Management Information Question Bank 2019
Management Information Question Bank 2019
MANAGEMENT
INFORMATION
Question Bank
www.icaew.com
Management Information
The Institute of Chartered Accountants in England and Wales
ISBN: 978-1-50971-999-0
Previous ISBN: 978-1-78363-883-3
© ICAEW 2018
ii ICAEW 2019
Contents
The following questions are exam-standard. Unless told otherwise, these questions are the style,
content and format that you can expect in your exam.
Title Page
Questions Answers
2 Certain types of income and cost are of no interest to the cost accountant.
An example of such income or cost is
A indirect labour
B purchase of raw materials
C dividends received
D rent paid on a factory LO 1a
4 Which of the following costs would not be the concern of the supervisor of a production
department?
A Material costs
B Labour costs
C Maintenance costs for a machine
D Lease payments on a machine LO 1a
7 A business has ascertained that its total costs (TC) can be estimated for any level of
production (P) and sales (S) according to the following equation:
TC = (£5 P + £1,000) + (£2 S + £500)
If the production level was 500 units and sales were 400 units, what would be the
company's fixed costs?
A £1,500
B £4,800
C £3,500
D £3,300 LO 1b
10 Prime cost is
A the total of all direct costs
B the total of all costs incurred in manufacturing a product
C the same as the fixed cost of a cost unit
D any cost which does not vary with changes in output levels LO 1b
11 A cost which contains both fixed and variable components, and so is partly affected by
changes in the level of activity is known as
A a direct cost
B a variable cost
C an indirect cost
D a semi-variable cost LO 1b
12 Which of the following costs are fixed per unit, but change in total, as production levels
change?
A Variable costs
B Direct costs
C Fixed costs
D Step costs LO 1b
13 If an assembly line supervisor is paid a salary of £100 each week and an additional £0.10 for
every unit of production made in the week, this wage could be described as
A a semi-variable cost
B a fixed cost
C a variable cost
D a step cost LO 1b
Level of activity
B
Total
Cost
Level of activity
C
Total
Cost
Level of activity
D
Total
Cost
Level of activity
LO 1b
16 The annual salary paid to a business's financial accountant would best be described as
A a variable administrative cost
B a fixed production cost
C part of prime cost
D a fixed administrative cost LO 1b
Level of activity
To which of the following costs does the graph correspond?
A Electricity bills made up of a standing charge and a variable charge
B Bonus payments to employees when production reaches a certain level
C Sales representatives' commissions payable per unit up to a maximum amount of
commission
D Bulk discounts on purchases, the discount being given on all units purchased LO 1b
1400
1200
1000
800
600
400
200
0
0 20 40 60 80
In the graph above, the x-axis represents volume of output, and the y-axis represents total
costs. Which of the following could explain the shape of the graph?
A Fixed costs = 500. Variable costs per unit are constant until output is 30, then
additional costs per unit are higher.
B Fixed costs = 500. Variable costs per unit are constant until output is 30, then all costs
per unit (from the first unit onwards) are higher.
C Fixed costs cannot be determined, because the two parts of the line will intersect the
y-axis at different points. Variable costs per unit are constant until output is 30, then
additional costs per unit are higher.
D Fixed costs cannot be determined, because the two parts of the line will intersect the
y-axis at different points. Variable costs per unit are constant until output is 30, then all
costs per unit (from the first unit onwards) are higher. LO 1b
22 Which of the following items might be a suitable cost unit within the accounts payable
department?
(1) Postage cost
(2) Invoice processed
(3) Supplier account
A Item (1) only
B Item (2) only
C Item (3) only
D Items (2) and (3) only LO 1a
Cost
(£)
0
Output (level of activity)
A The line with the constant upward slope represents fixed costs; D represents variable
cost per unit
B The line with the constant upward slope represents variable costs; D represents fixed
costs
C The line with the constant upward slope represents total costs; D represents fixed costs
D The line with the constant upward slope represents total costs; D represents variable
cost per unit LO 1b
Q
0
Output (level of activity)
A Total fixed costs fall after production reaches Q, but variable costs per unit increase.
B Fixed costs are constant until production reaches Q after which fixed costs step up to a
higher level.
C Variable costs per unit are constant until output reaches Q after which all production
(from the first unit onwards) incurs higher variable costs per unit.
D Variable costs per unit are constant until output reaches Q after which further
production incurs higher variable costs per unit. LO 1b
25 Select the cost classification that best describes each of the following:
Labour paid per hour worked
A Fixed
B Variable
C Semi-variable
Rent of a factory
D Fixed
E Variable
F Semi-variable
Salary plus profit-related pay
G Fixed
H Variable
I Semi-variable LO 1b
28 Adam is responsible for preparing a monthly analysis of total department costs for the
Managing Director of XYZ. Adam's boss, the Department Manager, has asked Adam to
exclude a number of costs from the monthly analysis to 'give a better impression' of the
department, and has threatened to start disciplinary proceedings against Adam for poor
work if he fails to do so.
Which threat does this represent?
A Familiarity
B Self-interest
C Intimidation
D Self-review LO 5a
29 The ICAEW Code of Ethics exemplifies which of the following theoretical approaches to
ethical codes?
A A rules-based approach
B A framework-based approach
C A compliance-based approach
D A tick box approach LO 5a
3 Wage payments for idle time of direct workers within a production department are
classified as
A direct labour cost
B prime cost
C administration overhead
D factory overhead LO 1c
4 Grant Leeve is an assembly worker in the main assembly plant of Gonnaway Co.
Details of his gross pay for the week are as follows.
Basic pay for normal hours worked: 38 hours at £5 per hour £190
Overtime: 8 hours at time and a half £60
Gross pay £250
Although he is paid for normal hours in full, Grant had been idle for 10 hours during the
week because of the absence of any output from the machining department.
The indirect labour costs that are included in his total gross pay of £250 are
A £20
B £50
C £70
D £110 LO 1c
6 A small engineering company that makes generators specifically to customers' own designs
has had to purchase some special tools for a particular job. The tools will have no further
use after the work has been completed and will be scrapped.
Which of the following options is the correct cost classification for these tools?
A Variable production overheads
B Fixed production overheads
C Indirect expenses
D Direct expenses LO 1c
10 A company pays £1 per unit as a royalty to the designer of a product which it manufactures
and sells.
When costing units of the company's product, the royalty charge is classified as a
A direct expense
B production overhead
C administrative overhead
D selling overhead LO 1c
13 A wholesaler had an opening inventory of 750 units of geronimo valued at £80 each on
1 February.
The following receipts and sales were recorded during February.
4 February Received 180 units at a cost of £85 per unit
18 February Received 90 units at a cost of £90 per unit
24 February Sold 852 units at a price of £110 per unit
Using the FIFO valuation method, what was the cost of the units of geronimo sold on
24 February?
A £68,160
B £68,670
C £69,960
D £93,720 LO 1c
14 A wholesaler had an opening inventory of 750 units of product A valued at £80 each on
1 February.
The following receipts and sales were recorded during February.
4 February Received 180 units at a cost of £85 per unit
18 February Received 90 units at a cost of £90 per unit
24 February Sold 852 units at a price of £110 per unit
Using the LIFO valuation method (to the nearest £), what was the gross profit earned from
the product A sold on 24 February?
A £17,040
B £23,760
C £69,960
D £93,720 LO 1c
16 At the beginning of week 15 there were 200 units of pixie held in the stores. 80 of these had
been purchased for £7.55 each in week 14 and 120 had been purchased for £7.91 each in
week 13.
On day 3 of week 15 a further 60 pixies were received into stores at a purchase cost of
£7.96 each.
The only issue of pixies occurred on day 4 of week 15, when 75 pixies were issued to
production.
Using the LIFO valuation method, what was the total cost of the pixies issued on day 4?
A £566.25
B £590.85
C £593.25
D £597.00 LO 1c
17 At the beginning of week 12 there were 500 units of component J held in the stores. 200 of
these components had been purchased for £6.25 each in week 11 and 300 had been
purchased for £6.50 each in week 10.
On day 3 of week 12 a further 150 components were received into stores at a purchase cost
of £6.60 each.
The only issue of component J occurred on day 4 of week 12, when 90 units were issued to
production.
Using the FIFO valuation method, what was the value of the closing inventory of component
J at the end of week 12?
A £585
B £594
C £3,596
D £3,605 LO 1c
20 For many years Sunny has faced rising prices on his main raw material. He maintains
inventories of this material at a constant volume. He uses the FIFO method of inventory
valuation. If he had used the LIFO method this would have resulted in
A higher cost of sales and lower inventory value
B higher cost of sales and higher inventory value
C lower cost of sales and lower inventory value
D lower cost of sales and higher inventory value LO 1c
21 At 31 March which of the following closing inventory valuations using FIFO is correct?
A £8,000
B £7,500
C £7,000
D £6,500 LO 1c
22 At 31 March which of the following closing inventory valuations using LIFO is correct?
A £6,500
B £7,000
C £7,500
D £8,000 LO 1c
23 With all average price systems where it is required to keep prices up to date, the average
price must be re-calculated
A each time an issue is made
B each accounting period
C each time a purchase is made
D each time an inventory count is carried out LO 1c
25 Using the cumulative weighted average price method of inventory valuation, the value of
closing inventory on 30 June was
A £248
B £250
C £251
D £260 LO 1c
26 A wholesaler buys and resells a range of items, one of which is the Kay. Each Kay is resold
for £3 per unit and opening inventory for June was 400 units valued at £1.80 per unit. The
wholesaler purchased a further 600 units on 10 June for £2.10 per unit, and sold 800 units
on 25 June.
What gross profit would be recorded for the sale of Kays during June, using the FIFO
method of inventory valuation?
FIFO gross profit
A £780
B £960
C £840
D £1,560 LO 1c
27 A wholesaler buys and resells a range of items, one of which is the Kay. Each Kay is resold
for £3 per unit and opening inventory for June was 400 units valued at £1.80 per unit. The
wholesaler purchased a further 600 units on 10 June for £2.10 per unit, and sold 800 units
on 25 June.
What gross profit would be recorded for the sale of Kays during June, using the LIFO
method of inventory valuation?
LIFO gross profit
A £840
B £720
C £780
D £1,620 LO 1c
2 Which of the following is a valid reason for calculating overhead absorption rates?
A To reduce the total overhead expenditure below a predetermined level
B To ensure that the total overhead expenditure does not exceed budgeted levels
C To attribute overhead costs to cost units
D To attribute overhead costs to cost centres LO 1c
3 Which of the following is known as spreading common costs over cost centres on the basis
of benefit received?
A Overhead absorption
B Overhead apportionment
C Overhead allocation
D Overhead analysis LO 1c
6 The works manager of a company is fully occupied in running the production lines in the
factory. The logistics manager spends some time on production and some time organising
distribution.
How would their salaries be dealt with when calculating a fixed overhead absorption rate
for the factory?
Works manager
A Allocated to factory
B Apportioned to factory
Logistics manager
C Allocated to factory
D Apportioned to factory LO 1c
7 The following extract of information is available concerning the four cost centres of EG
Limited.
Service
cost
Production cost centres centre
Machinery Finishing Packing Canteen
Number of direct employees 7 6 2 –
Number of indirect employees 3 2 1 4
Overhead allocated and apportioned £28,500 £18,300 £8,960 £8,400
The overhead cost of the canteen is to be re-apportioned to the production cost centres on
the basis of the number of employees in each production cost centre.
After the re-apportionment, the total overhead cost of the packing department, to the
nearest £, will be
A £1,200
B £9,968
C £10,080
D £10,160 LO 1c
Overheads for the period are £30,000 and they are absorbed on the basis of labour hours.
What is the fixed overhead cost absorbed by a unit of Product B?
A £30.00
B £5.00
C £7.20
D £1.20 LO 1c
11 What is the most appropriate production overhead absorption rate for department 1?
A 40% of direct material cost
B 200% of direct labour cost
C £10 per direct labour hour
D £0.60 per machine hour LO 1c
12 What is the most appropriate production overhead absorption rate for department 2?
A 50% of direct material cost
B 18% of direct labour cost
C £0.72 per direct labour hour
D £60 per machine hour LO 1c
13 Budgeted fixed overheads for cost centre 1 during the last accounting period were £64,800
for apportioned overheads and £95,580 for allocated overheads. A predetermined
machine hour rate is used to absorb fixed overheads into product costs. Budgeted machine
hours during the period were 1,800. Actual fixed overheads were £178,200 and actual
machine hours for the period were 1,782.
What was the fixed overhead absorption rate per machine hour?
A £89.10
B £90.00
C £99.00
D £100.00 LO 1c
15 Which of the following statements about overhead absorption rates are true?
(1) They are usually determined in advance for each period.
(2) They are used to charge overheads to products.
(3) They are normally based on actual data for each period.
(4) They are used to control overhead costs.
A (1) and (2) only
B (1), (2) and (4) only
C (2), (3) and (4) only
D (3) and (4) only LO 1c
16 A product requires four hours of direct labour at £5.25 per hour, and requires direct
expenses of £53.50. In its production, it requires 24 minutes of complex welding.
Possible overhead absorption rates have been calculated to be £7.10 per direct labour
hour or £41.50 per welding machine hour.
Using the direct labour hour basis of overhead absorption, calculate to the nearest penny
the total product cost.
A £81.90
B £91.10
C £102.90
D £119.50 LO 1c
18 A company manufactures two products, J and K, in a factory divided into two production
cost centres, Primary and Finishing. In order to determine a budgeted production overhead
cost per unit of product, the following budgeted data are available.
Primary Finishing
Allocated and apportioned production overhead costs £96,000 £82,500
Direct labour minutes per unit
Product J 36 25
Product K 48 30
Budgeted production is 6,000 units of product J and 7,500 units of product K. Production
overheads are to be absorbed on a direct labour hour basis.
The budgeted production overhead cost per unit for product K is
A £10.00
B £13.20
C £14.00
D £14.60 LO 1c
20 Bumblebee Co absorbs production overhead costs on a unit basis. For the year just ended,
Bumblebee Co's production overhead expenditure was budgeted at £150,000 but was
actually £148,000 while the budgeted activity level (production units) was 30,000 units and
29,000 units were actually produced.
Which of the following is true?
A Fixed overheads were under absorbed by £5,000, this being the difference between
budgeted expenditure and 29,000 units at £5 per unit.
B Fixed overheads were under absorbed by £5,000, this being the difference between
budgeted and actual production at £5 per unit.
C Fixed overheads were over absorbed by £3,000, this being partly the difference
between budgeted and actual expenditure and partly the production shortfall of 1,000
units.
D Fixed overheads were under absorbed by £3,000, this being partly the difference
between budgeted and actual expenditure and partly the production shortfall of 1,000
units. LO 1c
22 The budgeted overhead absorption rate for variable production overheads in department
X of Lublin's factory is £3.00 per direct labour hour and for fixed overhead is £4.50 per
direct labour hour. Actual direct labour hours worked exceeded the budget by 500 hours.
If expenditures were as expected for variable and fixed overheads, the total over-absorbed
overhead for the period would be
A £507.50
B £1,500.00
C £2,250.00
D £3,750.00 LO 1c
23 The finishing department has budgeted labour hours of 3,250 and budgeted overhead
costs of £14,950.
The actual labour hours were 3,175 and actual overheads were £14,810.
