50 × 100 = $250
5  It ignores the time value of money.

 The result by itself does not tell you whether to accept or reject a project.
6 25 months
Discount Discounted
Year factor 7% cash flow Cumulative
$ $ $
Cost (120,000) 1.000 (120,000) (120,000)
Inflows
1 45,000 0.935 42,075 (77,925)
2 80,000 0.873 69,840 (8,085)
3 100,000 0.816 81,600 73,515
Payback = 2 years + ((8,085/(8,085 + 73,515)) × 12) months = 2 years 1 month
7 A relevant cost is a future incremental cash flow.

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174 14: I n v e s t me n t a p p rai s al A C C A MA
8 $ 12 million
Discounted cash
Year Cash flow Discount factor 9% flow
$m $m
0 Cost of investment (360) 1.000 (360.00)
2 Inflow 100 0.842 84.20
3 Inflow 100 0.772 77.20
4 Inflow 100 0.708 70.80
5 Inflow 125 0.650 81.25
6 Inflow 115 0.596 68.54
7 Rectification work (18) 0.547 (9.85)
12.14
9  Make Alpha and Beta, buy in Gamma.

The absorbed fixed overheads are not relevant to the decision. The relevant cost of Alpha is
$111, which is less than the buy in price of $145. The relevant cost of Beta is $143, which is less
than the buy in price of $170. The relevant cost of Gamma is $155, which exceeds the buy in
price of $150.
10  $575
Relevant cost of unskilled labour is zero as surplus hours exceed hours needed on job.
Cost of skilled labour per hr = $875/35 = $25.
Relevant cost relates to hrs not covered by surplus: 50 hrs – 30 hrs = 20 hrs. 50 hrs – 35 hrs = 15
hrs will be at overtime rate.
Relevant cost = (5 hrs × $25) + (15 hrs × $25 × 120%) = $575
11  I II only
Sunk costs have already been incurred so don’t affect the decision. Absorbed costs are not
influenced by the decision.
12  8.5%
Year Discount Discount factor
factor 5% 10%
$ $ $
0 (150,000) 1.000 (150,000) 1.000 (150,000)
1 30,000 0.952 28,560 0.909 27,270
2 70,000 0.907 63,490 0.826 57,820
3 80,000 0.864 69,120 0.751 60,080
11,170 (4,830)
IRR = 5 + ((11,170/(11,170 + 4,830)) × (10 – 5)) = 8.5%

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13 12.26 %
3450
𝐼𝐼𝐼𝐼𝐼𝐼 = 10% + 3450− −2657
(14% − 10%) = 12.26%
14  $17,100
Cash Net present
Year inflow Discount factor value
($) ($)
0 (120,000) 1.000 (120,000)
1 15,000 0.962 14,430
2 25,000 0.925 23,125
3 35,000 0.889 31,115
4 40,000 0.855 34,200
(17,130)
15  Only Statement I
16  14%
1,200
IRR ≈ 10% + 1,200−(−400) × (15 – 10)%
1,200
= 10 + ( × 5%)
1,600
= (10 + 3.75)% = 13.75% = 14% (to the nearest whole percent)
17  2.5
Cash generated p.a. = profit + depreciation = 25,500 + 8,500 = 34,000
Payback = 85,000/34,000 = 2.5 years
18  Approximately 12%
IRR must be between 6% and 14% since the NPV is positive at a 6% discount rate and negative
at a 14% one. The NPV is closer to zero at a 14% discount rate so the best answer is that the IRR
is closer to 14% than 6% (hence 12% is the most suitable answer).

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176 14: I n v e s t me n t a p p rai s al A C C A MA

1 MAURICE LTD
(a) 40 months
The cumulative cash flows are as follows:
$000
1 (690)
2 (435)
3 (120)
4 225
Payback period = 3 years + (120/120 + 225) × 12 = 3 years 4 months
The calculations in the following table are used in (b) and (c).
A B C D E F
1 Year 0 1 2 3 4
2 $000 $000 $000 $000 $000
3 Revenues 450 550 650 700
4 Cost of investment (900)
5 Running costs (240) (295) (335) (355)
6 Net cash flow (900) 210 255 315 345
7 Discount factor 5% 1.000 0.952 0.907 0.864 0.823
8 Discount factor 10% 1.000 0.909 0.826 0.751 0.683
9 Discounted cash flow 5% (900) 200 231 272 284
10 Discounted cash flow 10% (900) 191 211 237 236
11 Net present value at 5% 87
12 Net present value at 10% (25)
(b) 44 months
The cumulative discounted cash flows are as follows:
$000
1 (700)
2 (469)
3 (197)
4 87
Payback period = 3 years + (197/197 + 87) × 12 = 3 years 8 months
(c) 8.9 %
87
IRR = 5 + (10 − 5) = 8.9%
87− −25
(d)  = C6*C7
(e)
Advantage?
Yes No
It considers the time value of money.  
It considers cash flows over the whole life of a project.  
The answer provides a clear decision rule.  
It uses relevant cash flows.  

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2 EDRICH LIMITED
(a)
$
Costs of conversion 95,000
Light and heat Year 1 2,000
Depreciation Year 1 0
Notional rent Year 1 0
Staff salaries Year 1 60,000
Staff relocation costs 5,000
The $5,000 of customer research is a sunk cost and is not included. The increase in expenditure
in light and heat is the relevant cost. Depreciation and notional rent are not cash flows, so are
not included. Only the salaries of newly-recruited staff are relevant here. Staff relocation costs
are relevant costs.
(b) $ 646 000

Calculation is as follows
$ $ $
New outlet 800 920 1,058
Old outlet 600 660 726
Incremental sales 200 260 332
Discount factor 0.909 0.826 0.751
Discounted cash flows 181.8 214.8 249.3
Net present value 645.9
(c)
Advantage compared
with IRR?
Yes No
It is only possible to have a single NPV figure, but it is possible to have  
more than one IRR.
It considers cash flows over the whole life of a project.  
The answer provides a clear decision rule.  
It requires a cost of capital to be estimated.  
The IRR method also considers cash flows over the whole life of a project. The need to estimate
a cost of capital is a difficulty with the NPV method, not an advantage.

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Standard costing systems
1
Definition Cost standard
This standard assumes that current efficiency and cost levels will be maintained A current
standard
This standard assumes that nothing has changed since the standard was first set A basic
standard
This standard assumes an optimum level of efficiency and cost and minimisation An ideal
of waste standard
This standard assumes that there will be some improvements in current efficiency An attainable
and cost levels standard
2  $1.88
Flour required 750g × 100/80 = 937.5g. 937.5g costs $1.88
3  $112.94
Labour needed 12 × 100/85 = 14.118 hours
4  $37,500
Wages paid are based on the total number of standard hours in the level of output produced.
Standard hours are 3,750 (12 × 100 + 15 × 50 + 20 × 90)
5
True False
A standard cost is the planned unit cost of a product  
A standard hour is an hour during which the labour force is paid at  
its normal rate of pay
A standard hour is the quantity of work achievable in an hour if the workforce is working at
standard efficiency levels.
6  Past experience
 Detailed product specifications
 Discussions with experts in each department

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7
$ 1,400
8  A technique that reports variances by comparing actual costs to predetermined

standards
9  Relevant standard
Material variances
10  $4,000 favourable
1,200 units should have cost $30,000. They actually cost $26,000 so there is an overall
favourable material cost variance of $4,000.
11  $500 adverse
The budgeted cost of the 5,100 kg of material purchased was $25,500. The actual cost was
$26,000 so there was a $500 adverse variance.
It was budgeted that 1,200 units would need 6,000 kg of material. In fact only 5,100 kg were
used leading to a favourable variance of $4,500.
13
Material price Material usage
 $200 adverse $28 adverse
500 kg of material should have cost $700 but did cost $900, so there is a $200 adverse material
price variance. 600 units should have used 480 kg of material but did use 500kg. Thus at the
standard cost there is a $28 adverse material usage variance.
14  $10
Price variance ($2,000) = standard cost – actual cost ($38,000).
Standard cost = $40,000. The standard cost per kg purchased is $10 per litre.

lOMoARcPSD|21428003
15  $10,700 adverse
9,750 units should have cost $339,300 but actually cost $350,000. There is an adverse variance
of $10,700.
16
$ 700 favourable
1,050kg should have cost $10,500 but actually cost $9,800 so there is a $700 favourable
variance
17
$ 500 adverse
500 units should have used 1,000 kg of direct materials. 50 additional kg used at the standard
cost of $10 per kg give a $500 adverse material quantity variance.
18
$ 200 favourable
500 units should have cost $10,000. They actually cost $9,800 so there is a $200 favourable total
material variance.
19  15,000 kg
The standard cost of 12,000 kg was $24,000. This is $6,000 favourable so the expected cost was
$30,000 which would have been 15,000 kg at the standard price.
The materials in 4,900 units should have cost $147,000. They actually cost $146,000, so there is
a favourable variance of $1,000.
29,500 kg should have cost $147,500. They actually cost $146,000 so there is a $1,500
favourable variance.
22  $500 adverse
4,900 units should have used 29,400 kg of material. Actual usage was 29,500 so there was a
100kg overuse at $5 per kg. This gives a $500 adverse variance.
54,000 labour hours should cost $550,800. Actual cost was $540,000 so there is a $10,800
favourable variance.

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24
4 hours
Labour efficiency variance (3,000) = Std labour rate (10) × Excess hrs spent on 900 units
Excess hours = 300. Actual hours worked were $39,000/$10 per hour = 3,900 hours so the
budgeted hours were 3,900 – 300 = 3,600 or 4 hours a unit (3,600/900 = 4).
25  15,500
The favourable labour efficiency variance means that less hours were worked than standard.
Labour efficiency variance ( 4,250) = Standard labour rate ( 8.50) × Hours underspent
Hours underspent = 500, so the standard hours were 15,500
26  4
The labour efficiency variance is adverse so more hours than expected were worked.
Labour efficiency variance (40,000) = Standard labour rate (10) × Hours overspent
Hours overspent = 4,000. This means the standard hours for 10,000 units was 40,000 or 4 hours
a unit.
The standard cost of producing 20,000 units is $412,500. As the actual cost was $400,000 there
is a $12,500 overall labour cost variance.
28  $25,000 adverse
The standard cost of 50,000 hours is $375,000. As $400,000 was spent there is an adverse
labour rate variance of $25,000.
The standard number of hours in 20,000 units is 55,000. 5,000 less hours than standard were
worked which, at the standard rate, means there is a favourable labour rate variance of
$37,500.
30
$ 4,800 adverse
The budgeted labour hours in 11,600 units are 34,800. 400 excess hours were worked. At the
standard rate of $12 an hour this gives an adverse labour efficiency variance of $4,800.

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31
$ 68,400 favourable
The budgeted cost of 35,200 labour hours is $422,400. The actual cost was $354,000, so there is
a favourable labour rate variance of $68,400.
32
$ 63,600 favourable
The budgeted cost of 11,600 units was $417,600. When compared to the actual cost of
$354,000 this gives a favourable overall labour cost variance of $63,600.
33  1,180
Material usage variance @ actual production = (should use – did use) @ standard cost per litre
$2,200 = (production × 10 litres – 11,000 litres) × $2.75
$2,200/$2.75 = 800 = Production × 10 litres – 11,000 litres
Production = (11,000 + 800)/10.0 = 1,180 units
34  1,512.50 adv
Price variance @ actual purchases = should cost – did cost
= 11,000 × $2.75 – 11,000 x $2.75 × 1.05 = $1,512.50 Adverse
35  34,786 kg
Standard cost per KG = Standard cost / Units = $258,750/34,500kg = $7.50 per kg
At Actual production, materials usage variance = (Should use – Did use) at Standard cost per kg.
So, $2,145 Fav = (Should use – 34,500) × $7.50
$2,145/$7.50 = 286 = Should use – 34,500, therefore Should use = 34,500 + 286 = 34,786 kg.
36  7.4% adverse
Labour total variance = Flexed budget at Standard cost – Actual cost
Labour total variance= 29,500 units × $17.50 ─ $554,250 = $(38,000) Adverse
Variance as % of flexed budget = $38,000/$516,250 = 7.36% Adverse
Causes of variances
37  II and III
Lower production than usual does not affect the materials usage variance as the usage variance

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38  I and III
39  A sudden shortage of materials worldwide led to suppliers increasing their prices.
40  A discount offered by a materials supplier

A reduction in quality control checking standards – no, expect a favourable usage variance
Using a higher quality of materials than specified in the standard - no, expect a favourable usage
variance
Achieving a lower output volume than budgeted – no, the budget is flexed so no variance if as
standard
A discount offered by a materials supplier – Yes, this represents a price decrease not reflected in
the standard cost so will show a favourable price variance

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Variable overhead variances
1
Adverse Favourable
$100  
The variable overhead associated with 1,000 units was budgeted to be $6,000. As the overhead
was actually $6,100 there was a $100 adverse variance.
2
Adverse Favourable
$100  
The variable overhead was budgeted to cost $1 an hour, so $6,200 in total. It actually cost
$6,100 so there is a $100 favourable variance.
3
Adverse Favourable
$200  
The budgeted labour hours in 1,000 units were 6,000. 6,200 hours were worked. At the
standard rate of $1 an hour this means that there was a $200 adverse efficiency variance.
4
Adverse Favourable
$5,000  
The standard variable production overhead in 2,000 units was $20,000. The actual overhead
was $15,000 so there was a $5,000 favourable variance.
5
Adverse Favourable
$3,000  
The 3,600 hours worked had a standard cost of $18,000. Actual cost was $15,000, so there was
a $3,000 favourable expenditure variance.

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6
Adverse Favourable
$2,000  
4,000 hours were expected to be worked in 2,000 units but only 3,600 hours were worked.
The 400 hours at the standard rate of $5 an hour gives a $2,000 favourable variable overhead
efficiency variance.
7  $12
The $400 favourable overhead expenditure variance tells us that the expected cost associated
with 500 labour hours was $6,000 or $12 per hour.
8
Adverse Favourable
$265,000  
Total variance = Actual units @ standard cost per unit – Actual costs
Total variance = (220,000 × $4 × 3) – $2,375,000 = $265,000 favourable
9
Adverse Favourable
$25,000  
Expenditure variance = Budgeted cost – Actual cost

Expenditure variance = (200,000 × $4 × 3) – S2,375,000 = $25,000 favourable
10
Adverse Favourable
$240,000  
Volume variance = (Actual production – Budgeted production) at standard cost

Volume variance = (220,000 – 200,000) × $4 × 3 = $240,000 favourable
11
Adverse Favourable
$180,000  
Capacity variance = (Actual time – Budgeted time) × Standard cost per hour
Capacity variance = (645,000 – (200,000 × 3)) × $4 = $180,000 favourable

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12
Adverse Favourable
$60,000  
Efficiency variance = (Time production should take – Actual time) × Standard cost per hour
Efficiency variance = ((220,000 × 3) – 645,000) × $4 = $60,000 favourable
13
Adverse Favourable
$355,000  
Total variance = Actual units @ standard cost per unit – Actual costs
Standard cost per unit = 7,000,000/(500,000 × 2) = $7
Total variance = (520,000 × $7 × 2) – $6,925,000 = $355,000 favourable
14
Adverse Favourable
$75,000  
Expenditure variance = Budgeted cost – Actual cost