The overheads for the period were
A under-absorbed by £140
B over-absorbed by £140
C under-absorbed by £205
D over-absorbed by £205 LO 1c
25 Budgeted and actual data for the year ended 31 December 20X1 is shown in the following
table.
Budget Actual
Production (units) 5,000 4,600
Fixed production overheads £10,000 £9,500
Sales (units) 4,000 4,000
Fixed production overheads are absorbed on a per unit basis.
Why did under/over absorption occur during the year ended 31 December 20X1?
A The company sold fewer units than it produced.
B The company sold fewer units than it produced and spent less than expected on fixed
overheads.
C The company produced fewer units than expected.
D The company produced fewer units than expected and spent less on fixed overheads.
LO 1c
26 Budgeted overheads for a period were £340,000. At the end of the period the actual labour
hours worked were 21,050 hours and the actual overheads were £343,825.
If overheads were over absorbed by £14,025, how many labour hours were budgeted to be
worked?
A 20,000
B 20,225
C 21,050
D 21,700 LO 1c
28 AB produces two products, A and B. Budgeted overhead expenditure for the latest period
was £54,500. Overheads are absorbed on the basis of machine hours. Other data for the
period are as follows:
Product A Product B
Actual results: Units Units
Opening inventory 400 700
Sales 1,800 2,400
Closing inventory 500 500
Production 1,900 2,200
Budgeted results:
Production 1,700 2,500
Machine hours per unit 2 3
If actual overhead expenditure for the period was £55,400, what was the under- or over-
absorption of overhead for the period?
A £900 under-absorbed
B £900 over-absorbed
C £3,400 under-absorbed
D £3,400 over-absorbed LO 1c
34 Select the costing method that would be appropriate in each of the following industries.
Brewing Motorway construction
A Process D Job
B Job E Batch
C Batch F Contract
Plumbing repairs Shoe manufacture
G Process J Process
H Job K Job
I Contract L Batch LO 1d
36 Which two of the following items used in costing batches are normally contained in a typical
batch cost?
A Actual material cost
B Actual manufacturing overheads
C Absorbed manufacturing overheads
D Budgeted labour cost LO 1d
39 A firm makes special assemblies to customers' orders and uses job costing, with overheads
being absorbed based on direct labour cost.
The data for a period are:
Job A Job B Job C
£ £ £
Opening work in progress 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
Job B was completed during the period, during which actual overheads were the same as
the budgeted figure of £126,000.
What was the approximate value of closing work-in progress at the end of the period?
A £58,575
B £101,675
C £217,323
D £227,675 LO 1d
41 For each of the following industries select the appropriate method to establish the cost of
products.
Oil refining Clothing Car repairs
A Process D Process G Process
B Job/contract E Job/contract H Job/contract
C Batch F Batch I Batch LO 1d
In a marginal costing system the value of a closing inventory of 4,300 units of product MC
will be
A £85,355
B £117,562
C £125,603
D £172,430 LO 1c
4 Which three of the following statements concerning marginal costing are true?
A Marginal costing is an alternative method of costing to absorption costing.
B Contribution is calculated as sales revenue minus fixed cost of sales.
C Closing inventories are valued at full production cost.
D Fixed costs are treated as a period cost and are charged in full to the income statement
of the accounting period in which they are incurred.
E Marginal cost is the cost of a unit which would not be incurred if that unit were not
produced. LO 1c
5 Which two of the following statements concerning marginal costing systems are true?
A Such systems value finished goods at the variable cost of production.
B Such systems incorporate fixed overheads into the value of closing inventory.
C Such systems necessitate the calculation of under- and over-absorbed overheads.
D Such systems write off fixed overheads to the income statement in the period in which
they were incurred. LO 1c
6 A company budgets during its first year of operations to produce and sell 15,900 units per
quarter of its product at a selling price of £24 per unit.
Budgeted costs are as follows:
£ per unit
Variable production costs 8.50
Fixed production costs 2.50
Variable selling costs 6.00
In the first quarter the unit selling price, variable unit cost and expenditure on fixed
production costs were as budgeted. The sales volume was 16,000 units and closing
inventory was 400 units.
7 Which of the following statements about profit measurement under absorption and
marginal costing is true (assuming unit variable and fixed costs are constant)?
A Profits measured using absorption costing will be higher than profits measured using
marginal costing.
B Profits measured using absorption costing will be lower than profits measured using
marginal costing.
C Profits measured using absorption costing will be either lower or higher than profits
measured using marginal costing.
D Profits measured using absorption costing may be the same as, or lower than, or
higher than profits measured using marginal costing. LO 1c
8 If the number of units of finished goods inventory at the end of a period is greater than that
at the beginning, marginal costing inventory will result in (assuming unit variable and fixed
costs are constant)
A less operating profit than the absorption costing method
B the same operating profit as the absorption costing method
C more operating profit than the absorption costing method
D more or less operating profit than the absorption costing method depending on the
ratio of fixed to variable costs LO 1c
9 Adams Ltd's budget for its first month of trading, during which 1,000 units are expected to
be produced and 800 units sold, is as follows:
£
Variable production costs 95,500
Fixed production costs 25,800
Selling price is £250 per unit
The profit calculated on the absorption cost basis compared with the profit calculated on
the marginal cost basis is
A £24,260 lower
B £5,160 higher
C £5,160 lower
D £24,260 higher LO 1c
The budget has been produced using an absorption costing system. If a marginal costing
system were used, the budgeted profit would be
A £22,500 lower
B £10,000 lower
C £10,000 higher
D £22,500 higher LO 1c
11 A company produces a single product for which cost and selling price details are as follows:
£ per unit £ per unit
Selling price 28
Variable material 10
Variable labour 4
Variable overhead 2
Fixed overhead 5
21
Profit per unit 7
Last period, 8,000 units were produced and 8,500 units were sold. The opening inventory
was 3,000 units and profits reported using marginal costing were £60,000.
For absorption costing purposes, the fixed overhead absorption rate is set at £7 per unit for
20X8.
If absorption costing were to be used in inventory valuation throughout 20X8, what would
the profit (or loss) be for 20X8?
A £400 loss
B £400 profit
C £2,400 profit
D £2,400 loss LO 1c
13 A company had opening inventory of 48,500 units and closing inventory of 45,500 units.
Profits based on marginal costing were £315,250 and on absorption costing were
£288,250.
What is the fixed overhead absorption rate per unit?
A £5.94
B £6.34
C £6.50
D £9.00 LO 1c
14 In March, a company had a marginal costing profit of £78,000. Opening inventories were
760 units and closing inventories were 320 units. The company is considering changing to
an absorption costing system.
What profit would be reported for March, assuming that the fixed overhead absorption rate
is £5 per unit?
A £74,200
B £75,800
C £76,400
D £80,200 LO 1c
16 Which two of the following statements are advantages of marginal costing as compared
with absorption costing?
A It complies with accounting standards
B It ensures the company makes a profit
C It is more appropriate for short-term decision-making
D Fixed costs are treated in accordance with their nature (ie, as period costs)
E It is more appropriate when there are strong seasonal variations in sales demand LO 1c
17 When comparing the profits reported under marginal and absorption costing when the
levels of inventories decreased (assuming unit variable and fixed costs are constant)
A absorption costing profits will be lower and closing inventory valuations higher than
those under marginal costing
B absorption costing profits will be lower and closing inventory valuations lower than
those under marginal costing
C absorption costing profits will be higher and closing inventory valuations lower than
those under marginal costing
D absorption costing profits will be higher and closing inventory valuations higher than
those under marginal costing LO 1c
19 Iddon Ltd makes two products, Pye and Tan, in a factory divided into two production
departments, Machining and Assembly. Both Pye and Tan need to pass through the
Machining and Assembly departments. In order to find a fixed overhead cost per unit, the
following budgeted data are relevant:
Machining Assembly
Fixed overhead costs £120,000 £72,000
Labour hours per unit: Pye 0.5 hours 0.20 hours
Tan 1.0 hours 0.25 hours
Budgeted production is 4,000 units of Pye and 4,000 units of Tan (8,000 units in all) and
fixed overheads are to be absorbed by reference to labour hours.
What is the budgeted fixed overhead cost of a unit of Pye?
A £18
B £20
C £24
D £28 LO 1c
2 A company manufactures two products for which budgeted details for the forthcoming
period are as follows:
Product L Product T
£ per unit £ per unit
Materials 6.00 9.00
Labour (£15 per hour) 30.00 22.50
Production overhead of £61,200 is absorbed on a labour hour basis. Budgeted output is
4,000 units of product L and 6,000 units of product T.
The company adds a mark up of 20% to total production cost in order to determine its unit
selling prices.
The selling price per unit of product L is
A £47.52
B £51.84
C £54.00
D £61.56 LO 1e
Print Ltd absorbs production overhead at a rate of 20% of variable wages cost. A further 5%
is added to the total production cost of each batch to allow for selling, distribution and
administration overhead.
Print Ltd requires a profit margin of 25% of sales value.
The selling price for a batch of 300 binders should be
A £189.00
B £193.20
C £201.60
D £252.00 LO 1e
4 A firm makes special assemblies to customers' orders and uses job costing.
The data for a period are:
Job A Job B Job C
£ £ £
Opening work in progress 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
The budgeted overheads for the period were £126,000 and these are absorbed on the
basis of labour cost.
Job B was completed and delivered during the period and the firm wishes to earn a 33 1/3%
profit margin on sales.
What should be the selling price of job B?
A £69,435
B £75,523
C £84,963
D £258,435 LO 1e
Variable production overheads are recovered at the rate of £3 per direct labour hour.
Fixed production overheads for the year are budgeted to be £200,000 and are to be
recovered on the basis of the total of 40,000 direct labour hours for the year.
Other overheads, in relation to selling, distribution and administration, are recovered at the
rate of £80 per job.
The selling price to be quoted for job 173 is
A £404
B £424
C £485
D £505 LO 1e
6 An item priced at £90.68, including local sales tax at 19%, is reduced in a sale by 20%.
The new price before sales tax is added is
A £58.76
B £60.96
C £72.54
D £76.20 LO 1e
7 Three years ago a retailer sold electronic calculators for £27.50 each. At the end of the first
year he increased the price by 5% and at the end of the second year by a further 6%. At the
end of the third year the selling price was £29.69 each.
The percentage price change in Year 3 was a
A 2.7% decrease
B 3.0% increase
C 3.0% decrease
D 3.4% decrease LO 1e
9 A greengrocer sells apples either for 45p per kg, or in bulk at £9 per 25 kg bag.
The percentage saving per kg from buying a 25 kg bag is
A 9%
B 11.25%
C 20%
D 25% LO 1e
10 A skirt which cost a clothes retailer £50 is sold at a profit of 25% on the selling price.
The profit is therefore
A £12.50
B £16.67
C £62.50
D £66.67 LO 1e
13 A company prices its product at the full cost of £4.75 per unit plus 70%. A competitor has
just launched a similar product selling for £7.99 per unit. The company wishes to change
the price of its product to match that of its competitor.
The product mark up percentage should be changed to
A 1.1%
B 1.8%
C 40.6%
D 68.2% LO 1e
14 Details from a retailer's records concerning product D for the latest period are as follows.
£
Sales revenue 60,000
Purchases 40,000
Opening inventory 12,000
Closing inventory 2,000
The profit margin for product D is
A 16.7%
B 20.0%
C 33.3%
D 50.0% LO 1e
16 A product's marginal costs are 60% of its fixed costs. Selling prices are set on a full cost
basis to achieve a margin of 20% of selling price.
To the nearest whole number, which percentage mark up on marginal costs would produce
the same selling price as the current pricing method?
A 67%
B 108%
C 220%
D 233% LO 1e
17 A company determines its selling prices by adding a mark up of 100% to the variable cost
per unit.
If the selling price is increased by 50%, the quantity sold each period is expected to reduce
by 40% but the variable cost per unit will remain unchanged.
Which of the following statements is correct?
A The total revenue will increase and the total contribution will increase.
B The total revenue will increase and the total contribution will decrease.
C The total revenue will decrease and the total contribution will increase.
D The total will decrease and the total contribution will decrease. LO 1e
21 The following data relate to Bailey plc, a manufacturing company with several divisions.
Division X produces a single product which it sells to division Y and also to external
customers.
Sales to division Y External sales
£ £
Sales revenue
At £25 per unit 250,000
At £20 per unit 100,000
Variable costs at £12 per unit (60,000) (120,000)
Contribution 40,000 130,000
Fixed costs (20,000) (50,000)
Profit 20,000 80,000
23 Which of the following best describes a dual pricing system of transfer pricing?
A The receiving division is charged with the market value of transfers made and the
supplying division is credited with the standard variable cost.
B The receiving division is credited with the market value of transfers made and the
supplying division is charged with the standard variable cost.
C The receiving division is charged with the standard variable cost of transfers made and
the supplying division is credited with the market value.
D The receiving division is credited with the standard variable cost of transfers made and
the supplying division is charged with the market value. LO 1f
24 A company has two divisions, A and B. Division A transfers one third of its output to B and
sells the remainders to the external market for £14 per unit. The transfers to division B are
made at the transfer price of cost plus 20%.
Division B incurs costs of £4 per unit in converting the transferred units before selling them
to external customers for £20 per unit.
Division A costs amount to £10 per unit and the budgeted total output for the period is 270
units. There is no budgeted change in inventories for either division.
The reported profits for the period will be
Division A Division B
A £900 profit £360 profit
B £900 profit £720 profit
C £900 profit £1,440 profit
D £1,332 profit £72 loss LO 1f
26 A and B are two divisions of company C. A manufactures two products, the X and the Y. The
X is sold outside the company. The Y is sold only to division B at a unit transfer price of
£410. The unit cost of the Y is £370 (variable cost £300 and absorbed fixed overhead £70).
Division B has received an offer from another company to supply a substitute for product Y
at a price of £330 per unit. Assume Division A and B have spare operating capacity.
Which of the following statements is correct with regard to the offer from the other
company?
A The offer is not acceptable from the point of view of company C and the manager of
Division B will make a sub-optimal decision.
B The offer is not acceptable from the point of view of company C and the manager of
Division B will not make a sub-optimal decision.
C The offer is acceptable from the point of view of company C and the manager of
Division B will make a sub-optimal decision.
D The offer is acceptable from the point of view of company C and the manager of
Division B will not make a sub-optimal decision. LO 1f
28 In a contract to sell a commodity the selling price is agreed between the supplier and the
buyer to be the actual costs incurred by the supplier plus a profit mark-up using a fixed
percentage on actual costs. No credit period is offered by the supplier.
Which of the following best describes how the risk caused by inflation will be allocated
between the supplier and the buyer?
A The supplier and the buyer will each bear some of the inflation risk but not necessarily
equally
B Only the supplier will bear the inflation risk
C Only the buyer will bear the inflation risk
D The supplier and the buyer will each bear equal amounts of the inflation risk LO 1e
29 F and G are two divisions of a company. Division F manufactures one product, Rex. Unit
production cost and the market price are as follows:
£
Variable materials 24
Labour 16
Variable fixed overhead 8
48
Prevailing market price £64
Product Rex is sold outside the company in a perfectly competitive market and also to
division G. If sold outside the company, Rex incurs variable selling costs of £8 per unit.
Assuming that the total demand for Rex is more than sufficient for division F to manufacture
to capacity, what is the price per unit (in round £s) at which the company would prefer
division F to transfer Rex to division G?
A £64
B £56
C £40
D £48 LO 1f
31 The master budget for Serse Ltd, a single-product firm, for the current year is as follows:
£ £
Sales 480,000
Serse Ltd has substantial excess production capacity. A sales enquiry has been received,
late in the year, which will increase sales and production for the year by 25% over budget.
The extra requirement for 5,000 tonnes of material will enable the firm to purchase 7,000
tonnes at a discount of 5% on its normal buying price. The additional 2,000 tonnes will be
used to complete the year's budgeted production.
What price should Serse Ltd charge for the special order in order to earn the same
budgeted net profit for the year of £64,000?
A £83,500
B £100,500
C £82,500
D £101,500 LO 1e
The company's variable manufacturing cost per unit is now expected to increase by 10%,
but all other costs remain unchanged.
Assuming an unchanged volume of sales, calculate the selling price per unit that would
maintain the contribution ratio.
A £531
B £733
C £550
D £518 LO 1e
34 Delta and Gamma are two divisions of a company. Delta manufactures two products X and
Y. X is sold outside the company. Y is sold only to division Gamma at a unit transfer price of
£176. Unit costs for product Y are:
£
Variable materials 60
Variable labour 40
Variable overhead 40
Fixed overhead 20
160
35 Delta and Gamma are two divisions of a company. Delta manufactures two products X and
Y. X is sold outside the company. Y is sold only to division Gamma at a unit transfer price of
£176. Unit costs for product Y are:
£
Variable materials 60
Variable labour 40
Variable overhead 40
Fixed overhead 20
160
Division Gamma has received an offer from another company to supply a substitute for Y for
£152 per unit.
Assuming division Delta can sell as much of Product X as it can produce and the unit
profitability of X and Y are equal, what will be the effect on profits if Gamma accepts the
offer?
Division Overall
Delta company
profit profit
A No change Decrease
B Decrease No change
C No change Increase
D Increase No change LO 1f
36 A company currently sets its selling price at £10, which achieves a 25% mark-up on variable
cost. Annual production and sales volume is 100,000 units and annual fixed costs are
£80,000.
By how much would the selling price need to be increased in order to double profit if costs,
production and sales volume remain unchanged?
A 12%
B 17%
C 20%
D 25% LO 1e
A (4) only
B (1), (2) and (4) only
C (1), (3) and (4) only
D (1), (2) and (3) only LO 2d
4 When preparing the master budget, which of the following tasks would normally be carried
out first?
A Calculate the overhead absorption rate
B Establish the organisation's long-term objectives
C Identify the principal budget factor
D Prepare the sales budget LO 2c
10 Which two of the statements below correctly complete the following sentence?
The master budget
A will include a budgeted balance sheet and a budgeted income statement prepared on
the accruals basis
B will include a cash budget
C is usually prepared before the functional budgets
D details the timetable for the preparation of the various budgets
E includes the instructions for the completion of the budget forms and the
responsibilities of the personnel involved LO 2d
12 A company is preparing its production budget for product Z for the forthcoming year.
Budgeted sales of product Z are 1,500 units. Opening inventory is 120 units and the
company wants to reduce inventories at the end of the year by 10%.
The budgeted number of units of product Z to be produced is
A 1,392
B 1,488
C 1,500
D 1,512 LO 2c
14 When preparing a material purchases budget, which of the following is the quantity to be
purchased?
A Materials required for production – opening inventory of materials – closing inventory
of materials
B Materials required for production – opening inventory of materials + closing inventory
of materials
C Opening inventory of materials + closing inventory of materials – materials required for
production
D Opening inventory of materials – materials required for production – closing inventory
of materials LO 2c
15 Barlow plc manufactures two products, Vip and Bip. It intends to produce 2,000 units of
each product in the next year to meet the sales budget.
Each Vip requires 2 kg of material Z and 1 kg of material Y and each Bip requires 3 kg of
material Z and 4 kg of material Y.
At present there are 200 kg of Z and 500 kg of Y in inventory.
Barlow plc intends to increase the inventory levels of these materials by the end of the year
to 600 kg of Z and 800 kg of Y.
Material Z costs £4 per kg and material Y costs £5 per kg.
What is the total materials purchases for the next year?
A £86,900
B £90,000
C £93,100
D £96,400 LO 2c
17 Budgeted sales of X for December are 18,000 units. At the end of the production process
for X, 10% of production units are scrapped as defective. Opening inventories of X for
December are budgeted to be 15,000 units and closing inventories will be 11,400 units. All
inventories of finished goods must have successfully passed the quality control check.
The production budget for X for December, in units, is
A 12,960
B 14,400
C 15,840
D 16,000 LO 2c
18 The quantity of material in the material purchases budget is greater than the quantity of
material in the material usage budget.
Which of the following statements can be inferred from this situation?
A Wastage of material occurs in the production process.
B Finished goods inventories are budgeted to increase.
C Raw materials inventories are budgeted to increase.
D Raw materials inventories are budgeted to decrease. LO 2c
19 George has been asked by his bank to produce a budgeted income statement for the six
months ending on 31 March 20X4.
He forecasts that monthly sales will be £3,000 for October, £4,500 for each of November
and December and £5,000 per month from January 20X4 onwards.
Selling price is fixed to generate a margin on sales of 33 1/3%.
Overhead expenses (excluding depreciation) are estimated at £800 per month.
He plans to purchase non-current assets on 1 October costing £5,000, which will be paid for
at the end of December and are expected to have a five-year life, at the end of which they
will possess a nil residual value.
The budgeted net profit for the six months ending 31 March 20X4 is
A £3,200
B £3,700
C £3,950
D £8,200 LO 2c
21 A retailing company budgets to maintain inventories at the end of each month which are
sufficient to meet the budgeted sales requirements for the following month. Two months'
credit will be received from suppliers of inventory.
Budgeted sales, which earn a gross profit margin of 20% of sales value, are as follows:
£
January 28,300
February 26,100
March 33,800
April 30,690
The budgeted balance sheet as at the end of March will show a payables balance of
A £47,920
B £51,592
C £59,900
D £64,490 LO 2c
The company's management are considering a change in the materials specification. This
would reduce the materials cost per unit by 10%. The reduced product quality would
necessitate a 2% reduction in the selling price and the sales volume would fall by 5%.
The revised budgeted net profit for the period would be
A £3,620
B £6,975
C £9,025
D £9,375 LO 2c
24 A company has recorded the following costs over the last six months.
Month Total cost Units produced
£
1 74,000 3,000
2 72,750 1,750
3 73,250 2,000
4 75,000 2,500
5 69,500 1,500
6 72,750 2,000
Using the high-low method, which of the following represents the total cost equation?
A Total cost = 61,250 + (1.25 quantity)
B Total cost = 65,000 + (3 quantity)
C Total cost = 65,000 + (1.25 quantity)
D Total cost = 61,250 + (3 quantity) LO 2a
25 A company has recorded the following costs over the last four months.
Month Cost Production
£ Units
1 21,995 1,050
2 19,540 1,090
3 19,000 750
4 17,200 700
Using the high-low method, the expected cost of producing 950 units is
A £17,030
B £18,700
C £20,625
D £23,343 LO 2a
27 The following data have been extracted from the budget working papers of BL Ltd.
Production volume 1,000 2,000
£/unit £/unit
Variable materials 4.00 4.00
Variable labour 3.50 3.50
Production overhead – department 1 6.00 4.20
Production overhead – department 2 4.00 2.00
The total fixed cost and variable cost per unit is
Total fixed cost Variable cost per unit
£ £
A 3,600 9.90
B 4,000 11.70
C 7,600 7.50
D 7,600 9.90 LO 2a
29 Which two of the following are underlying assumptions of forecasts made using regression
analysis?
A A curvilinear relationship exists between the two variables
B The value of one variable can be predicted or estimated from the value of one other
variable
C A perfect linear relationship between the two variables
D What has happened in the past will provide a reliable guide to the future LO 2a
30 A company's weekly costs (£C) were plotted against production level (P) for the last 50
weeks and a regression line calculated to be C = 100 + 20P.
Which of the following statements about the breakdown of weekly costs is true?
A Fixed costs are £100. Variable costs per unit are £20.
B Fixed costs are £20. Variable costs per unit are £100.
C Fixed costs are £20. Variable costs per unit are £5.
D Fixed costs are £100. Variable costs per unit are £4. LO 2a
X
(b) Y
X
Which of the following statements is correct?
A Diagram (a) represents perfect positive correlation; diagram (b) represents negative
correlation.
B Diagram (b) represents perfect positive correlation; diagram (a) represents negative
correlation.
C Diagram (a) represents perfect negative correlation; diagram (b) represents imperfect
positive correlation.
D Diagram (b) represents perfect negative correlation; diagram (a) represents perfect
positive correlation. LO 2a
36 The linear relationship between advertising in thousands of pounds (X) and sales in tens of
thousands of pounds (Y) is given by Y = 5 + 2X.
Which two of the following statements are correct?
A For every £1,000 spent on advertising, sales revenue increases by £50,000 on average.
B When nothing is spent on advertising the average level of sales is £50,000.
C For every £1,000 spent on advertising, sales revenue increases by £20,000 on average.
D When nothing is spent on advertising, the average level of sales is £20,000. LO 2a
47 An extract from next year's budget for a manufacturing company is shown below.
Month 3 Month 4
£ £
Closing inventory of raw materials 22,000 12,000
The manufacturing cost of production is £116,000 in both Month 3 and Month 4. Materials
costs represent 40% of manufacturing cost.
The budgeted material purchases for Month 4 are
A £36,400
B £42,400
C £46,400
D £56,400 LO 2c
48 You are given the following budgeted cost information for Verlaine plc for January.
Sales £120,000
Unit selling price £2
Gross profit 30% margin on sales
Opening inventory 6,000 units
Sales volumes are increasing at 20% per month and company policy is to maintain 10% of
next month's sales volume as closing inventory.
The budgeted cost of production for January is
A £84,000
B £85,680
C £120,000
D £122,400 LO 2c
50 Fashn Ltd runs a chain of fashion retail stores. A key element of its commercial success
comes from being able to identify customer trends, and responding to them, more quickly
than its competitors.
Which two of the following are potential sources of big data for Fashn Ltd?
A Online video clips of clothes being shared by customers
B Daily transactions records from stores
C Inventory records from the chain’s central warehouse
D Keywords from conversations about fashion on social media
E The number, and level, of discounts Fashn Ltd has to offer on its products LO 2b
54 The number of specialist data analytics firms has risen in recent years with the increase in
the collection of big data.
Which two of the following explain this?
A Privacy concerns mean that it is prudent to give data to analytics firms who are better
able to protect it.
B Cybersecurity risks can be avoided by the use of data specialists.
C There is a lack of employees within the organisation with appropriate data analytics
skills.
D Big data is often incorrect and data analysts are quicker to detect errors and
inaccuracies.
E Traditional data management systems cannot readily process unstructured data. LO 2b
3 A machine that was bought in January 20X1 for £44,000 and has been depreciated by
£8,000 per year, is expected to be sold in December 20X3 for £17,600.
What is the net cash inflow or (outflow) that will appear in the cash budget for December
20X3?
A £9,000 inflow
B £15,200 inflow
C £17,600 inflow
D £17,600 outflow LO 2e
5 Lotsa plc has budgeted that sales will be £101,500 in January 20X2, £580,500 in February,
£215,000 in March and £320,500 in April.
Half of sales will be credit sales. 80% of customers are expected to pay in the month after
sale, 15% in the second month after sale, while the remaining 5% are expected to be bad
debts.
Customers who pay in the month after sale can claim a 4% early settlement discount.
What level of sales receipts should be shown in the cash budget for March 20X2 (to the
nearest £)?
A £338,025
B £347,313
C £568,550
D £587,125 LO 2e
6 A company has a two month receivables cycle. It receives in cash 45% of the total gross
sales value in the month of invoicing.
Bad debts are 7% of total gross sales value and there is a 10% discount for settling accounts
within 30 days.
What percentage of the first month's sales will be received as cash in the second month?
A 38%
B 43%
C 48%
D 58% LO 2e
8 A company anticipates that 10,000 units of product Z will be sold during August.
Each unit of Z requires two litres of raw material W.
Actual inventories as at 1 August and budgeted inventories as at 31 August are:
1 August 31 August
Product Z (units) 14,000 15,000
Raw materials W (litres) 20,000 15,000
A litre of W costs £1.50. If the company pays for all purchases in the month of acquisition,
what is the payment for August purchases of W?
A £17,000
B £25,500
C £33,000
D £34,500 LO 2e
9 Sam is a trading company that holds no inventories. Each month the following relationships
hold:
Gross profit 40% of sales
Closing trade payables 30% of cost of sales
Sales are budgeted to be £48,500 in April and £36,500 in May.
How much cash is budgeted to be paid in May to suppliers?
A £19,740
B £21,900
C £23,340
D £24,060 LO 2e
12 A company is preparing the budget for a product, and the following data has been
provided:
Month 1 Month 2 Month 3 Month 4
Planned sales (units) 2,000 2,200 2,500 2,600
Closing inventory in each month must be 50% of the next month's sales. Suppliers are paid
in the month following purchase. The standard cost of materials is £4 per unit.
What is the budgeted payment to suppliers in Month 3?
A £8,200
B £9,400
C £10,000
D £10,200 LO 2e
14 Wages are paid 75% in the month of production and 25% in the following month.
The figures to be included in the cash budget for May in respect of wages is
A £222,600
B £231,000
C £233,800
D £235,200 LO 2e
15 Aaron Products is considering the implementation of a revised receivables policy, which will
result in an increase in the average collection period from the current 60 days to 90 days.
This is expected to lead to a 20% increase in annual sales revenue, currently £960,000,
resulting in additional inventories and trade payables of £30,000 and £15,000 respectively.
It is expected that all customers will take advantage of the extended credit period.
The net increase in working capital investment that would result from the change in policy,
assuming a 360-day year, is
A £31,000
B £95,000
C £113,000
D £143,000 LO 2e
17 Which two of the following actions would be appropriate if the cash budget identified a
short-term cash deficit?
A Issue shares
B Pay suppliers early
C Arrange an overdraft
D Implement better credit control procedures
E Replace non-current assets LO 2h
18 A company's cash budget for the next six months is shown below.
Jan Feb Mar Apr May Jun
Cash receipts £'000 £'000 £'000 £'000 £'000 £'000
From customers 5 8 10 15 14 15
Investment maturing – – 5 – – –
5 8 15 15 14 15
Cash payments
To suppliers 6 8 12 10 8 4
Tax – – 4 – – –
Wages and other 4 4 4 3 4 4
Capital expenditure – 5 – – – –
Loan repayment – – – 2 – –
10 17 20 15 12 8
Net inflow/(outflow) (5) (9) (5) – 2 7
Balance b/f 2 (3) (12) (17) (17) (15)
Balance c/f (3) (12) (17) (17) (15) (8)
19 A telephone business has annual sales of £1.1 million and a gross profit margin of 10%. It is
currently experiencing short-term cash flow difficulties, and intends to delay its payments to
trade suppliers by one month.