Expenditure variance = $7,000,000 – $6,925,000 = $75,000 favourable
15
Adverse Favourable
$280,000  
Volume variance = (Actual production – Budgeted production) at standard cost

Volume variance = (520,000 – 500,000) × $7 × 2 = $280,000 favourable
16
Adverse Favourable
$385,000  
Capacity variance = (Actual usage – Budgeted usage) × Standard cost per kg

Capacity variance = (1,055,000 – (500,000 × 2)) × $7 = $385,000 favourable
17
Adverse Favourable
$105,000  
Efficiency variance = (Materials production should use – Actual usage) × Standard cost per kg
Efficiency variance = ((520,000 × 2) – 1,055,000) × $7 = $105,000 adverse

lOMoARcPSD|21428003
Sales variances
18  $80 adverse
The sales price variance is the difference between what 4,620 units were sold for ( $41,500) and
what they were expected to be sold for (4,620 × $9 = $41,580).
19  $90 favourable
20 more meals than budgeted were sold leading to a favourable variance. 20 meals at the
standard contribution of $4.50 a meal gives a $90 variance.
20,100 units should have sold for $502,500 but were actually sold for $512,500, so there is a
$10,000 favourable sales price variance.
100 more units were sold than planned. 100 units at the standard contribution of $10 per unit
gives a $1,000 favourable sales volume contribution variance.
22
$ 10 per unit
An adverse sales price variance of $2,000 indicates that the standard selling price of the 9,800
units was $98,000 ($96,000 + $2,000) or $10 per unit.
The sales price variance is the difference between the budgeted and actual selling price of the
units sold.
24  $60,000 adverse
The sales volume contribution variance is the difference between the budgeted and actual sales
at the standard contribution of $30.
25 $ 1020
Standard profit per unit = $16 – $5.20 – $2.80 – $1.20 – $1.70 = $5.10
Variance = (9,200 – 9,000) × $5.10 = $1,020 favourable

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Causes of variances
26  An adverse labour efficiency variance

 An adverse variable overhead efficiency variance
27  A favourable variable overhead efficiency variance

 A favourable material usage variance
 A favourable sales volume variance
Multi task question
1 CUDDLYDUD
(a) $ 6300 Favourable
Sales volume variance = (Actual sales – Budgeted sales) × Contribution per unit
= (15,100 – 15,000) × ($155 – 36 – 48 – 8)
= $6,300 Favourable
(b) $ 3600 Favourable

Expenditure variance = Budgeted expenditure – Actual expenditure
= (15,000 × $7 × 2) – $206,400 = $3,600 Favourable
(c) $ 3600 Favourable
It’s the same as for marginal costing.
(d) $ 2100 Adverse
Capacity variance = (Actual hours – Budgeted hours) × Absorption rate

= (29,700 – (15,000 × 2)) × $7 = $2,100 Adverse
(e) $ 3500 Favourable

Efficiency variance
= (Expected hours for actual production – Actual hours) × Absorption rate
= ((15,100 × 2) – 29,700) × $7 = $3,500 Favourable
(f) $ 4200
Difference = Change in inventory levels × Overheads absorbed per unit

= 300 × $7 × 2 = $4,200.
Value of closing inventory under absorption costing will be higher and therefore profit will be
greater.

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Reconciliation of budgeted and actual profit
1
$ 44,300
Cost control and reduction
2  It takes into account a required standard of quality.

 It seeks the lowest cost method of achieving a desired end.
3  Marketing value
The four elements of value are, cost, exchange, esteem and use.
1 HENRY
(a)  Marginal
(b)  500 more than budgeted
Variance is positive, so units sold were more budgeted.
Extra number sold = Variance/Contribution per unit = 21,000/42 = 500 units
(c)  Lower
(d)  $3,070,900
Expected sales revenue = Flexed contribution × Selling price/Contribution per unit
= $861,000 × (150/42) = $3,075,000
Alternatively: 20,500 units actually sold.
Budgeted units 840,000/42=20,000, plus 500 extra calculated part (b).
Expected revenue 20,500 × 150=3,075,000
Actual sales revenue = Expected revenue – Adverse variance
= $3,075,000 – $4,100 = $3,070,900
(e)  Labour efficiency and Variable overhead efficiency
(f)  800
Hours saved = Variance/Standard cost per hour = 11,200/$14 = 800 hours
(g)  Favourable

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2 EDTED
(a)  Absorption
(b)  600 more than budgeted
Variance is positive, so units sold were more budgeted.
Extra number sold = Variance/Profit per unit = 34,200/57 = 600 units
(c)  More
(d)  59,930
Variance = (Quantity used (Q) × Standard price)
– (Budgeted Quantity for Actual production × Standard price)
13,770 = 9Q – (14,600 × 4 × $9)
9Q = 539,370
Q = 59,930
(e)  $0.300 less
Hours worked = Standard hours produced – (Efficiency variance/Standard cost per hour)
= (14,600 × 3) – (11,680/16) = 43,070
Labour cost = (43,070 × $16) – 12,921 = $676,199
Cost per hour = $676,199/43,070 = $15.70, $0.300 less than the budgeted cost per hour
Alternatively: 12,921/43,070 = 0.3 less as 12,921 was a favourable variance.
(f)  $348,140
Actual expenditure = Budgeted expenditure + Adverse expenditure variance
Budgeted quantity to be produced = Budgeted profit/Profit per unit
= 798,000/57 = 14,000
Budgeted expenditure = (3 × $8 × 14,000) = $336,000
Actual expenditure = $336,000 + $12,140 = $348,140

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3 WAKEUUP
(a) Standard cost operating statement
$
Budgeted contribution 1,371,600
Sales volume variance (27,000)
Flexed contribution 1,344,600
$ $
Labour rate 5,105
(34,300)
Fixed overhead expenditure variance 4,000
(164,000)
Actual profit 1,158,750
Material price = Standard cost of purchases – Actual costs = (30,200 × $30) – $901,470 = $4,530
Favourable
Material usage = (Standard usage in production – Actual usage) × Standard cost
= ((24,900 × 1.2) – 30,200) × $30 = $9,600 Adverse
Labour rate = Standard cost of hours taken – Actual costs
= (51,050 × $22.50) – $1,153,730 = $5,105 Adverse
Labour efficiency = (Standard time for production – Actual time) × Standard cost
= ((24,900 × 2) – 51,050) × $22.50 = $28,125 Adverse
Variable overhead expenditure = Standard costs of production – Actual costs
= (51,050 × $10) – $494,000 = $16,500 Favourable
Variable overhead efficiency
= (Standard time for production – Actual time) × Standard cost
= ((24,900 × 2) – 51,050) × $10 = $12,500 Adverse
Fixed overhead expenditure = Budgeted expenditure – Actual expenditure
= $160,000 – $164,000 = $4,000 Adverse
(b)  Stricter quality control procedures resulting in a lower volume of good output
 Under-estimation when budgeting of the time taken to produce individual units

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4 HARVEYHEDGE
(a) $ 378800
Quantity sold = Expected quantity + Sales volume variance/Profit per unit

= 1,750 + ($9,900/66) = 1,900 units
Sales revenue = Quantity sold at standard price – Sales price variance
= (1,900 × $200) – $1,200 = $378,800
(b) 12450 kg
Material usage variance

= (Expected usage – Actual usage) × Standard price
– 5,250 = ((1,950 × 6) – Actual usage) × $7
7 × Actual usage = 81,900 + 5,250
Actual usage = 12,450 kg
(c) $ 86680
Labour costs = Standard costs for hours worked – Labour rate variance
= (4,060 × 22) – $2,640 = $86,680
(d) $ 32,760
Actual cost = Expected cost – Total variance = (1,950 × $18) – $2,340 = $32,760
(e) $ 59850
Actual cost = Expected cost – Total variance = (1,950 × $30) – – $1,350 = $59,850
(f)  Expected output for a worker week compared with the actual output
 Expected labour time for actual output produced compared with actual labour time
The comparison of actual output with actual labour time gives no indication about
efficiency if how long labour was expected to take is not known. Comparison of actual
quality with expected quality would be a measure of effectiveness.