To the nearest £, the amount by which the cash balance will benefit in the short term from
this change in policy, assuming sales are spread evenly over the year, and inventory levels
remain constant throughout, is
A £82,500
B £83,333
C £91,667
D £100,833 LO 2e
21 A company has annual sales of £3 million and its gross profit is 60% of sales. Inventory
turnover is 60 days, customers take an average of 35 days to pay and the company pays its
suppliers after 25 days.
Defining working capital as average inventories plus average receivables minus average
trade payables and using a 365-day year for your calculations, to the nearest £1,000, the
company's working capital will be
A £280,000
B £403,000
C £567,000
D £699,000 LO 2f
23 Using the table below and a 365-day year, calculate the length of the working capital cycle
(operating cycle).
£
Inventories: Raw materials 250,000
Work in progress 115,000
Finished goods 186,000
Purchases 1,070,000
Cost of goods sold 1,458,000
Sales 1,636,000
Receivables 345,000
Trade payables 162,000
A 174 days
B 182 days
C 193 days
D 293 days LO 2f
24 Which two of the following might be associated with a lengthening cash cycle?
A Lower net operating cash inflow
B Lower investment in working capital
C Taking longer to pay trade suppliers
D Slower inventory turnover
E Higher net asset turnover LO 2f
26 A company has liquidity ratio (receivables divided by payables and bank overdraft) equal to
0.5. The directors believe that the company has to reduce its bank overdraft and have
agreed to alter the company's credit terms to customers from two months to one month.
What would be the effects on the company's cash operating cycle and liquidity ratio if this
change were to be achieved?
Cash operating cycle Liquidity ratio
A Decrease Decrease
B Decrease No change
C Decrease Increase
D Increase Increase LO 2f
27 From the following extracts from a draft balance sheet, calculate the quick (liquidity) ratio
£m £m
Assets
Non-current assets 10.5
Inventories 4.2
Receivables 2.8
Cash in hand 0.3
7.3
Liabilities 17.8
Trade payables 2.6
Other short-term payables 0.8
Loan repayable in five years 6.5
9.9
A 0.31
B 0.91
C 1.80
D 2.15 LO 2e
29 If an increase in inventory levels is funded by an increase in the bank overdraft, what will be
the effect on the quick (liquidity) ratio?
A Increase
B Decrease
C Remain the same
D Increase, decrease or remain the same depending on the initial size of the quick ratio
LO 2e
30 A company has a current ratio greater than 1:1 and a quick (liquidity) ratio less than 1:1. If
the company uses cash to reduce trade payables, how will these payments affect each of
the ratios?
Current ratio
A Increase
B Decrease
C No change
Quick (liquidity) ratio
D Increase
E Decrease
F No change LO 2e
32 Fenton Ltd's projected revenue for 20X1 is £350,000. It is forecast that 12% of sales will
occur in January and remaining sales will be equally spread among the other 11 months. All
sales are on credit. Receivables accounts are settled 50% in the month of sale, 45% in the
following month, and 5% are written off as bad debts after two months.
The budgeted cash collections for March are
A £24,500
B £26,600
C £28,000
D £32,900 LO 2e
33 A retail company extracts the following information from its accounts at 30 June 20X6:
£
Average inventory 490,000
Average receivables 610,000
Average payables 340,000
Cost of sales 4,500,000
Purchases 4,660,000
Gross profit margin 32%
The number of days in the company's cash operating cycle is
A 34 days
B 44 days
C 47 days
D 51 days LO 2f
36 Merlion plc is an international company based in Malaysia. It manufactures and sells items
for a wide variety of outdoor leisure pursuits including wind surfing, camping and mountain
biking. A summary of the ratios provided by the chief accountant is as follows:
Ratio 20X4 20X5 20X6
Receivables collection period 49 days 38 days 35 days
Payables payment period 51 days 35 days 30 days
Inventory turnover period 23 days 25 days 29 days
What are the figures for Merlion plc's cash operating cycle for each of the three years?
Cash operating cycle in 20X4
A 21 days
B 28 days
C 34 days
Cash operating cycle in 20X5
D 21 days
E 28 days
F 34 days
Cash operating cycle in 20X6
G 21 days
H 28 days
I 34 days LO 2g
38 If a business is suffering from liquidity problems, the aim must be to reduce the length of
the cash operating cycle. Which three of the following actions would achieve this?
A Reducing the credit period extended to receivables
B Reducing the payables payment period
C Extending the period of credit taken from suppliers
D Reducing the production period
E Extending the inventory holding period LO 2g
39 Albert's Autos is a small garage providing car servicing. Business is good, there is a steady
stream of income from repeat customers and breakdown recoveries. There are no
significant cash reserves and there is no need for an overdraft. Now the organisation that
passes on most of the breakdown recovery work offers Albert a contract to supply recovery
services over a 50-mile radius. It is seeking 60 days credit rather than Albert's usual 30 days.
Albert is keen but has been warned to look for signs of overtrading.
Which two of the following are most likely to be symptoms of overtrading?
A A lengthening of the cash operating cycle
B A rapid reduction in sales
C Increase in the level of the current ratio
D A rapid increase in sales
E A shortening of the cash operating cycle LO 2g
40 Apart from the actual cost of buying inventory, there are other inventory costs to consider.
Which two of the following are inventory holding costs?
A Clerical and administrative expenses
B Insurance
C Opportunity cost of capital tied up
D Production stoppages due to lack of raw materials
E The cost of inventory packaging materials LO 2g
2cd
42 The Economic Order Quantity (EOQ) can be expressed as follows:
h
What does h describe in this formula?
A The cost of holding one unit of inventory for one period
B The cost of placing one order
C The cost of a unit of inventory
D The customer demand for the item LO 2g
43 Fruit & Nut Ltd is re-evaluating its inventory control policy. Its daily demand for wooden
boxes is steady at 40 a day for each of the 250 working days (50 weeks) of the year. The
boxes are currently bought weekly in batches of 200 from a local supplier for £2 each. The
cost of ordering the boxes from the local supplier is £64 per order, regardless of the size of
the order. The inventory holding costs, expressed as a percentage of inventory value, are
2cd
25% pa. The Economic Order Quantity (EOQ) can be expressed as follows:
h
Identify the correct EOQ
A 101 boxes
B 253 boxes
C 1,600 boxes
D 2,262 boxes LO 2g
44 Kate Osmond works for a company manufacturing industrial fasteners, so the company has
several thousand types of inventory item. The company wants to introduce a new inventory
control system and Kate is reviewing what is available.
Identify the most suitable system for an organisation with so many inventory items.
A Re-order level system
B Periodic review system
C ABC system
D Just-in-time system LO 2g
46 Identify whether the following tasks are normally undertaken by the treasury department of
a large business.
Credit control
A Yes
B No
Short-term investment
C Yes
D No
Capital investment appraisal
E Yes
F No LO 2g
47 Total usage of one item of Archer Ltd's inventory for the next month is estimated to be
100,000 units. The costs incurred each time an order is placed are £180. The carrying cost
per unit of the item each month is estimated at £2. The purchase price of each unit is £4.
The economic order quantity formula is:
(2cd) /h
When using this formula to find the optimal quantity to be ordered, identify the amounts
that are included in the calculation.
Cost per order (£180)
A Included
B Not included
Carrying cost per unit per month (£2)
C Included
D Not included
Purchase price per unit (£4)
E Included
F Not included LO 2g
49 Youri plc has the following opening and closing balances on its trade receivables budget
for next year, 20X7:
£
Opening balance on trade receivables (invoiced on 31 December 20X6) 56,000
Closing balance on trade receivables (invoiced on 30 November 20X7) 72,000
In 20X7 credit sales are expected to be £276,000. The company offers a 10% discount on all
amounts paid within one month of the invoice date. In 20X7 the company expects 50% of
eligible trade customers to take advantage of this discount.
How much cash does Youri plc expect to receive from customers during the year?
A £247,000
B £243,400
C £260,000
D £276,000 LO 2g
Measure
Resources Operations
outputs
Control action
Monitor
X
and control
A Feedback
B Fixed costs
C Activity levels
D Budgets and standards LO 3a
4 Which two of the following statements about management control reports are correct?
A Reports should be completely accurate.
B Reports should be clear and comprehensive.
C Reports should not include information about uncontrollable items.
D Based on the information contained in reports, managers may decide to do nothing.
LO 3a
8 Select which of the following styles of using budgetary information is most likely to lead to
each of the situations described.
Job related tension is caused by which of the following styles:
A Budget constrained
B Profit conscious
C Non-accounting
Less focus on cost control is caused by which of the following styles:
D Budget constrained
E Profit conscious
F Non-accounting
9 A company have recently implemented a new budgetary planning and control system after
several years of trading.
Having made a significant investment in the new system, the company's management team
were surprised to learn that it is not designed to do which of the following?
A Improve control of actual performance
B Improve coordination of activities
C Improve gross profit
D Improve communication of ideas and plans LO 3a
10 Which of the following is a reason for adopting a decentralised rather than a centralised
organisational structure?
A Improved goal congruence between the goals of divisional management and the goals
of the organisation
B Rapid management response to changes in the trading environment
C Availability of objective performance measures
D Improved communication of information between the group's managers LO 3a
11 Division P is an investment centre within PC Ltd. Over which of the following is the manager
of division P likely to have control?
(1) Transfer prices
(2) Level of inventory in the division
(3) Discretionary fixed costs incurred in the division
(4) Apportioned head office costs
A (1), (2), (3) and (4)
B (1), (2) and (3) only
C (1) and (2) only
D (1) only LO 3b
Which of the following formulae calculates the division's controllable residual income?
A [C – F] – [(N + D + B) R]
B [C – F] – [(N + D + I + B) R]
C C – [(N + D) R]
D G – (T R) LO 3b
13 Division D of Distan Ltd is considering a project which will increase annual profit by £15,000
but will require average receivables levels to increase by £100,000. The company's target
return on investment is 10% and the imputed interest cost of capital is 9%. Division D
currently earns a return on investment of 13%.
Would the return on investment (ROI) and residual income (RI) performance measures
motivate the manager of Division D to act in the interest of the Distan company as a whole?
ROI
A Manager would wish to act in the interest of Distan Ltd
B Manager would not wish to act in the interest of Distan Ltd
RI
C Manager would wish to act in the interest of Distan Ltd
D Manager would not wish to act in the interest of Distan Ltd LO 3b
15 On the last day of the financial year a division has net assets with a total carrying amount of
£300,000. The return on investment for the division is 18%.
The division manager is considering selling a non-current asset immediately before the year
end. The non-current asset has a carrying amount of £15,000 and will sell for a profit of
£5,000.
What would be the division's return on investment (ROI) immediately after the sale of the
asset at the end of the year?
A 17.7%
B 19.3%
C 20.3%
D 20.7% LO 3b
16 Which of the following is not a perspective that is monitored by the balanced scorecard
approach to performance measurement?
A Financial
B Customer
C Supplier
D Innovation and learning LO 3b
What would be the total cost in a budget that is flexed at the 77% level of activity?
A £330,300
B £370,300
C £373,300
D £377,300 LO 3c
21 Within decentralised organisations there may be cost centres, investment centres and profit
centres. Which of the following statements is true?
A Cost centres have a higher degree of autonomy than profit centres.
B Investment centres have the highest degree of autonomy and cost centres have the
lowest.
C Investment centres have the lowest degree of autonomy.
D Profit centres have the highest degree of autonomy and cost centres have the lowest.
LO 3a
22 A manager of a trading division of a large company has complete discretion over the
purchase and use of non-current assets and inventories. Head Office keeps a central bank
account, collecting all cash from receivables and paying all suppliers. The division is
charged a management fee for these services. The performance of the manager of the
division is assessed on the basis of her controllable residual income. The company requires
a rate of return of 'R'. Using the following symbols:
Divisional non-current assets F
Divisional working capital
Receivables D
Inventory S
Payables (L)
W
Divisional net assets Z
Divisional profit P
Head office management charges (M)
Divisional net profit N
23 Which of the following sentences best describes what is necessary for a responsibility
accounting system to be successful?
A Each manager should know the criteria used for evaluating his or her own
performance.
B The details on the performance reports for individual managers should add up to the
totals on the report of their superior.
C Each employee should receive a separate performance report.
D Service department costs should be apportioned to the operating departments that
use the service. LO 3a
25 A division has a residual income of £480,000 and a net profit before imputed interest of
£1,280,000.
If it uses a rate of 10% for computing imputed interest on its invested capital, what is its
return on investment?
A 10%
B 22%
C 6%
D 16% LO 3b
27 A division currently has an annual return on investment (ROI) of 20% on its investment base
of £1,200,000. The following additional projects are being considered:
Investment Annual
Project outlay profit ROI
£'000 £'000 %
K 300 100 33
L 700 210 30
M 500 130 26
N 200 44 22
30 Which two of the following are true when management information is provided by a shared
service centre (SSC)?
A Management information quality is improved as best practice can be implemented
B There is a more consistent management of business data
C Specific finance issues affecting individual departments will be taken into account
D The costs of providing management information will increase LO 3e
33 The shared service centre (SSC) of Brilliant Job Ltd contains its human resource
management, payroll, accounting and IT functions. It has developed a service level
agreement (SLA) with its internal clients in the various business units of Brilliant Job Ltd. This
SLA places great importance on service quality, and particularly focuses on the accuracy of
the work that the SSC performs.
Which of the following performance measures reflects this focus on accuracy?
A Percentage of employment contracts sent out without errors
B Speed in dealing with IT user queries
C Number of sales invoices raised
D Timely removal of ex-employees from the payroll database LO 3e
34 The shared service centre (SSC) of Oilspill Ltd operates its payroll, finance and project
management functions. It has adopted the balanced scorecard for measuring its
performance.
Which two of the following would be appropriate for the SSC to use as performance
measures in the ‘customer perspective’ quadrant?
A Cost per accounting transaction processed
B Time saved updating payroll file for overtime payments
C Number of complaints about processing delays
D Number of new projects set up
E Training days per employee
F Percentage of reports issued to department heads on time LO 3e
2 Which of the following statements about budgets and standards is/are correct?
(1) Budgets can be used in situations where output cannot be measured but standards
cannot be used in such situations.
(2) Budgets can include allowances for inefficiencies in operations but standards use
performance targets which are attainable under the most favourable conditions.
(3) Budgets are used for planning purposes, standards are used only for control purposes.
A (1), (2) and (3)
B (1) and (2) only
C (1) only
D (2) and (3) only LO 3c
11 The following information is available for Mentamint Ltd, which makes one product.
Budgeted fixed overhead per unit £10
Budgeted output 1,000 units
Actual output 1,200 units
Actual fixed overheads £11,200
What is the fixed overhead expenditure variance?
A £1,200 adverse
B £800 favourable
C £1,200 favourable
D £800 adverse LO 3c
Nan Ltd budgeted for a sales volume of 1,000 units, but actually sold 100 units less than
this.
Which of the following shows the correct calculation of the sales price and contribution volume
variances?
A Sales price variance = £1,800 favourable
Sales volume variance = £2,000 adverse
B Sales price variance = £2,000 favourable
Sales volume variance = £900 adverse
C Sales price variance = £2,000 favourable
Sales volume variance = £2,000 adverse
D Sales price variance = £1,800 favourable
Sales volume variance = £900 adverse LO 3c
13 To reconcile the budgeted contribution to the actual contribution, which of the following
must be accounted for?
A All sales variances and all marginal cost variances
B All sales variances
C All marginal cost variances
D Neither sales nor marginal cost variances LO 3c
14 A company budgets to make and sell 83,000 units of its product each period. The standard
contribution per unit is £8.
The following variances (A = adverse; F = favourable) were reported for the latest period.
Variances £
Sales volume contribution 42,400 (A)
Sales price 7,310 (F)
Material total 7,720 (F)
Material price 10,840 (F)
Labour total 6,450 (A)
Variable overhead total 4,250 (A)
Fixed overhead expenditure 8,880 (F)
The budgeted fixed overhead expenditure for the period was £210,000.
15 In a period, 11,280 kg of material were used at a total standard cost of £46,248. The
material usage variance was £492 adverse.
What was the standard allowed weight of material for the production achieved?
A 10,788 kg
B 11,160 kg
C 11,280 kg
D 11,400 kg LO 3c
16 During a period, 17,500 labour hours were worked at a standard cost of £6.50 per hour.
The labour efficiency variance was £7,800 favourable.
How many standard hours should have been worked?
A 1,200
B 16,300
C 17,500
D 18,700 LO 3c
17 The following information relates to material costs for the latest period.
Actual material purchased and used 210,000 kg
Standard material for actual output 175,000 kg
Total actual materials cost £336,000
Materials price variance £21,000 adverse
What was the standard materials price per kg?
A £1.50
B £1.70
C £1.80
D £2.04 LO 3c
19 Variances which are simply random deviations can be described as which of the following?
A Controllable
B Uncontrollable
C Either controllable or uncontrollable
D Marginal costs LO 3c
21 Which of the following would not help to explain a favourable materials usage variance?
A Using a higher quality of materials than specified in the standard
B Achieving a lower output volume than budgeted
C A reduction in quality control checking standards
D A reduction in materials wastage rates LO 3c
23 Which of the following could cause a favourable variable overhead efficiency variance?
A Using less material than the flexed materials usage budget predicts
B Working fewer hours than the flexed labour hours budget predicts
C Variable overhead cost per hour being less than the standard variable overhead cost
per hour
D Fixed overhead expenditure being less than budgeted LO 3c
24 The labour total variance for the latest period was favourable. Which of the following are,
together, certain to have caused this variance?
A Lower hourly rates than standard and higher than budgeted labour hours
B Lower hourly rates than standard and lower than budgeted labour hours
C Lower hourly rates than standard and lower than standard labour hours for the actual
production
D Lower hourly rates than standard and higher than standard labour hours for the actual
production LO 3c
26 A business has a budgeted labour cost per unit of £15.50. During the month of December
production details were as follows:
Budget 12,600 units
Actual 12,000 units
The actual labour cost for the month was £199,400
What was the labour total variance as a percentage of the flexed budgeted figure?
A 2.1% adverse
B 2.1% favourable
C 7.2% adverse
D 7.2% favourable LO 3c
27 A company's actual output for the period was 22,000 units and variable overhead costs
were in line with budget. The budgeted variable overhead cost per unit was £3 and total
overhead expenditure of £108,000 meant that fixed overheads were £8,000 under budget.
What was the budgeted level of fixed overheads for the period?
A £34,000
B £50,000
C £66,000
D £116,000 LO 3c
28 When absorbing variable overheads on the basis of machine hours, the total variable
overhead variance can be worked out by comparing actual variable overheads in a period
with the product of the absorption rate and which of the following?
A (Planned output) (Standard machine hours per unit)
B (Actual output) (Actual machine hours per unit)
C (Planned output) (Actual machine hours per unit)
D (Actual output) (Standard machine hours per unit) LO 3c
The purchasing manager decided to buy a superior quality material that was more
expensive than the standard material for use in October. This superior material causes less
waste. Labour was able to convert this superior material into the final product in less than
the standard time. A wage rise, agreed in July and implemented at the beginning of
October, also impacted on the results.
The decision to buy the superior quality materials caused the profit in October to change.
Select which of the following best describes that change.
A Fall by £1,600
B Rise by £4,800
C Fall by £6,000
D Rise by £2,000 LO 3c
32 The following information relates to a firm's labour costs for the year:
Standard rate per hour £2.00
Actual rate per hour £4.00
Actual hours worked 130,000
Labour efficiency variance £10,000 favourable
The standard number of labour hours for actual output were
A 125,000 hours
B 127,500 hours
C 132,500 hours
D 135,000 hours LO 3c
33 Would each of the following actual events during the year lead to a sales volume variance
being adverse or favourable or have no impact on it?
Sales prices increased
A Adverse
B Favourable
C No impact
Successful advertising campaign
D Adverse
E Favourable
F No impact
Increased labour pay rates
G Adverse
H Favourable
I No impact LO 3c
2 Which two of the following show how the breakeven point in units can be calculated?
A Total fixed costs/contribution per unit
B Contribution required to break even/contribution per unit
C Contribution/sales
D Fixed costs/costs to sales ratio LO 4a
3 A company makes a single product and incurs fixed costs of £30,000 per month. Variable
cost per unit is £5 and each unit sells for £15. Monthly sales demand is 7,000 units.
The breakeven point in terms of monthly sales units is
A 2,000 units
B 3,000 units
C 4,000 units
D 6,000 units LO 4a
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 113
4 A company manufactures a single product for which cost and selling price data are as
follows:
Selling price per unit £12
Variable cost per unit £8
Fixed costs per month £96,000
Budgeted monthly sales (units) 30,000
The margin of safety, expressed as a percentage of budgeted monthly sales, is
A 20%
B 25%
C 73%
D 125% LO 4a
5 Uula plc makes a single product, which it sells for £16 per unit. Fixed costs are £76,800 per
month and the product has a contribution ratio of 40%.
In a month when actual sales were £224,000, Uula plc's margin of safety, in units, was
A 2,000
B 12,000
C 14,000
D 32,000 LO 4a
6 A company has budgeted sales revenue of £500,000 for Period 1, with an associated
contribution of £275,000. Fixed production costs are £137,500 and fixed selling costs are
£27,500.
What is the breakeven sales revenue?
A £165,000
B £250,000
C £300,000
D £366,667 LO 4a
7 A company has calculated its margin of safety to be 20% of budgeted sales. Budgeted sales
are 5,000 units per month and budgeted contribution is £25 per unit.
What are the budgeted fixed costs per month?
A £25,000
B £100,000
C £125,000
D £150,000 LO 4a
9 Jackson plc expects a new venture to yield a gross profit of 50% on sales.
Fixed salary costs are expected to be £23,520 per month and other expenses are expected
to be 8% of sales.
Calculate the sales revenue necessary to yield a monthly profit of £58,800.
A £56,000
B £140,000
C £164,640
D £196,000 LO 4a
10 Bandido Ltd manufactures and sells a single product, with the following estimated costs for
next year.
Unit cost
100,000 units of 150,000 units of
output output
£ £
Variable materials 20.00 20.00
Variable labour 5.00 5.00
Production overheads 10.00 7.50
Marketing costs 7.50 5.00
Administration costs 5.00 4.00
47.50 41.50
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 115
11 Xena Ltd generates a 12% contribution on its weekly sales of £280,000. A new product, Z, is
to be introduced at a special offer price in order to stimulate interest in all the company's
products, resulting in a 5% increase in weekly sales of the company's other products.
Product Z will incur a variable unit cost of £2.20 to make and £0.15 to distribute. Weekly
sales of Z, at a special offer price of £1.90 per unit, are expected to be 3,000 units.
The effect of the special offer will be to increase the company's weekly profit by:
A £330
B £780
C £5,700
D £12,650 LO 4a
12 JJ Ltd manufactures a product which has a selling price of £14 and a variable cost of £6 per
unit. The company incurs annual fixed costs of £24,400. Annual sales demand is 8,000 units.
New production methods are under consideration, which would cause a 30% increase in
fixed costs and a reduction of £1 in the variable cost per unit. The new production methods
would result in a superior product and would enable the sales price to be increased to £15
per unit.
If the organisation implements the new production methods and wishes to achieve the
same profit as that under the existing method, the number of units to be produced and sold
annually would be
A 3,960
B 4,755
C 7,132
D 8,915 LO 4a
80,000
30,000
Level of activity
10,000 (units)
The above breakeven chart has been drawn for a company's single product. Which of the
following statements about the product are correct?
(1) The product's selling price is £10 per unit.
(2) The product's variable cost is £8 per unit.
(3) The product incurs fixed costs of £30,000 per period.
(4) The product earns a profit of £70,000 at a level of activity of 10,000 units.
A (1), (2) and (3) only
B (1) and (3) only
C (1), (3) and (4) only
D (3) and (4) only LO 4a
14 Which two of the following statements about traditional breakeven charts are correct?
A The fixed costs are depicted by a straight line parallel to the vertical axis.
B The sales revenue line passes through the origin.
C The total cost line cuts the vertical axis at the point which is equal to the period fixed
costs.
D The breakeven point is the point where the sales revenue line crosses the fixed cost
line.
LO 4a
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 117
15 When using limiting factor analysis in order to calculate maximum profit, which three of the
following assumptions should be made?
A Fixed costs per unit are not changed by increases or decreases in production volume.
B Fixed costs in total are not changed by increases or decreases in production volume.
C Variable costs per unit are not changed by increases or decreases in production
volume.
D Variable costs in total are not changed by increases or decreases in production
volume.
E Estimates of sales demand, prices and resources required for each product are known
with certainty. LO 4a
16 A company produces a single product for which standard cost details are as follows.
£ per unit
Material (£2 per kg) 8
Labour (£6 per hour) 18
Production overhead 9
Total production cost 35
The marketing department says the maximum annual demand is for 1,000 units of Product
B, 1,200 units of product A and 1,500 units of product T, and the factory has budgeted to
produce that number of units. It has just been discovered that next year materials will be
limited to 5,000 kg and labour to 10,000 hours.
If the company wishes to maximise profit, the priority in which the products should be made
and sold is
A B then A then T
B A then B then T
C T then A then B
D T then B then A LO 4b
18 A company makes three products and has produced the following standard cost cards.
X Y Z
£ per unit £ per unit £ per unit
Selling price 100 80 70
Variable costs
Material 20 30 5
Labour 30 10 5
Fixed overheads 40 10 40
Profit 10 30 20
The same labour is used to make all three products, but in different quantities.
Assume that the company can make and sell any combination of products.
In a month where expenditure on labour is restricted to £50,000, what is the maximum
contribution and profit that can be earned?
A Contribution: insufficient information to calculate, Profit: insufficient information to
calculate
B Contribution: Insufficient information to calculate, Profit: £200,000
C Contribution: £600,000, Profit: Insufficient information to calculate
D Contribution: £600,000, Profit: £200,000 LO 4b
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 119
19 Brian Ltd produces three products which have the following unit contributions and labour
requirements.
Labour
Product Unit contribution requirement
£ Hours
Scratch 6 2
Purr 7 3
Buzz 8 3
Due to industrial action only 2,600 labour hours are available next period, when expected
demand is 700 units of each product. Fixed costs are £1,700 for the period.
What is the maximum profit that can be achieved next period?
A £5,062
B £5,700
C £6,100
D £13,000 LO 4b
20 Using the following data Chin has correctly selected the plan which will maximise profit for
next month, assuming 15,000 labour hours are available.
Product M Product Q
£ per unit £ per unit £ per unit £ per unit
Selling price 171 235
Less Variable costs
Materials 26 45
Labour (at £10 per hour) 60 80
86 125
Contribution 85 110
Maximum demand (units) 1,000 1,200
If an extra 48 hours were available (at the normal hourly rate of £10) and allocated
optimally, profit for next month would be expected to increase by
A £180
B £660
C £680
D £880 LO 4b
22 Jethro Ltd manufactures three products, the selling prices, maximum demand and cost
details of which are as follows.
X Y Z
£ £ £
Unit selling price 150 190 190
Unit costs
Materials (£10/kg) 20 10 30
Labour (£8/hr) 32 48 40
Variable overheads 16 24 20
Fixed overheads 48 72 60
Maximum demand (units) 590 840 660
In the forthcoming period direct materials are restricted to 1,400 kg and the company has
contracted to supply 100 units of Z and 130 units of Y to a customer (included in the
maximum demand figures above).
What is the profit-maximising production plan?
X Y Z
Units Units Units
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 121
23 Green Ltd manufactures two components, the Alpha and the Beta, using the same
machines for each. The budget for next year requires the production of 4,000 units of each
component.
The variable production cost per component is as follows:
Machine hours per unit Variable production cost (£ per
unit)
Alpha 3 20
Beta 2 36
Only 16,000 machine hours will be available next year. A sub-contractor has quoted the
following unit prices to supply components: Alpha £29; Beta £40.
The optimum plan to obtain the components required is
Component Alpha Component Beta
Purchase from Purchase from
Produce sub-contractor Produce sub-contractor
Units Units Units Units
A 0 4,000 0 4,000
B 2,000 2,000 0 4,000
C 2,666 1,334 4,000 0
D 4,000 0 2,000 2,000
LO 4b
24 Blue plc manufactures two components, the Aura and the Venta, using the same machines
for each. The budget for next year requires the production of 400 units of each component.
The variable production cost per component is as follows:
Machine hours per unit Variable production cost (£ per
unit)
Aura 30 360
Venta 20 360
A maximum of 15,000 machine hours will be available next year. A sub-contractor has
quoted the following unit prices to supply components: Aura £390; Venta £400.
The optimum plan to obtain the components required is
Component Aura Component Venta
Purchase from Purchase from
Produce sub-contractor Produce sub-contractor
Units Units Units Units
A 400 0 150 250
B 250 150 375 25
C 233 167 400 0
D 0 400 0 400
LO 4b
X Y Z
26 A company makes large plastic containers for storing chemicals. An extract from the 20X7
budget based on a sales volume of 10,000 units is given below.
£ per unit £ per unit
Selling price 200
Variable cost 80
Fixed overhead cost 20
Total cost (100)
Profit 100
Actual results for 20X7 were in line with this budget except that 12,000 units were
produced and sold.
For 20X8 all costs are expected to increase by 10%, although selling price increases are
expected to be restricted to 5%.
What level of sales must be achieved in 20X8 in order to maintain the actual profit at the
20X7 level?
A 12,400 units
B 11,639 units
C 12,000 units
D 11,967 units LO 4a
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 123
124 Management Information: Question Bank ICAEW 2019
Chapter 11: Investment appraisal techniques
1 A company is considering investing £46,000 in a machine that will be operated for four
years, after which time it will sell for £4,000. Depreciation is charged on the straight-line
basis. Forecast operating profits/(losses) to be generated by the machine are as follows:
Year £
1 16,500
2 23,500
3 13,500
4 (1,500)
What are the Payback Period (PP) and the Accounting Rate of Return (ARR), calculated as
average annual profits divided by the average investment?
PP ARR
A 1.56 years 52.0%
B 2.44 years 56.5%
C 2.44 years 52.0%
D 1.56 years 56.5% LO 4c
2 A company is currently evaluating a project which requires investments of £5,000 now, and
£2,000 at the end of Year 1. The cash inflow from the project will be £7,000 at the end of
Year 2 and £6,000 at the end of Year 3.
The cost of capital is 16%.