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Performance measurement overview
1  Strategy
 Values
2  Tactical
Financial measures
3
25 %
Return on capital employed
= Profit before interest and tax/Total assets – Current liabilities × 100%
= 7,000/(30,000 – 2,000) × 100%
= 25%
4
36 %
Gross profit margin
= Gross Profit/Revenue × 100%
= 9,000/25,000 × 100%
= 36%
5
28 %
Net profit margin
= Profit before interest and tax/Revenue × 100%
= 7,000/25,000 × 100%
= 28%
6
0.89
Asset turnover
= Revenue/Total assets less current liabilities
= 25,000/28,000
= 0.89

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7
5
Current ratio
= Current assets/Current liabilities
= 6,000 + 3,000 + 1,000/1,500 + 500
=5
8
2
Quick ratio
= Current assets excluding inventory /Current liabilities
= 3,000 + 1,000/1,500 + 500
=2
9
2.67
Inventory turnover
= Cost of sales/Inventory
= 16,000/6,000
= 2.67
10
137 days
Inventory days
= Inventory/Cost of sales × 365 days
= 6,000/16,000 × 365 days
= 137 days
11
44 days
Receivables collection period
= Trade receivables/Revenue × 365 days
= 3,000/25,000 × 365 days
= 44 days
12
34 days
Payables payment period

= Trade payables/Cost of sales × 365 days
= 1,500/16,000 × 365 days
= 34 days

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13
40 %
Debt to equity ratio
= Long-term debt/Equity × 100%
= 8,000/20,000 × 100%
= 40%
14
28.6 %
Gearing
= Long-term debt/Equity + Long-term debt × 100%
= 8,000/(20,000 + 8,000) × 100%
= 28.6%
15
14
Interest cover
= Profit before interest and tax/Finance cost
= 7,000/500
= 14
16
21.4 %
Return on capital employed

= Profit before interest and tax/Total assets – Current liabilities × 100%
= 12,000/(62,000 – 6,000) × 100%
= 21.4%
17
37.5 %
Gross profit margin
= Gross Profit/Revenue × 100%
= 15,000/40,000 × 100%
= 37.5%
18
30 %
Net profit margin

= Profit before interest and tax/Revenue × 100%
= 12,000/40,000
= 30%

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19
0.71
Asset turnover
= Revenue/Total assets less current liabilities
= 40,000/62,000 – 6,000
= 0.71
20
2
Current ratio
= Current assets/Current liabilities
= 3,000 + 6,000 + 3,000/5,000 + 1,000
=2
21
1.5
Quick ratio
= Current assets excluding inventory /Current liabilities
= 6,000 + 3,000/5,000 + 1,000
= 1.5
22
8.33
Inventory turnover
= Cost of sales/Inventory
= 25,000/3,000
= 8.33
23
44 days
Inventory days
= Inventory/Cost of sales × 365 days
= 3,000/25,000 × 365 days
= 44 days
24
55 days
Receivables collection period

= Trade receivables/Revenue × 365 days
= 6,000/40,000 × 365 days
= 55 days

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25
73 days
Payables payment period
= Trade payables/Cost of sales × 365 days
= 5,000/25,000 × 365 days
= 73 days
26
40 %
Debt to equity ratio
= Long-term debt/Equity × 100%
= 16,000/40,000 × 100%
= 40%
27
28.6 %
Gearing
= Long-term debt/Equity + Long-term debt × 100%
= 16,000/(40,000 + 16,000) × 100%
= 28.6%
28
6
Interest cover
= Profit before interest and tax/Finance cost
= 12,000/2,000
=6
29  The remuneration of senior management
30 $ 18,000
(RI + (600,000 × 12%))/600,000 = 0.15

RI + (600,000 × 12%) = 90,000
RI = $18,000

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1 OLDTED
(a) 6.8 %
Change in gross profit = ((6,790 – 6,360)/6,360) × 100% = 6.8%
(b) 10.8 %
Return on capital employed = PBIT/TALCL = (3,590/(42,090 – 8,730)) × 100% = 10.8%
(c) 10.1 %
Return on capital employed = (3,210/(39,910 – 7,780)) × 100% = 10.0%
(d) 0.97
Asset turnover = Revenue/TALCL = (32,200/(42,090 – 8,730)) = 0.97
(e) 1.01
Asset turnover = (29,220/(39,910 – 7,780)) = 0.91
(f) 2.23
Inventory turnover = Cost of sales/Inventory = 25,410/11,410 = 2.23
(g) 11 days
Inventory days = (Inventory/Cost of sales) × 365

This year = (11,410/25,410) × 365 = 163.9 days
Last year = (9,580/22,860) × 365 = 153.0 days
(h)  Use of the Economic Order Quantity model
Taking advantage of supplier discounts may reduce the total costs associated with holding and
ordering inventory, but these costs combined will be at their lowest at the Economic Order
Quantity
2 LOXWOOD FOODS
(a) 20.0 %
Return on investment = Profit/investment × 100% = (1.5/(6.5 + 1)) × 100% = 20%
(b) 19.9 %
Return on investment = ((1.5 + 0.45)/(6.5 + 1 + 1.5 + 0.8)) × 100% = 19.9%
(c) $ 0.825 m
Residual income = Profit – (Investment × Cost of capital)

= 1.5 – (0.09 × (6.5 + 1)) = $0.825m
(d) $ 1.068 m
Residual income = 1.5 + 0.45 – (0.09 × (6.5 + 1 + 1.5 + 0.8)) = $1.068m

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(e)  RI could increase every year because assets are getting older, even though profits may
remain static or fall.
 RI cannot easily be used to compare the performance of divisions of different sizes.
If assets get older, their value will fall as they are depreciated and this may outweigh falls
in profit. There is no need for companies to use the same cost of capital for every
division. Different divisions may have different cost depending on their risk profile. If
profit exceeds the imputed interest charge, this will indicate to managers that they
should undertake the investment.
(f)  Target costing

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Non-financial measures
1  I and II only
Tutors and classrooms are major resources for a training business and so I and II would be
appropriate measures of resource utilisation.
Balanced scorecard
2 AI BIII CII DIV
Activity, efficiency and capacity ratios
3
105.0 %
Activity ratio = (Standard hours produced/Budgeted hours) × 100%
Activity ratio = (105,000 × 3/300,000) × 100% = 105.0%
4
110.5 %
Efficiency ratio = (Standard hours produced/Actual hours worked) × 100%
Efficiency ratio = (105,000 × 3/285,000) × 100% = 110.5%
5
95 %
Capacity ratio = (Actual hours worked/Budgeted hours) × 100%
Capacity ratio = (285,000/300,000) × 100% = 95%
Process and job performance measurement
6  Idle time
 Productivity

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Non-profit seeking and public sector organisations
7  Effectiveness
Manufacturing and service businesses
8  Net profit margin

 Number of returning customers
 Staff turnover
Benchmarking
9  Internal
Performance reports
10  CO2 emissions