What are the Discounted Payback Period (DPP) and the Net Present Value (NPV)?
DPP NPV
A 2.0 years £3,013
B 2.4 years £2,323
C 2.0 years £2,323
D 2.4 years £3,013 LO 4c
3 An investment will generate cash flows of £1,800 each year in Years 3 to 7 (ie, first amount
to be received three years from now). The discount rate is 15% per annum.
What is the present value of the cash flows?
A £1,350
B £3,377
C £4,561
D £6,830 LO 4c
5 An investment has a net present value of £4,000 at 10% and one of –£2,000 at 15%. What is
the approximate Internal Rate of Return?
A 11.67%
B 12.50%
C 13.33%
D 20.00% LO 4c
6 Which two of the following statements about the Net Present Value (NPV) and Internal Rate
of Return (IRR) methods of investment appraisal are correct?
A The graph of the NPV against the discount rate has a negative slope.
B If the NPV of an investment at r% is positive, the NPV will be lower at a rate of s% if s% is
less than r%.
C The IRR can be obtained exactly using interpolation whereas the graphical method
provides only an approximate rate for the IRR.
D An estimate of the IRR requires the calculation of the NPV at two different discount
rates. LO 4d
7 Which of the following statements about Net Present Value (NPV) and Internal Rate of
Return (IRR) methods are correct?
(1) An investment with a positive NPV is financially viable.
(2) NPV is a superior method to IRR.
(3) The graph of NPV against discount rate has a negative slope for most projects.
(4) NPV is the present value of expected future net cash receipts less the cost of the
investment.
A (1) and (3) only
B (2) and (4) only
C (1), (2) and (3) only
D (1), (2), (3) and (4) LO 4d
10 For a company with the objective of maximising net present value, what is the validity of the
following statements for a conventional investment project?
(1) The accounting rate of return (ARR) method of project appraisal usually gives too little
weight to cash flows which occur late in the project's life.
(2) For a project with a (unique) IRR greater than the opportunity cost of capital, the IRR
method of project appraisal usually gives too little weight to cash flows which occur
late in the project's life.
Statement 1 Statement 2
A True True
B True False
C False False
D False True LO 4d
12 Which of the following is not an advantage of the payback method of investment appraisal?
A Focus on a short payback period enhances liquidity
B Investment risk is reduced if the payback period is shorter
C It quantifies the effect of the timing of cash flows through the investment
D It is useful as an initial screening device LO 4d
13 Which two of the following are not advantages of the accounting rate of return (ARR)
method of investment appraisal?
A It is based on objective accounting profits
B The calculation method of ARR is universally agreed
C It involves a familiar concept of a percentage return
D It takes account of returns over the entire project life LO 4d
14 In a comparison of the Net Present Value (NPV) and Internal Rate of Return (IRR) techniques,
which of the following statements is true?
A Both methods give the same accept or reject decision, regardless of the pattern of the
cash flows.
B IRR is technically superior to NPV and easier to calculate.
C The NPV approach is superior if discount rates are expected to vary over the life of the
project.
D NPV and the accounting rate of return (ARR) can be confused. LO 4d
16 A company has identified two mutually-exclusive projects which have an equivalent effect
on the risk profile of the company.
Project I Project II
Discounted payback period 2.8 years 3.2 years
Net present value £17,200 £15,700
Internal rate of return 18% 22%
Average accounting rate of return 19% 21%
Cost of capital is 15%.
Assuming that the directors wish to maximise shareholder wealth and that no shortage of
capital is expected, which project should the company choose and why?
A Project I because it has the shorter payback period
B Project I because it has the higher net present value
C Project II because it has the higher internal rate of return
D Project II because it has the higher accounting rate of return LO 4d
17 A group of projects all involve the same initial outflow followed by a series of constant
annual cash inflows. The projects all have the same lives.
What is the validity of the following statements?
(1) A ranking of the projects by NPV gives the same order as ranking by payback.
(2) A ranking of the projects by IRR gives the same order as ranking by payback.
Statement 1 Statement 2
A True True
B True False
C False False
D False True LO 4d
23 A company is considering a project which has an initial outflow followed by several years of
cash inflows, with a cash outflow in the final year.
How many internal rates of return could there be for this project?
A Only two
B Either one or two
C Either zero or two
D Zero, one or two LO 4d
26 A project analyst has just completed the following evaluation of a project which has an
initial cash outflow followed by several years of cash inflows:
Internal rate of return (IRR) 15% pa
Discounted payback period (DPP) 7 years
She then realises that the company's annual cost of capital is 12% not 10% and revises her
calculations.
Select the option for what will happen to each of the IRR and DPP figures when the
calculations are revised.
IRR
A No change
B Increase
C Decrease
DPP
D No change
E Increase
F Decrease LO 4c
27 For a project with a normal pattern of cash flows (ie, an initial outflow followed by several
years of inflows) the internal rate of return is the interest rate that equates the present value
of expected future cash inflows to
A the project's cost of capital
B zero
C the terminal (compounded) value of future cash receipts
D the initial cost of the investment outlay LO 4d
29 A company has identified three independent projects, X, Y and Z. It has estimated the cash
flows and positive internal rates of return (IRRs) as follows:
Year Project X Project Y Project Z
£ £ £
0 (25,000) 82,000 (50,000)
1 – (20,000) 127,500
2 – (20,000) (78,750)
3 20,000 (20,000) –
4 40,000 (20,000) –
5 (27,938) (20,000) –
IRRs 10% 7% 5% and 50%
If the three projects are of equivalent risk and the company aims to maximise shareholder
wealth, at which of the following costs of capital would all three projects be deemed to be
acceptable by the company?
A 12%
B 8%
C 6%
D 4% LO 4c
31 A project has an initial investment cost of £200,000. It is expected to generate a net cash
inflow of £20,000 at the end of its first year. This will rise to £25,000 at the end of the second
year and remain at £25,000 per annum in perpetuity. The relevant cost of capital is
expected to be 8% in the first year and 10% in the second and subsequent years.
What is the net present value of the project (to the nearest £100)?
A £29,000
B £45,800
C £50,000
D £68,500 LO 4c
34 Soyuz Ltd is considering two separate investment projects. Both projects involve an initial
outlay and both are expected to produce positive annual net cash flows throughout their
expected lives. The projects are not mutually exclusive. The company uses the net present
value (NPV) method and internal rate of return (IRR) method to evaluate its investment
projects.
The following statements have been made in relation to the above projects:
(1) The IRR method may produce multiple solutions for one or both of the projects.
(2) The IRR method and NPV method may not give the same decision concerning
acceptance or rejection of the projects.
(3) The IRR method and NPV method may not rank the projects in the same order of
acceptability.
Which of the above statements are correct?
A (1) and (2)
B (1) and (3)
C (2) and (3)
D (3) only LO 4d
NPV NPV
i i
Y Y
X
X
Diagram C Diagram D
NPV NPV
i i
X
X
Y
Y
A Diagram A
B Diagram B
C Diagram C
D Diagram D LO 4d
37 A project has a normal pattern of cash flows (ie, an initial outflow followed by several years
of inflows).
What would be the effects on the internal rate of return (IRR) of the project and its
discounted payback period (DPP) of an increase in the company's cost of capital?
IRR DPP
A Increase Decrease
B Increase Increase
C No change Increase
D No change Decrease
LO 4c
38 A project has an initial cash outflow followed by three annual positive cash inflows and has a
payback period of two years.
What is the validity of the following statements?
(1) The project always has a unique internal rate of return.
(2) If the internal rate of return is less than the cost of capital then the project has a positive
NPV at the cost of capital.
Statement (1) Statement (2)
A False True
B True False
C False False
D True True
LO 4d
40 A project with an initial cash outflow of £55,000 was expected to have the following cash
inflows which arise at the end of each year:
Year 1 £19,000
Year 2 £19,000
Year 3 £19,000
Year 4 £19,000
Subsequently it was discovered that the cash inflow at the end of Year 3 had been
underestimated by £6,000. What would be the effect on the project's internal rate of return
(IRR) and its payback period?
IRR Payback period
A Increase No change
B Increase Decrease
C Decrease No change
D Decrease Decrease
LO 4c
41 A company is considering undertaking a cost reduction project which will require an outlay
in one year's time (t1) of £900,000. Savings in costs are likely to amount to £400,000 at t2,
and £600,000 at t3. The company's cost of capital is 10% p.a.
If all cash savings are deemed to arise at the end of each year, what (to the nearest £1,000)
is the NPV of the project?
A £(41,000)
B £(37,000)
C £41,000
D £37,000 LO 4c
1 Sunshine Ltd
Sunshine Ltd (Sunshine) manufactures and sells a range of three umbrellas – the Standard, the
Easy Opener and the Dome. Production and sales data for April was as follows:
Standard Easy Opener Dome
Selling price £36 per unit £10 per unit £25 per unit
Variable materials £6 per unit £2 per unit £5 per unit
Variable labour £6 per unit £2 per unit £4 per unit
Variable production overhead £2 per unit £1 per unit £2 per unit
Easy Opener
Dome
Sunshine is considering the impact of changing to absorption costing.
Calculate the fixed overhead absorption rate per labour hour for April:
£ per labour
hour
Fixed overhead absorption rate
During May the fixed overhead absorption rate was calculated as £15 per labour hour and the
value of the closing inventory under marginal costing, and the number of units, was as below.
The labour cost per hour and per unit remained at their April values.
Closing inventory value Closing inventory
£ Units
Standard 19,500 1,500
Easy Opener 3,000 500
Dome 5,000 500
Calculate the total value of the closing inventory for May for each product under absorption
costing.
£
Standard
Easy Opener
Dome
Standard
Easy Opener
Dome
Gross profit
During July sales matched production and Sunshine was again left holding no inventories for
any of its products.
Assuming the same actual production data and costs in July as for April, select whether the
gross profit in July was
A Higher under marginal costing
B Higher under absorption costing
C Exactly the same under absorption and marginal costing
2 Kingsman Ltd
Kingsman Ltd (Kingsman) started business on 1 September manufacturing a single product, the
A356. The budgeted production cost per unit of the A356 is as follows:
£
Variable materials 78
Variable labour 12
Variable production overheads 6
Fixed production overheads 18
The budget showed production and sales for the first six months of 1,200 units. The budgeted
selling price is £170 per unit.
The budgeted selling, distribution and administration costs are as follows:
Fixed £36,000 per annum
Variable £2.50 per unit
Variable production
costs
Opening inventory
Closing inventory
Production cost of
sales
Under/over absorption
Variable selling,
administration and
distribution
Fixed selling,
administration and
distribution
Profit/loss
In the second six months of the year Kingsman plans to introduce the B786, a deluxe version of
the A356. The budgeted total absorption cost for the B786 is £420 per unit including £40 per
unit for fixed overheads. In order to set a selling price Kingsman plans to use a margin of 25% on
the absorption cost.
If there is no inventory of the B786 at the end of the first six months of production, will the
profits calculated under marginal costing be higher than, lower than or the same as those
calculated under absorption costing?
Use the drop down to select from:
Higher
Lower
Same
Calculate the per cent mark-up for the B786 using marginal costing and the planned selling
price.
%
The budgeted cost and resource requirements for March were all met except for materials price
2
and usage. Owing to higher quality supplies, only 4.5m of material were actually used per
2
Gazza but at a cost of £52 per m . Numan absorbs fixed overheads into all its products using a
rate of 115% of actual materials cost.
Calculate the actual absorption cost per Gazza for March:
£
During April the actual absorption cost per Gazza was £592 and Numan set a target of a 33 1/3%
margin on the selling price per Gazza.
Calculate the selling price per Gazza in April:
£
During May Numan changed the production process. This resulted in a saving of 30 minutes of
labour time per Gazza compared with March. Materials actual price and usage were as in March.
Actual labour and variable production overhead costs were as March's budget. Numan decided
to absorb fixed overheads at a rate of 60% of prime cost.
Calculate the actual absorption cost per Gazza in May:
£
In June, the materials usage and labour and variable overhead costs were as the March budget
2
but materials were 10% cheaper per m . The labour time per unit was the same as in May. The
fixed overhead absorption rate was £56 per Gazza and 1,400 units were produced.
Calculate the actual marginal cost per Gazza in June:
£
Before finalising the selling price for July, which was to be based on the June costs, the
accountant noticed an error in the costing information and this resulted in the actual marginal
cost per unit for June being corrected. The fixed overhead per Gazza remained at its June level.
A target mark-up on absorption cost was now set.
Using a corrected marginal cost of £302 and a target mark-up on absorption cost of 22%,
calculate the selling price for July:
£
Numan's accountant decided to experiment with different ways of calculating the fixed
overhead absorption rate in August. In particular she wanted to see the effect of using a blanket
absorption rate (based on all of Numan's products) on selling prices. The target mark-up
remained at 22%.
The budgeted blanket fixed overhead absorption rate for August was £66.25 per unit of output.
Calculate the total under or over absorption of fixed overheads for all of Numan's products
using the blanket rate in August:
4 Oaklea plc
Oaklea plc manufactures high quality dining tables. The standard cost per table is as follows:
£
Materials 4 kg @ £10/kg 40
Labour 12 hours @ £16/hour 192
Variable overheads 12 hours @ £4/hour 48
Fixed overheads 12 hours @ £2.50/hour 30
Total absorption cost 310
The budgeted production and sales for each month are 400 tables selling for £600 each.
In April everything went according to budget except that only 380 tables were sold.
Calculate the difference between the absorption costing and marginal costing profits for April:
Difference £
Cost variances
Materials price
Materials usage
Labour rate
Labour efficiency
Total variances
Actual profit
5 VanHensen plc
VanHensen plc has two production departments (Assembly and Finishing) and two service
departments (Stores and Maintenance). Its budgeted overheads for the next quarter (July to
September) are as follows:
£
Rent and rates 80,000
Plant depreciation 100,000
Light and heat 50,000
Canteen costs 85,000
Finishing costs 32,000
These overheads are to be allocated and apportioned as fairly as possible to the four
departments using the information contained in the table below.
Assembly Finishing Stores Maintenance
Plant cost (£) 25,000 60,000 7,500 7,500
Number of employees 10 20 10 10
Floor area (m2) 2,000 4,000 3,000 1,000
Plant depreciation
Canteen costs
Finishing costs
In the following quarter (October to December) VanHensen's accountant has already completed
the initial allocation and apportionment of budgeted overheads to the four departments and
now wishes to reapportion the service department overheads to the production departments.
He has provided the following information:
Assembly Finishing Stores Maintenance
Total overhead (£) 70,000 185,000 65,000 38,000
Plant cost (£) 25,000 60,000 7,500 7,500
Number of employees 10 20 10 10
Floor area (m2) 2,000 4,000 3,000 1,000
Stores works 50% of the time for Assembly, 30% for Maintenance and the balance for Finishing.
Its costs should be reapportioned first. Maintenance looks after the plant in each department.
Reapportion the service department overheads (Stores and Maintenance) to the production
departments (Assembly and Finishing):
Assembly Finishing Stores Maintenance
£ £ £ £
Total overhead 70,000 185,000 65,000 38,000
Stores reapportionment
Maintenance
reapportionment
During January the actual absorption cost per Large Hamper was £165 and Basket's accountant
recommended setting all its selling prices using a target mark-up of 40% on the actual
absorption cost per unit.
Calculate the selling price per Large Hamper in January:
£
During February, Basket took delivery of new weaving equipment that resulted in a 22%
reduction in the labour time per unit for each hamper size from the January level. However, as a
result of the new equipment, February's fixed production overheads were 10% higher than their
level in January. Material costs and usage and variable overheads were at the same level as
budgeted for January, as was the volume of output for all products.
Calculate the fixed overhead absorption rate per labour hour in February for Large Hampers:
£
During March, the materials usage and variable overhead costs for Large Hampers were the
same as February but due to movements in foreign exchange rates the materials cost was 15%
higher per kg. The labour time per unit was the same as the January budget adjusted for the
saving made in February. The fixed overhead absorption rate was £48 per hamper.
Calculate the absorption cost per Large Hamper in March:
£
When preparing the monthly cost reports for March, Basket's accountant calculated the
absorption cost per Small Hamper to be £84. In order to stimulate demand a target margin of
20% was set.
Calculate the selling price per Small Hamper for March:
£
The budgeted company wide blanket fixed overhead absorption rate for April was £38 per
hamper.
Calculate the total under or over absorption of fixed overheads for all three hamper sizes using
Basket's wide blanket absorption rate in April:
£ Use drop down to select from:
Under absorption
Over absorption
7 Geartop plc
Geartop plc (Geartop) manufactures components for the car industry. Data for three of its
products for July was as follows:
AVX12 PUH78 YTF65
Selling price per unit £45 £60 £70
Variable materials per unit £15 £14 £21
Variable labour per unit £6 £8 £9
Variable production overhead £2 £3 £4
per unit
Actual production (units) 3,000 2,500 1,800
Closing inventory (in units) for each product was 10% of July's production. The variable labour
rate is £12 per hour and Geartop's fixed overheads for these three products for July were
£80,000. There was no opening inventory of any of the products.
Calculate the total value of the cost of sales for each product for July using marginal costing:
£
AVX12
PUH78
YTF65
Geartop's accountant now wishes to change to absorption costing.
Calculate the fixed overhead absorption rate as a percentage of the labour cost for July:
% of labour
cost
Fixed overhead absorption rate
PUH78
YTF65
During September Geartop sold all the units it produced during the month together with the
entire opening inventory of the three product lines. Sales price, absorption cost, production and
inventory information for September was as follows:
AVX12 PUH78 YTF65
Selling price (per unit) £45 £60 £70
Total absorption cost (per unit) as £35 £40 £50
of August
Actual production (units) 3,000 2,500 1,800
Opening inventory (units) 200 150 100
Assuming fixed production overheads of £81,300 were incurred during September and that
there was a total of £4,950 of fixed production overheads included in the absorption costing
value of opening inventory, complete the table below which calculates Geartop's profit for
September under marginal costing and absorption costing.
Marginal Absorption
costing costing
£ £
Sales revenue
AVX12
PUH78
YTF65
Gross profit
In October Geartop sold all the units of each product that it produced.
Assuming the same actual production data and costs in October as for September, select
whether the gross profit in October was:
A Higher under marginal costing
B Higher under absorption costing
C Exactly the same under absorption and marginal costing
Standard load
Low load
The board of directors of Borehole has decided to stop using marginal costing and instead
adopt absorption costing.
Calculate the fixed overhead absorption rate as a percentage of the labour cost for May:
% of labour
cost
Fixed overhead absorption rate
During June Borehole's accountant calculated the company's fixed overhead absorption rate as
£6 per labour hour. She also calculated the value of the closing inventory for each pump type
using absorption costing as below. The labour cost remained at £10 per hour.
Closing inventory Closing inventory
£ units
High load 4,600 20
Standard load 6,000 30
Low load 800 5
Calculate the total value of the closing inventory for each pump type for June using marginal
costing.
£
High load
Standard load
Low load
July was a very dry month with almost no rainfall and as a consequence Borehole sold all the
pumps it could produce during the month together with the entire opening inventory of the
three pump types. Fixed production overheads for July were £31,000 and the sales price,
absorption cost, production and inventory information for July was as follows:
Standard load
Low load
Gross profit
In August the dry weather ended and Borehole did not sell all the pumps that it produced but
the month's production data and costs were the same as in July.
Select whether Borehole's profit in August was:
A Higher under marginal costing
B Higher under absorption costing
C Exactly the same under absorption and marginal costing
9 Hector plc
Hector plc (Hector) provides a number of different services from two service departments
(Service 1 and Service 2) that are supported by two other departments (Canteen and
Administration). Hector's budgeted overheads for the next six months (January to June) are as
follows:
£
Rent and business rates 500,000
Fixtures depreciation 700,000
Electricity, gas and water 175,000
Supervisors' salaries 750,000
Canteen costs 60,000
Canteen takings for the next six months are budgeted at £10,000.
These overheads are to be allocated and apportioned to the four departments using the
information gathered below.
Fixtures depreciation
Supervisors' salaries
Canteen costs
In the following six months (July to December) Hector's accountant has already completed the
initial allocation and apportionment of budgeted overheads to the four departments and now
wishes to reapportion the canteen and administration overheads to the two service
departments. He has provided the following information:
Service 1 Service 2 Canteen Administration
Total apportioned 740,000 650,000 280,000 500,000
overhead (£)
2
Floor area (m ) 3,000 4,000 1,500 1,500
Fixtures cost (£'000) 120 80 50 100
Number of employees 40 30 5 25
Reapportion the Canteen and Administration overheads to Service 1 and Service 2:
Service 1 Service 2 Canteen Maintenance
£ £ £ £
Total overhead 740,000 650,000 280,000 500,000
First reapportionment
10 Oakbeam Ltd
Oakbeam Ltd (Oakbeam) is a manufacturer of kitchen furniture. It has two production
departments (Cabinets and Worktops) that are supported by two non-production departments
(Warehousing and Administration). Its budgeted overheads for this year are as follows:
£
Rent and rates 60,000
Machinery depreciation 60,000
Building utility costs 90,000
Managers' salaries 120,000
Warehousing department costs 175,000
Administration department costs 50,000
These overheads are to be allocated and apportioned to the four departments as fairly as
possible and the information below is available to help with this.
Cabinets Worktops Warehousing Administration
Direct labour cost (£'000) 65 35 50 100
Machinery cost (£'000) 400 300 300 0
Floor area (m2) 2,200 1,800 10,000 1,000
Allocate and apportion the overheads to the four departments:
Cabinets Worktops Warehousing Administration
£ £ £ £
Rent and rates
Machinery
depreciation
Building utility costs
Managers' salaries
Warehousing
department costs
Administration
department costs
In the following year, Oakbeam's accountant has already completed an initial allocation and
apportionment of budgeted overheads between its four departments. As a second stage she
now wishes to reapportion the Warehousing and Administration department overheads to the
two other departments. She has provided the following information:
Cabinets Worktops Warehousing Administration
Total overhead (£) 170,000 70,000 300,000 80,000
Direct labour cost (£'000) 70 30 50 100
Machinery cost (£'000) 400 300 300 –
Floor area (m2) 2,200 1,800 10,000 1,000
Administration
reapportionment
Warehousing
reapportionment
11 Jitinder plc
Jitinder plc (Jitinder) started business on 1 January manufacturing a single product, the
Gromett. The budget includes the following for production costs per Gromett:
Variable materials: 4 kg @ £15/kg
Variable labour: 2.5 hours @ £16/hour
Variable production overheads: £10/unit
The budgeted production and sales for the first year is 4,800 Grometts, selling for a budgeted
price of £300 each. Budgeted fixed production overheads are £192,000 per annum. Jitinder
uses a pre-determined fixed overhead absorption rate.
Selling, administration and distribution costs are partly fixed and partly variable as follows:
Fixed £27,000 per quarter
Variable £7 per unit
Variable production
costs
Opening inventory
Closing inventory
Production cost of
sales
Under/over absorption
Variable selling,
administration and
distribution
Fixed selling,
administration and
distribution
Profit/loss
In its second year of business Jitinder plans to introduce a basic version of its product known as
the Salis, which is budgeted to have a far greater volume of sales than the Gromett and will be
much easier to manufacture. The budgeted total absorption cost for the Salis is £80 per unit
using traditional volume based absorption costing. In order to set a selling price Jitinder plans
to use either a mark up of 25% or a margin of 25%.
If Jitinder were to switch to using Activity Based Costing (ABC), would the total cost per Salis
be higher or lower than the cost calculated using traditional absorption costing?
Use the drop down to select from:
Higher
Lower
Calculate the difference in the price of a Salis from applying either a 25% mark-up or 25%
margin.
Inventory at the end of August was 115 Standards. In the quarter September to November, Flag
manufactured 4,200 Standards and sold 4,215. Flag's budgeted fixed costs are incurred evenly
throughout its financial year. Flag's actual costs and the selling price were as budget except for
the fixed element of the sales, administration and distribution costs, which were 4% higher than
budgeted.
Calculate Flag's profit or loss for the quarter September to November under both marginal
costing and absorption costing:
Enter costs as negative values.
Absorption Marginal
£ £ £ £
Sales
Variable production
costs
Opening inventory
Closing inventory
Production cost of
sales
Under/over absorption
Variable sales,
administration and
distribution costs
Fixed sales,
administration and
distribution costs
Profit/loss
Following extensive market research, Flag has decided to launch a low cost product called the
Substandard. The budgeted total absorption cost is £9 per Substandard including £2 per unit
for fixed costs. In order to set a selling price Flag's accountant plans to apply a mark up of 60%
to the total absorption cost. During the first year of manufacture the Substandard will not be
marketed, with all production going into inventory. By the end of the second year of
manufacture the aim is to keep inventory levels as close to zero as possible, with production
more or less keeping pace with sales.
If there is a high inventory of the Substandard at the end of the first year it is manufactured, but
no inventory at the end of the second year, will the profits calculated under absorption costing
for the second year be higher or lower than those calculated under marginal costing?
Use the drop down to select from:
Higher
Lower
Calculate the % margin for the Substandard using marginal costing and the planned selling
price.
%
13 Hexabeast plc
Hexabeast plc manufactures up-market model figurines. The standard cost per unit of one of its
products, the Grimmbo, is as follows:
£
Plastic material 2 kg @ £12/kg 24.00
Labour 3 hours @ £22/hour 66.00
Variable overheads 3 hours @ £5.50/hour 16.50
Budgeted production and sales for August are 1,200 units selling for £199.50 each. Budgeted
fixed overheads are £300,000 per quarter incurred evenly each month.
Actual results for August are as follows:
1,290 units were produced and sold at a price that was £10 per unit less than the budget. The
cost of material was £29,025 and there was a favourable usage variance of 0.2 kg per unit
because better quality plastic was used. Labour worked 3,600 hours and received a 3% pay rise
at the start of August. Fixed and variable overheads were £98,765 and £21,600 respectively.
Complete the table below to generate the operating statement for August:
Make one entry (adverse or favourable) for each variance and enter a zero or dash in the other
column.
Enter the net total of adverse and favourable variances as either a positive number (favourable
total) or negative number (adverse total) in the final column.
14 Yarn & Co
Yarn & Co (Yarn) is an unincorporated business that manufactures a single type of wool, the Knit.
The standard cost for a unit of Knit is as follows:
£
Skilled labour 4 hours @ £10/hour 40
Raw material 4 metres @ £6/metre 24
Variable overheads 4 hours @ £4/hour 16
Yarn's budget for November is to manufacture and sell 1,200 units of Knit at a selling price of
£105 per unit. Yarn has budgeted fixed overheads of £72,000 per annum, which are incurred
evenly throughout the year.
Yarn's actual results for November are as follows:
In total 110% of the budgeted number units of Knit were manufactured and sold, although the
average selling price achieved was £5 per unit below budget.
The total skilled labour variance was £2,200 adverse, with 5,200 hours worked. The total
materials variance was also £2,200 adverse with raw materials usage of 5,100m. Yarn's fixed and
variable overheads were £5,500 and £23,400 respectively.
Complete the operating statement table below for the month of November:
Make one entry (adverse or favourable) for each variance and enter a zero or dash in the other
column.
Enter the net total of adverse and favourable variances as either a positive number (favourable
total) or negative number (adverse total) in the final column.
Materials price
Materials usage
Total variances
Actual profit
In 20X1 Johnson & Redmond worked 30,000 labour hours, split as follows:
Labour hours
Small 8,000
Medium 12,000
Large 10,000
During the year the company incurred fixed production overheads of £336,000 of which
£216,000 related to the manufacture of Large Cartons. Small and Medium cartons shared the
remaining fixed production overhead equally. All fixed overheads are absorbed into output
using a rate per labour hour based upon actual labour hours worked. Each carton took two
hours to produce.
During 20X1 the actual absorption cost per Large carton was £44 and the accountant of
Johnson & Redmond decided to set all its selling prices using a target mark up of 25% on the
absorption cost per unit.
Calculate the selling price of Large cartons in 20X1:
£
During the following year, 20X2, Johnson & Redmond introduced a streamlined manufacturing
process that resulted in a reduction of 10% in labour time per carton from the level in 20X1.
However, as a result of other changes, the fixed production overheads were 5% higher than their
level in 20X1. Material costs and usage and variable overheads were at the same level as for
20X1, as was the volume of output for all products.
Calculate the fixed overhead absorption rate per labour hour for Large cartons in 20X2:
£
Johnson & Redmond's budget for the next year, 20X3, is to be set using the materials usage and
variable overhead costs for all products as in 20X1 but due to lower import duties the raw
materials cost is expected to be 5% lower per kg. The labour time per unit is budgeted to 90% of
that in 20X1. The fixed overhead absorption rate for 20X3 is budgeted to be £28 per unit of
output.
Calculate the budgeted absorption cost per Medium carton for 20X3:
£
When the actual cost reports for 20X3 became available they showed that the absorption cost
per unit for Small cartons was £40. In order to stimulate sales demand for 20X4 a target margin
of 15% was set.
Using this data for Small cartons for 20X3 and the target margin, calculate the selling price for
20X4:
£
Johnson & Redmond's managing director asked to see the effect of calculating the fixed
overhead absorption rate in different ways. In particular she wanted to see the effect of using a
blanket absorption rate (based on all of the company's products) on selling prices. The target
margin remained at 15%.
During 20X4 the company manufactured 5,000 cartons of each size and the variable cost for a
Medium carton was £50. In 20X4 total fixed overheads were £350,000 of which 35% were
attributable to Medium cartons. Labour hours per unit remained in line with the 20X3 budget.
Calculate the decrease in the selling price of a Medium carton achieved by switching from a
fixed overhead rate absorption rate based on the specific carton's labour hours to a single
blanket fixed overhead absorption rate based on all three carton sizes:
£
The budgeted company wide blanket fixed overhead absorption rate for 20X4 was £22.50 per
carton.
Calculate the total under or over absorption of fixed overheads for all three carton sizes using
the company wide blanket absorption rate in 20X4:
£ Use drop down box to select from:
Under absorption
Over absorption
In October the restaurant’s head chef proposes that take-away meals are offered in addition to
those served in the restaurant. He estimates 1,080 take-away meals could be sold at £18 each
per week at a variable cost of £10.50 each. Incremental fixed costs per week would be £9,150.
All other cost and revenue data for existing restaurant meals is the same as in August.