1 FUZZY LIMITED
(a) 6.88 %
ROI = Divisional profit/Divisional investment × 100% = (5,500/80,000) × 100% = 6.88%
(b) $ –2500000
RI = Divisional profit – Notional interest

= $5,500,000 – ($80,000,000 × 10%) = – $2,500,000
(c) 24.44 %
Turnover = Number of staff leaving in period/Average number of staff employed × 100% =

(11/45) × 100% = 24.44%
(d) 100.40 %
Efficiency ratio = Standard hours produced/Actual hours worked × 100%

= (49,700/49,500) × 100% = 100.40%
(e) 99.00 %
Capacity ratio = Actual hours worked/Budgeted hours
= (49,500/50,000) × 100% = 99.00%
(f) 99.40 %
Activity ratio = Standard hours produced/Budgeted hours
= (49,700/50,000) × 100% = 99.40%

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(g)
Yes No
Divisional managers have to consider the costs of financing their divisions.  
Divisional managers avoid dysfunctional decision-making.  
It is directly related to net present value.  
It means that managers will select projects with positive net present  
values.
It relates size of income to size of investment.  
It is an absolute measure of performance.  
It helps in comparing the performance of managers who control  
divisions of different sizes.
It is easily understood by managers.  
(h)  The rate of staff turnover was higher than budgeted.

 Errors were made when allocating time to jobs during planning.
A greater number of new, inexperienced, staff than expected is likely to lead to more errors and
lower productivity. Errors in allocation could explain both an adverse and a favourable variance.
If idle time was taken into account when planning, it shouldn’t affect efficiency calculations. An
increase in wage rates should account for an adverse labour rate variance but (hopefully) have a
favourable impact on labour efficiency.
2 BROADBRIDGE CLINICS LTD

(a) 16 %
Return on capital employed = (Operating profit/TALCL) × 100%

= ($1,356,000/($8,765,000 – $420,000)) × 100% = 16%
(b) 34 %
Net profit percentage = (Operating profit/Revenue) × 100%

= ($1,356,000/$3,940,000) × 100% = 34%
(c) $ 54
Operating profit per patient night = Operating profit/Number of patients × Average stay
= $1,356,000/(1,250 × 20) = $54.24
(d) 76 %
Occupancy = (No of patients × Average stay)/(Average no of rooms × 365) × 100%

= (1,250 × 20)/(90 × 365) × 100% = 76%
(e) $ 79000
Revenue per member of medical staff = $3,940,000/(12 + 38) = $78,800
(f) $ 19000
Operating profit per employee = $1,356,000/(12 + 38 + 7 + 15) = $18,833

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(g)  Speed of delivery of care to patients

 Care plans tailored to individual patients
Number of available beds is not itself an indication of flexibility if beds are available but
there are no patients to fill them.
3 SYDNEY DARWIN LIMITED

(a) 1.5
Interest cover = PBIT/Finance cost = 1,200/800 = 1.5
(b) 30 %
Gearing = (Long-term debt/Equity + Long-term debt) × 100%

= (8,100/8,100 + 18,800) × 100% = 30%
(c) 1.16
Current ratio = Current assets/Current liabilities = 5,750/4,950 = 1.16
(d) 0.47
Quick ratio = Current assets excluding inventory/Current liabilities

= (5,750 – 3,410)/4,950 = 0.47
(e)  Interest cover
(f)  Quick ratio
The quick ratio shows the company’s ability to realise its more liquid assets (that is,
excluding inventory, which may be difficult to sell).
(g)  Business process re-engineering

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205
ACCA
Practice Examination
Time allowed: 2 hours
Section A – ALL 35 questions are compulsory and MUST be attempted

Section B – ALL THREE questions are compulsory and MUST be attempted

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206 P rac t i c e e xami n at i on q u es t i o n s A C C A MA Q ue s t ion Ba nk
Section A
1 Are the following statements relating to management accounts TRUE or FALSE?
True False
Accuracy is more important than timeliness  
They are prepared primarily for internal rather than external  
stakeholders
2 Which quality of information can be defined as the omission of information that is not needed
for a decision?
 Relevant
 Understandable
 Authoritative
 Easy to use
3 A sample is taken by first dividing the population into different ethnic groups and then sampling
randomly within each group. What is this sampling method called?
 Random
 Block
 Cluster
 Multi-stage
4 Are the following statements relating to inventory valuation TRUE or FALSE?
True False
Inventory is valued by including both production and non-  
production costs
The LIFO method of inventory valuation assumes that the oldest  
items in inventory will be sold last
5 A factory employee is paid a fixed salary of $15,000 per annum, plus an overtime rate of $20 per
hour for each hour above 40 worked per week. What type of cost is the factory employee’s
salary?
 A fixed cost
 A variable cost
 A semi variable cost
 A step cost
6 Which section of a report is most likely to contain a detailed list of the information sources used?
 Contents
 Terms of reference
 Recommendations
 Appendices

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A C C A MA Q ue s t ion Ba nk P rac t i c e e xami n at i on q u es t i o n s 207
7 The following pie chart shows what students taking the MA exam planned to do on their
holidays after they had taken the exam.
Holiday activity
Skiing
Sightseeing
Walking
Sunbathing
Are the following statements about the pie chart TRUE or FALSE?
True False
The % of students going on active holidays (defined as Skiing and  
Walking) is greater than the % of students taking other types of
holidays
The % of students going on a Sightseeing holiday is greater than  
25%
8 Within the time series model, longer term fluctuations caused by such factors as economic
activity are known as a:
 Cyclical variation
 Random variation
 Seasonal variation
 Trend
9 Using a multiplicative time series model, a business has identified the following seasonal
variations in the quarterly demand for its product:
Q1 Q2 Q3 Q4
Demand (units) 300 500 140 650
Seasonal variation -25% +40% +15% ?
The seasonal variation for Q4 is:
 Not possible to determine
 +30%
 0%
 -30%

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10 A construction company is bidding for three property development contracts, which are
awarded independently of each other. The board estimates it has a 45% chance of winning
Contract A, 20% chance of winning Contract B, and 35% chance of winning Contract C. The
profits from A, B and C are estimated to be $500,000, $550,000 and $575,000 respectively.
The expected value to the company of the profits from all three contracts will be closest to
 $500,000
 $525,000
 $536,250
 $542,000
11 The number of holidays undertaken by a group of eight friends in one year was as follows:
1 3 2 0 3 2 4 1
The standard deviation of the number of holidays undertaken, correct to 2 decimal places, is :
12 The annual demand for a product is 30,000 units. The cost of placing an order is $160 and the
annual cost of holding an item in inventory is $15.00. Calculate the Economic Order Quantity, to
the nearest unit.
units
13 Puppypup made the following purchases and sales of its most popular item, a large cuddly dog,
in November. The value of opening inventory was $776,250.
Date Quantity Cost/Revenue per unit
000 $
1 Opening inventory 45 17.25
9 Sales 20 25.00
23 Sales 60 25.00
Calculate the value of closing inventory using the FIFO method.
14 Eleanor is a lawyer who normally works 40 hours a week. She is paid at the rate of S60 per hour
with an overtime premium of 25% of all overtime hours worked. In the week commencing 7
May, Eleanor worked 53 hours. The hours worked included 2 hours idle time, 5 hours on one
client to cover for a colleague who was off sick and 6 hours to complete a job by 9 May at
another client’s request.
What is the direct cost of Eleanor’s time in the week commencing 9 May?

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15 A standard working day at Tigger Limited is 8 hours. The rate of pay is $16 per hour. The
standard time allowed to produce one unit is 10 minutes and there is a premium at basic rate of
salary of 25% of time saved.
On one day an employee produces 60 units. What is his pay for the day?
A  is a customer order or task of relatively short duration.

Process Batch Job Contract
17 100,000 kg of materials were added to a process. The process has a normal loss of 5%. What is
the expected output?
kg
18 The input to a process costing system was 5,000 units. There was no opening or closing work in
progress. Normal losses are 2% of input. In which of the following circumstances is there an
abnormal gain?
I Actual output = 5,000 units
II Actual output = 4,950 units
III Actual output = 4,800 units
 None of them
 I only
 II and III
 I and II
19 Product X is manufactured in a single process. At the start of the last period there was no work
in progress. During the period 600 kg of raw material costing $12,000 was input into the process
and $9,000 was spent on conversion. 500 kg of X was transferred to finished goods. The normal
process loss is 10% of input. The abnormal loss was 10kg. The closing work in progress was
100% complete with respect to materials and 50% complete with respect to conversion costs.
The material equivalent units in closing work in progress were:
units
20 Which of the following organisations would NOT normally use service costing?
 IT consultant
 Hospital
 Accountancy firm
 Large manufacturing company

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21 At what stage of the product life cycle should sales revenues increase and the product start to
make a profit?
 Introduction
 Growth
 Maturity
 Decline
22 Indicate whether the following statements about budgeting are TRUE or FALSE:
True False
A business must establish its long term objectives BEFORE it commences  
budgeting
Better local knowledge is an advantage of bottom-up budgeting compared  
with top-down budgeting
23 Fill in the blank in the following statement.
A  is a ‘detailed budget of estimated cash inflows and

outflows incorporating both revenue and capital items’.
Master budget
Flexible budget
Cash budget
Cash flow statement
24 A business wishes to increase its finished goods inventory by 10%. Indicate whether the
following statements are TRUE or FALSE:
True False
The quantity of finished goods in the production budget is the budgeted sales  
quantity minus the opening inventory plus the increased closing inventory
The quantity of finished goods in the production budget must also be higher  
by exactly 10% if the finished goods inventory increases by 10%
25 Which of the following would not be included in a cash budget?

 Dividend paid to shareholders
 Tax paid to the taxation authorities
 Receipt on the sale of a motor vehicle
 Depreciation of computer equipment

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26 Fill in the blank in the following definition.
A  is a ‘budget set prior to the control period and not

subsequently changed in response to changes in activity, costs or revenue. It may serve as a
benchmark in performance evaluation’.
Fixed budget Master budget Rolling budget Incremental budget
27 A business has produced the following flexed budget for the product that it manufactures:
Level of activity 50% 75% 90%
Direct materials $15,000 $22,500 $27,000
Direct labour $33,750 $50,625 $60,750
Production overhead $17,500 $18,750 $19,500
In a budget flexed at the 55% level of activity, the value of direct materials is:
28 How and where the company is going to compete is a definition of which element of a mission
statement?
 Purposes
 Strategy
 Behavioural standards
 Values
29 Which of the following indicators is a financial performance measurement?

 Cash flow
 Output per employee
 Number of complaints received
 Sales volume growth
30 The following information is taken from the financial statements of FT Limited.

20X9 20X8
$000 S000
Revenues 60,000 50,400
Gross profit 37,500 31,500
Profit before interest and tax 24,000 19,950
Profit after taxation 9,600 8,400
Capital employed 240,000 210,000
Calculate the change in return on capital employed from 20X8 to 20X9.
 Increase from 24.0% to 25.0%
 No change; remains at 4%

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31 Which of the following is an advantage of using annual profit as a performance indicator?

 It cannot easily be manipulated.
 It is easy to understand.
 It motivates directors to focus on the longer-term.
 It gives a good indication of market share.
32 Henry has calculated that the profit for the division for which he has responsibility in 20X8 was
$3,000,000. The costs he took into account when calculating the profit included $300,000 of
centrally allocated Head Office costs. The division’s net assets at the start of 20X8 were
$14,800,000 and were S15,200,000 at the end of 20X8. The Finance Director has estimated that
the Cost of Capital for Henry’s division is 8%.
Calculate the Residual Income for Henry.
33 Which TWO of the following are non-financial measures?

 Number of new products introduced
 Increase in market share
 Fall in inventory levels
 Customer retention rate
34 Which of the following is not an advantage of the balanced scorecard?

 It emphasises the importance of customer value.
 It steers the business away from solely focusing on financial measures.
 It considers how the business is developing its markets by producing new products.
 It provides a means of reconciling short-term and long-term objectives.
35 Which of the following groups make up the three Es in value for money analysis?
 Economy, Efficiency, Expenditure
 Economy, Expenditure, Effectiveness
 Efficiency, Expenditure, Effectiveness
 Economy, Efficiency, Effectiveness

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Section B
1 BRIAN
Brian produces a product called a kitmonk, which includes 8 kg of raw materials costing $10 per kg.
Forecast sales in the next calendar year are as follows:
Units
January 2,000
February 1,800
March 1,900
April 2,200
May 2,400
June 2,500
July 2,100
August 1,700
September 2,200
October 2,600
November 2,800
December 3,000
Required:
(a) Initially Brian has adopted a policy of closing inventory at the end of each month equalling 30%
of expected sales in the following month. What, in units, is the opening inventory for February?
units (1 mark)
(b) At the start of April, opening inventory was 500 units, but Brian intends to return to its initial
policy at the end of April. What, in units, is the budgeted level of production for April?
units (2 marks)
(c) Opening inventory of finished goods in July is expected to be 630 units and closing inventory is
expected to be 510 units. Brian does not maintain inventory of raw materials. What is the
budgeted amount of raw materials purchases in July?
$ (2 marks)
(d) Raw materials purchases in September are expected to be $185,600, in October $212,800 and
in November $228,800. Brian pays for 60% of raw materials in the month of purchase and 40%
one month later. What is the budgeted level of payment for raw materials in October?
$ (1 mark)
(e) Excess demand worldwide is expected to mean that Brian will only be able to purchase 20,000
kg of raw materials in December. Opening inventory of finished goods in December will be 900
units, but the target level of closing inventory is having to be relaxed because of the shortage of
raw materials. What will be the expected level of closing inventory at the end of December?
units (2 marks)

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(f) Because of the lower demand over the summer, Brian may face a short-term shortage of cash
between June and August. Which of the following methods would it be appropriate for Brian to
use to alleviate the short-term cash shortage? (2 marks)
Use Not use

Taking out a bank overdraft  
Taking out a five year bank loan  
Investing in short-term debt instruments  
Agreeing with suppliers to delay payment  
(10 marks)
2 CEDRIC
Cedric is about to make an investment in facilities to produce a new product. The following details will
be used to appraise the investment.
A B C D E F
1 Year 0 1 2 3 4
2 $000 $000 $000 $000 $000
3 Revenues 900 1,200 1,340 500
4 Cost of investment (1,500)
5 Running costs (330) (550) (620) (240)
6 Net cash flow (1,500) 570 650 720 260
7 Discount factor 8% 1.000 0.926 0.857 0.794 0.735
8 Discount factor 10% 1.000 0.909 0.826 0.751 0.683
9 Discount factor 20% 1.000 0.833 0.694 0.579 0.482
Required:
(a) Calculate the payback period for this investment to the nearest month.
months (2 marks)
(b) Calculate the discounted payback period for this investment to the nearest month, using a
discount rate of 8%.
months (2 marks)
(c) Calculate the Internal Rate of Return (IRR) of this investment, using discount rates of 10% and
20%, to the nearest 0.1%.
% (2 marks)
(d) Which of the following list are advantages of the IRR method of investment appraisal? (2 marks)
Advantage?
Yes No
It considers the time value of money  
It considers cash flows over the whole life of a project  
It considers the relative size of investments  
It considers relevant cash flows  

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(e) Which of the following list are advantages of using a computer spreadsheet in an investment
appraisal? (2 marks)
Advantage?
Yes No
Spreadsheets can be used to do repetitive calculations quickly  
Spreadsheets automatically highlight incorrect data that has been  
input
Spreadsheets make it easy to see the formulae used  
Spreadsheets allow what-if analysis to be performed quickly on the  
data in the appraisal
(10 marks)
3 GRAHAM
The standard cost card for Graham’s product, the Teded, is as follows:
$
Selling price 250
Fixed overhead 4 hrs @ $8 per hour 32
Profit 88
The incomplete operating statement for the Teded is as follows:

Profit reconciliation:
$
Sales price variance (14,500)

Favourable Adverse
Cost variances $ $
Material price variance 7,500
Material usage variance 8,000
Labour rate variance 6,310
Labour efficiency variance 7,200
Variable overhead expenditure variance 1,230
Variable overhead efficiency variance
Fixed overhead expenditure variance 3,940
Fixed overhead capacity variance 2,800
Fixed overhead efficiency variance 3,600
Actual profit
The number of units budgeted to be produced and sold in the period was 7,800. The number of units
actually produced was 8,000 and actual labour hours were 31,550.

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Required:
(a) Is the following statement TRUE or FALSE?
True False
Graham is using marginal costing to account for the Teded  
(b) What is the flexed budgeted profit for the Teded?
$ (1 mark)
(c) How many units of the Teded were sold in the period?
units (1 mark)
(d) What was the actual material usage?
units (1 mark)
(e) What was the average labour rate per hour?
$ (1 mark)
(f) What was the variable overhead efficiency variance (no need to say whether favourable or
adverse)?
$ (1 mark)
(g) What was the fixed overhead volume variance (no need to say whether favourable or adverse)?
$ (1 mark)
(h) What was the amount of overhead under/over-absorbed (no need to say whether under or
over-absorbed)?
$ (1 mark)
(i) Which of the following might be an explanation for the favourable labour efficiency variance?
(2 marks)
Explanation?
Yes No
Errors on time sheets  
Use of higher grade staff  
Lower pay rises than budgeted and promised  
Lower learning rate  
(10 marks)

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217
ACCA
Practice Examination
Answers

lOMoARcPSD|21428003
218 P rac t i c e e xami n a t i on an s w e rs A C C A MA Q ue s t ion Ba nk
Section A
1
True False
Accuracy is more important than timeliness  
They are prepared primarily for internal rather than external  
stakeholders
It is more important that management accounts are timely, rather than completely accurate.
They must be accurate enough for their purpose but do not need to be completely accurate or
go into unnecessary detail.
Management accounts are created for the internal managers, rather than for the external
stakeholders such as customers, shareholders or employees
2  Relevant
3  Multi-stage
Multi-stage sampling is a probability sampling method that involves selecting a sample in two or
more stages. Clusters designed to contain more population units than are required for the final
sample are initially selected. Population units are then chosen from clusters to derive a final
sample.
4
True False
Inventory is valued by including both production and non-  
production costs
The LIFO method of inventory valuation assumes that the oldest  
items in inventory will be sold last
Inventory is valued using production costs only. LIFO assumes that the newest items will be sold
first, and therefore that the oldest items will be sold last.
5  A semi variable cost
6  Appendices

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A C C A M A Q ue s t ion Ba nk P ra c t i c e e xa mi n a t i on a n s w e rs 219
7
True False
The % of students going on active holidays (defined as Skiing and  
Walking) is greater than the % of students taking other types of
holidays
The % of students going on a Sightseeing holiday is greater than  
25%
8  Cyclical variation
9  -30%
The sum of the seasonal variations always equates to zero
-25% + 40% + 15% = +30%, so remaining variation must be -30%
10  $536,250
Expected value = (0.45 × $500k) + (0.2 × $550k) + (0.35 × $575k) = $536,250
11
1.22
16
x̅ = =2
8
𝟐𝟐
Number of holidays (𝒙𝒙 – 𝐱𝐱
�) (𝒙𝒙 − ��
𝐱𝐱)
1 -1 1
3 1 1
2 0 0
0 -2 4
3 1 1
2 0 0
4 2 4
1 -1 1
12
(𝑥𝑥−𝑥𝑥̅ )2 12
Standard deviation = � = � 8 = √1.5 = 1.22
𝑛𝑛
12
800 units
2Co D
EOQ = � Ch
EOQ =√ (2 × 160 × 30,000/15)= 800 units

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13
$ 366500

000 $ $
Opening 45 17.25 776,250
7 15 18.00 270,000
9 (20) 17.25 (345,000)
14 30 18.25 547,500
23 (25) 17.25 (431,250)
23 (15) 18.00 (270,000)
23 (20) 18.25 (365,000)
28 10 18.40 184,000
Closing 10 18.25 182,500
10 18.40 184,000
Total Closing 20 366,500
14
$ 3150
$
Basic pay (40 × $60) 2,400
Basic rate for hours covering colleague’s absence (5 × $60) 300
Full rate for customer job (6 × $60 × 125%) 450
3,150
Only the basic salary for the hours covering the absent colleague are direct costs, as the reason
for the overtime is the colleague’s absence and not demands that the client has made. The
hours worked to complete the job by 9 May can be related to a specific job and are due to the
demands of the client and are charged in full. Any idle time hours are excluded.
15
$ 136
Basic salary = $16 × 8 hours = $128

Time that should have been taken to produce 60 units = 60 × (10/60) = 10 hours
Time saved = 10 hours – 8 hours = 2 hours
Bonus = 2 × 25% × $16 = $8
Pay = $128 + $8 = $136
16 A job is a ‘customer order or task of relatively short duration’.
17
95000 kg
The normal loss is 5%, so expected output is 95% × 100,000 kg = 95,000 kg

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18  I and II
There is an abnormal gain when actual output exceeds the expected output.
19
30 units
Kg
Input 600
Transferred to finished goods (500)
Normal loss (60)
Abnormal loss (10)
Closing work in progress 30
As the closing work in progress was 100% complete with respect to materials, there were
30 equivalent units.
20  Large manufacturing company
21  Growth
22
True False
A business must establish its long term objectives BEFORE it commences budgeting  
Better local knowledge is an advantage of bottom-up budgeting compared with top-  
down budgeting
23 A cash budget is a ‘detailed budget of estimated cash inflows and outflows incorporating both
revenue and capital items’.
24
True False
The quantity of finished goods in the production budget is the budgeted sales  
quantity minus the opening inventory plus the increased closing inventory
The quantity of finished goods in the production budget must also be higher  
by exactly 10% if the finished goods inventory increases by 10%
The quantity of finished goods in the production budget will be influenced by the change in the
level of sales as well as the change in the level of inventory.
25  Depreciation of computer equipment

This is not a cash expense.

lOMoARcPSD|21428003
26 A fixed budget is a ‘budget set prior to the control period and not subsequently changed in
response to changes in activity, costs or revenue. It may serve as a benchmark in performance
evaluation’.
27
$ 16,500
The direct materials cost is an entirely variable cost of $300 per % of activity.
15,000 22,500 27,000

= 300, = 300, = 300
50 75 90
therefore $300 × 55 = $16,500
28  Strategy
29  Cash flow
30  Increase from 9.5% to 10.0%

Use PBIT, 20X8 ($19,950/$210,000) × 100% = 9.5%, 20X9 ($24,000/$240,000) × 100% = 10%
31  It is easy to understand.
32
$ 2100000
Residual Income = 3,000,000 + 300,000 – ((14,800,000 + 15,200,000)/2) × 8%)

= $2,100,000
33  Number of new products introduced

 Customer retention rate
34  It provides a means of reconciling short and long-term objectives.

The balanced scorecard can highlight that there are conflicts between short and long-term
objectives, but may not provide a clear guide to resolve these conflicts.
35  Economy, Efficiency, Effectiveness

lOMoARcPSD|21428003
Section B
1 BRIAN
(a)
540 units
Opening inventory = 30% × February sales = 30% × 1,800 = 540 units

(b)
2420 units
Production = Sales + Closing inventory – Opening inventory
Production = 2,200 + (30% × 2,400) – 500 = 2,420
(c)
$ 158400
Production = Sales + Closing inventory – Opening inventory

Production = 2,100 + 510 – 630 = 1,980
Cost of kg required for production = 1,980 × 8 × $10 = $158,400
(d)
$ 201920
Budgeted payment = (40% × $185,600) + (60% × $212,800) = $201,920

(e)
400 units
Maximum production = 20,000/8 = 2,500 units, as 8 kg used per unit
Closing inventory = Opening inventory + Production – Sales = 900 + 2,500 – 3,000 = 400
(f)
Use Not use
Taking out a bank overdraft  
Taking out a five year bank loan  
Investing in short-term debt instruments  
Agreeing with suppliers to delay payment  
A bank overdraft is designed to be used in the short-term. Longer-term finance is not necessary
as the shortage is temporary. Investment would be appropriate if the business has a cash
surplus, not shortage (it would be investing in someone else’s debt). Suppliers may well agree to
a delay providing it does not become regular.

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2 CEDRIC
(a) 29 months
The cumulative cash flows are as follows:
$000
1 (930)
2 (280)
3 440
Payback period = 2 years + (280/(280 + 440)) × 12 = 2 years 5 months = (2 × 12) + 5 = 29
months
The calculations in the following table are used in (b) and (c).
A B C D E F
1 Year 0 1 2 3 4
2 $000 $000 $000 $000 $000
3 Revenues 900 1,200 1,340 500
4 Cost of investment (1,500)
5 Running costs (330) (550) (620) (240)
6 Net cash flow (1,500) 570 650 720 260
7 Discount factor 8% 1.000 0.926 0.857 0.794 0.735
8 Discount factor 10% 1.000 0.909 0.826 0.751 0.683
9 Discount factor 20% 1.000 0.833 0.694 0.579 0.482
10 Discounted cash flow 8% (1,500) 528 557 572 191
13 Net present value at 10% 274
14 Net present value at 20% (32)
(b) 33 months
The cumulative discounted cash flows are as follows:
$000
1 (972)
2 (415)
3 157
Payback period = 2 years + (415/(415 + 157)) × 12 = 2 years 9 months = (2 × 12) + 9 = 33
months
(c) 19.0 %
274
IRR = 10 + (20 − 10) = 19.0%
274 − − 32

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(d)
Advantage?
Yes No
It considers the time value of money  
It considers cash flows over the whole life of a project  
It considers the relative size of investments  
It considers relevant cash flows  
IRR does not consider the relative size of investments, which is one of its disadvantages
compared with NPV.
(e)
Advantage?
Yes No
Spreadsheets can be used to do repetitive calculations quickly  
Spreadsheets automatically highlight incorrect data that has been  
input
Spreadsheets make it easy to see the formulae used  
Spreadsheets allow what-if analysis to be performed quickly on the  
data in the appraisal
Spreadsheets do not highlight incorrect data and it is not possible to see the formulae used
without accessing the spreadsheet file.
3 GRAHAM
(a)
True False
Graham is using marginal costing to account for the Teded  
The cost card includes fixed overheads, so Graham must be using absorption costing.
(b)
$ 699600
Budgeted profit = Budgeted number of units × Profit per unit = 7,800 × $88 = $686,400
Flexed budgeted profit = Budgeted profit + Sales volume variance = $686,400 + $13,200 =
$699,600
(c)
7950 units
Favourable sales volume variance in units = $ variance/Profit per unit = $13,200/$88 = 150 units
Number of units sold = 7,800 + 150 = 7,950
(d)
40800 kg
Usage variance in kg = $ variance/Standard cost per kg = $8,000/$10 = 800 kg adverse
8,000 units should have used 8,000 × 5 kg = 40,000 kg
Actual usage = 40,000 kg + 800 kg = 40,800 kg

lOMoARcPSD|21428003
(e)
$ 16.20
Variance per labour hour = $ variance/actual hours = 6,310/31,550 = $0.20 adverse

Average labour rate per hour = $16 + $0.20 = $16.20
(f)
$ 1800
The efficiency variance in hours will be the same as for labour.

In $ it will be Labour efficiency variance × VOR per hour/Labour rate per hour = $7,200 × $4/$16
= $1,800 (favourable)
(g)
$ 6400
Volume variance = Capacity variance + Efficiency variance = $2,800 + $3,600 = $6,400

(favourable)
(h)
$ 2460
Overhead under/over absorbed = Total fixed overhead variance = Capacity variance + Efficiency
variance + Expenditure variance = $2,800 + $3,600 – $3,940 = $2,460 (over-absorbed)
(i)
Explanation?
Yes No
Errors on time sheets  
Use of higher grade staff  
Lower pay rises than budgeted and promised  
Lower learning rate  
Errors on timesheets could explain both favourable and adverse efficiency variances. Higher
grade staff should work more efficiently. The level of pay rises directly affects the labour rate
variance, and if there is an impact on motivation, it is likely to be adverse if pay rises are lower
than expected. A higher learning rate would lead to a favourable efficiency variance.

lOMoARcPSD|21428003
A C C A MA Q ue s t ion Ba nk Fo rmu l ae an d T ab le s 227
Formulae and Tables

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228 Fo rmu l ae an d T ab le s A C C A MA Q ue s t ion Ba nk
Present value table

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A C C A MA Q ue s t ion Ba nk Fo rmu l ae an d T ab le s 229
Annuity table

lOMoARcPSD|21428003
230 Fo rmu l ae an d T ab le s A C C A MA Q ue s t ion Ba nk

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Management Accounting (Association of Chartered Certified Accountants)

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How to use this Question Bank

1 QUESTION PRACTICE IS KEY TO SUCCESS

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Chapter 1: Management accounting and information

Chapter 2: Statistical techniques

Chapter 5: Accounting for materials

Chapter 6: Accounting for labour

Chapter 7: Accounting for overheads

Chapter 8: Absorption and marginal costing

Chapter 9: Process costing

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Chapter 10: Other costing techniques

Chapter 11: Nature and purpose of budgeting

Chapter 12: Budget preparation

Chapter 13: Discounted cash flow

Chapter 14: Investment appraisal

Chapter 15: Material and labour variances

Chapter 16: Other variances

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Chapter 17: Variance review and control

Chapter 18: Financial performance measures

Chapter 19: Non-financial performance measures and

Formulae and tables 227

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ACCA Specimen paper

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Chapter 1: Management accounting and information

Objective test questions

Planning, decision-making and control

Data and information

% of first time students who passed final exam) 98%

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7 Are the following internal or external information sources?

9 Which of the following statements are correct?

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11 Which of the following BEST describes cluster sampling?

Use the following information to answer the next six questions.

14 Which is the most popular newspaper amongst women?

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17 What percentage of people does not read the Press?

18 To the nearest whole %, what percentage of the Chronicle’s readership is male?

Use this diagram to answer the next four questions.

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Use this diagram to answer the next five questions.

0% 20% 40% 60% 80% 100%

25 Which programme has the largest audience?

26 Which programme is least popular amongst women?