Calculate the additional profit or loss that the restaurant would earn per week from introducing
take-away meals.
Additional profit/(loss) per week £
The restaurant manager points out that the head chef has ignored the following three items in
her calculation:
Volume purchasing discounts would result in a saving of 12.5% on meat, fruit, vegetable
and drinks costs per existing restaurant meal
Recyclable packaging costs would amount to £0.75 per take-away meal
The take-away meals service would need to be advertised at a cost of £200 per week.
If the three additional items are allowed for in the appraisal of the take-away meals proposal,
then they would result in an
additional profit Drop down menu choice
additional loss
Interpolate the internal rate of return of the rapid baker using costs of capital of 10% and 15%
(to the nearest whole percent).
%
18 Baybee plc
Baybee plc (Baybee) manufactures hand-made cots for babies and is currently preparing its
budget for February and has provided the following information:
Budgeted sales
Basic 220 units at £800 each
Standard 310 units at £1,195 each
Deluxe 45 units at £1,640 each
Budgeted inventory and production
Basic Standard Deluxe
Opening (units) 50 Not required 24
Closing (units) 60 Not required 16
Production (units) To be calculated 310 To be calculated
Baybee wishes to use this data to budget fixed and variable overheads for February.
Calculate the budgeted total sales revenue for February.
£
Calculate the budgeted production for February of the Basic and the Deluxe.
Basic Deluxe
Production (units)
Calculate the budgeted total direct cost of the 310 units of the Standard to be produced in
February.
Budgeted total direct £
cost for the Standard
If the budgeted fixed overhead absorption rate per labour hour for the Standard is £23,
calculate the budgeted total fixed overheads for the Standard for February.
Budgeted total fixed £
overheads for the
Standard for February
Using the high low method, calculate the budgeted total fixed overheads and variable
overheads per unit for the Deluxe.
Total fixed overheads £
Variable overheads per £
unit
Baybee is also preparing its cash budget for the period May to July. Total sales of the Basic,
Standard and Deluxe are budgeted to be £700,000 in each month from March to May, £750,000
in June and £800,000 in July.
25% of sales in any month are for cash. Cash customers receive a 1.5% discount.
The balance of sales is made on credit. 70% of credit customers pay after a month, 25% pay after
two months and the remainder is written off as bad debts.
Sales of the Standard are budgeted to be 320 units per month in the period March to May, rising
to 330 units in June, 350 units in July and 380 units in August.
Production takes place in the month before sale. Labour and materials costs per unit of the
Standard are budgeted at the same level as for February above. No overtime will be necessary
19 McCarthy plc
McCarthy plc (McCarthy) manufactures a number of products, one of which is Product Z.
Estimated costs for March for Product Z are as follows:
Cost per unit
At 40,000 units At 60,000 units
£ £
Variable materials 40 40
Variable labour 30 30
Production overheads 15 10
Other overheads 10 8
95 88
Total fixed costs are unaffected by the volume of output. McCarthy has budgeted to sell 35,000
units in March at a price of £120 each.
Calculate the breakeven number of units (to the nearest whole unit) for March.
Breakeven (units)
In April, McCarthy is considering a new production method for Product Z. Using the existing
production method, the budget for April for Product Z shows a variable cost of £80 per unit, a
selling price of £150 per unit, total fixed costs of £1,400,000 and sales demand of 35,000 units.
The new production method would cause the total fixed costs to increase by 15% and the
variable cost per unit to reduce by 10%. Owing to an increase in Product Z’s quality with the new
production method, the selling price per unit would be increased by 12%.
Calculate how many fewer units (to the nearest 100) would need to be sold using the new
production method to give the same budgeted profit for April as the existing production
method.
Reduction in the
number of units
In May, McCarthy’s budget shows it generating a contribution of 40% on monthly sales of
Product Z of £3,000,000. McCarthy is considering introducing a new special edition version of
Product Z in order to stimulate demand and this will cause the budgeted sales of the original
version of Product Z to increase by an estimated 10%. The special edition version is expected to
have a variable production cost of £100 per unit and packaging and distribution costs of £20 per
In June, the single raw material from which McCarthy manufactures Products X, Y and Z is
expected to be in short supply. Product details for June are budgeted to be as follows:
Product X Product Y Product Z
Maximum demand (units) 15,000 10,000 8,000
Optimum planned production (units) 0 6,000 8,000
Contribution (per unit) £10 £15 £20
Material cost per unit (at £2/kg) £8 £6 £4
The planned production optimises the use of the raw material available from McCarthy’s normal
supplier at £2/kg. A new supplier is willing to supply a further 20,000 kg of raw material at £3/kg.
Calculate the maximum total price that McCarthy should pay for the extra 20,000 kg of raw
materials.
Maximum total price (£)
In July, McCarthy decides to replace the machine that manufactures Product Z. Two alternative
machines have been identified.
Machine L7
Machine L7 requires an initial outlay of £800,000 and is expected to have a scrap value of
£80,000 after 4 years. The machine will generate a constant annual cash contribution of
£640,000 in each year of its life. Cash fixed costs are expected to be £360,000 pa.
Calculate (to the nearest whole year) the payback period for machine L7.
Payback (years)
Calculate (to the nearest whole %) the Internal Rate of Return (IRR) of machine L7,
interpolating at discount rates of 10% and 20% pa.
IRR (%)
Machine M8
Machine M8 requires an initial outlay of £680,000 and is expected to have a scrap value of
£120,000 after 4 years. Depreciation is calculated on a straight-line basis. Profits after
depreciation are expected to be £120,000, £130,000, £140,000 and £110,000 in Years 1–4 of its
life respectively.
Calculate the difference (to the nearest whole % point) between the Accounting Rate of Return
(ARR) based on the initial investment and the ARR based on the average investment for
machine M8.
Difference in ARRs (% points)
Calculate the net present value (NPV) (to the nearest £1,000) for machine M8 at a discount rate
of 15% pa.
NPV (£)
21 Treeze Ltd
Treeze Ltd (Treeze) manufactures a product called the Barc. For the first quarter of the year
(quarter 1), the following budgeted information is available for the Barc:
£
per unit
Budgeted selling price 35.00
Budgeted variable production cost 10.00
Budgeted variable selling cost 4.50
For
quarter 1
Fixed production costs £11,500
Administration costs £6,250
Sales and production 5,000 units
60% of the administration costs are fixed costs and the remainder are variable costs.
Calculate the breakeven point for quarter 1 (to the nearest whole unit):
units
New production methods are under consideration for quarter 2 that would lead to a total
variable cost per unit of £14 and total fixed costs of £18,300. Budgeted sales volume is expected
to be 5,200 units for the quarter.
Level of activity
The cost consists of a fixed amount up to a certain level of activity which is represented
by a straight horizontal line on the graph. At a certain point a variable element is
introduced and the cost line slopes upwards at a constant rate as the level of activity
increases.
15 A A step cost
As the hiring cost remains fixed within certain activity levels it is a step cost.
Although the cost may increase with output it remains constant for certain activity
levels. It is therefore not a variable cost.
If the factory made between 1 and 100 toys in one month the cost would be £1,000.
However if they made 101 toys they would need two production lines, and therefore
two machines. The cost would then be £2,000. As this cost can be seen to increase with
output it cannot be fixed.
This cost remains constant within a range of activity levels. It is therefore not a semi-
variable cost.
16 D A fixed administrative cost
As the salary paid to the financial accountant is unlikely to change if output levels
change the cost is fixed, and as the expense relates to the business's administration it is
an administrative cost.
A variable administrative cost is incorrect. This cost is unlikely to vary as output
changes, therefore this cost is more likely to be a fixed cost.
A fixed production cost is incorrect. An accountant's salary is incurred as part of the
business's administration not production.
Prime cost is the total of all direct production costs. An accountant's salary is neither a
direct cost, nor a production cost, and therefore would not be part of prime cost.
17 A Electricity bills made up of a standing charge and a variable charge
The cost shown in the graph has a basic fixed element which is payable even at zero
activity, with a variable element being added at a constant rate as activity increases.
Therefore the correct answer is where electricity bills are made up of a standing charge
and a variable charge. The cost depicted is known as a semi-variable cost.
18 A C = 480 + 0.01T
A standing charge of £40/month is £480 per year. Costs then increase by
£0.01/minute.
SAMPLE PAPER
26 B, D
A, C and E are all elements of cost.
27 D, E
A, B and C are all cost objects.
28 C Intimidation
Threat of disciplinary proceedings or dismissal over a disagreement about the
application of accounting principle or the way in which financial information is to be
reported is an example of an intimidation threat.
SAMPLE PAPER
29 B A framework-based approach
The ICAEW Code of Ethics is a framework or ethics-based approach, which is the
opposite of the compliance, rule or tick-box approach seen in other jurisdictions such
as the US.
If you answered £68,160 you valued all of the units sold at the opening inventory cost
of £80 per unit. However there are only 750 units held at this cost. The cost of the
remainder of the units sold must be taken from the next batch received.
The option of £69,960 uses the LIFO basis rather than the required FIFO basis.
The option of £93,720 uses the sales revenue, not the cost of the units sold.
14 B £23,760
The LIFO method uses the cost of the most recent batches first.
Cost of units sold on 24 February £
90 product A @ £90 8,100
180 product A @ £85 15,300
582 product A @ £80 46,560
852 69,960
Sales revenue = 852 units £110 93,720
Less cost of units sold 69,960
Gross profit 23,760
The option of £17,040 values all the units sold at the cost of the latest batch received.
However, there are only 90 units at this cost. The remaining units must be valued at the
cost of earlier batches received.
If you selected the option of £69,960 you calculated the correct cost of goods sold, but
the question asks for the gross profit earned.
The option of £93,720 is the sales revenue of the units sold, not the gross profit
earned.
If you selected £566.25 you ignored the receipts on day 3 of week 15 and based your
calculations on the opening inventory. However the LIFO method uses the cost of the
latest batch first.
The option of £593.25 would have been the correct cost of pixies issued if the FIFO
method was used.
If you selected £597.00 you valued all of the pixies issued at the price of the latest
batch received. However, there are only 60 units in this batch and the remaining units
must be taken from the latest batch in the opening inventory.
17 D £3,605
Components issued on day 4 = 90 from week 10 receipts
Closing inventory week 12:
£
Remaining 210 components from week 10 @ £6.50 1,365
200 components from week 11 @ £6.25 1,250
150 components from week 12 @ £6.60 990
560 3,605
If you answered £585 you selected the cost of the issues rather than the value of the
closing inventory.
The answers of £594 and £3,596 are the cost of the issues and the closing inventory
respectively, using the LIFO valuation method.
18 D Student D
The LIFO method charges the latest prices paid to cost of sales. In a period of falling
prices the latest prices will be the lowest prices. Therefore the student using the LIFO
method would record the lowest cost of sales and the highest gross profit.
21 C £7,000
If you selected the wrong option then check your working carefully against the above
table.
22 C £7,500
If you selected the wrong option then check your working carefully against the above
table.
23 C Each time a purchase is made
Each time a purchase is made this is likely to change the average price of the items
held in inventory. If it is required to keep prices up to date, the average price must be
re-calculated each time a purchase is made at a different price.
Each time an issue is made is incorrect because the average price of remaining
inventory items is not altered when an issue is made at the average price.
Re-calculating the average price at the end of each accounting period would not keep
prices up to date.
An inventory count is verification of physical quantities and does not require the re-
calculation of average prices.
* A new weighted average price is calculated every time there are receipts into
inventory.
From the above records, it can be seen that the cost of material issued on 5 June was
£1,067.
If you selected £1,056 you used a unit rate of £4.80, ie, the price of the latest goods
received, rather than the average price of £4.85.
If you selected £1,078 you used a simple average price of £4.90, rather than a
weighted average price.
If you selected £1,100 you used a unit rate of £5, ie, the price of the oldest items in
inventory.
25 C £251
From the table in solution 25, the closing inventory value is £251.
If you selected £248 you used a periodic weighted average cost of all inventory at the
month end, instead of recalculating the average every time there are receipts into
inventory.
If you selected £250 you calculated a simple average of all three available prices.
£260 would be the correct solution if the FIFO method of inventory valuation was used.
26 C FIFO = £840
£ £
Sales value £3 800 2,400
Less cost of sales:
400 £1.80 720
400 £2.10 840
(1,560)
Gross profit 840
If you selected £720 you priced all units at the latest price of £2.10 for LIFO. However,
you must deal with the separate batches of units, taking account of how many were
received at each price.
£1,620 is the correct figure for cost of sales, but the question asked for the gross profit.
28 A £3,150
Units Value
£
Opening inventory 600 3,600
Week 6 400 3,200
Week 8 100 900
1,100 7,700
If you selected £1,200 you forgot to include the original overhead allocated and
apportioned to the packing department.
If you selected £9,968 you included the four canteen employees in your calculation,
but the question states that the basis for apportionment is the number of employees in
each production cost centre.
If you selected £10,080 you based your calculation on the direct employees only.
8 A Costs can be allocated where it is possible to identify which department caused them.
C Costs need to be apportioned where they are shared by more than one department.
D There is no need for a single product company to allocate and apportion overheads in
order to determine overhead cost per unit.
Although supervisors' salaries might be apportioned over more than one department
or cost centre, it is more likely that a supervisor would work in a single cost centre.
Therefore, supervisors' salaries are likely to be allocated rather than apportioned.
The process of apportioning overhead costs is arbitrary. There is no single 'correct'
result.
9 B Volume of space occupied in cubic metres
From the four options available, a basis relating to space occupied would seem to be
most appropriate. This eliminates the number of employees and labour hours worked.
Since heating is required to warm the whole of the space occupied, from floor to
ceiling, the volume of space is more appropriate than the floor space occupied.
A rate of 40% of direct material cost is not the most appropriate because it is not time-
based, and most items of overhead expenditure tend to increase with time.
The two rates based on direct labour are not the most appropriate because labour
activity is relatively insignificant in department 1, compared with machine activity.
12 C £0.72 per direct labour hour
Department 2 appears to be labour-intensive therefore a direct labour-hour rate would
be most appropriate.
£18,000
= £0.72 per direct labour hour
25,000
The rate of 18% of direct labour cost is based on labour therefore it could be suitable.
However, differential wage rates exist and this could lead to inequitable overhead
absorption. The machine hour rate is not suitable because machine activity is not
significant in department 2.
13 A £89.10
Fixed overhead absorption rate = budgeted overheads/budgeted machine hours
= £(95,580 + 64,800)/1,800
= £89.10
The rate of £100 per machine hour is the actual rate for the period. However, a
predetermined rate, based on the budget data both for the overhead expenditure and
the activity level, is used to absorb overheads.
14 D £20.91
Overhead absorption rate = £460,000/22,000 = £20.91 per hour
Remember overhead absorption rates are based on budgeted information.
The answer of £81.90 does not include a direct labour cost. The direct cost is not
affected by the basis chosen for the absorption of overheads.
If you selected £91.10 you based the overhead absorption on the rate per welding
machine hour, rather than using the direct labour hour basis as requested.
The answer of £119.50 includes too much overhead cost. It uses both bases of
absorption together, but only one basis of overhead absorption can be used.
17 B £4,462.50
Apportionment of budgeted overhead costs £
Rent and rates (area) £3,000 (700/8,000) 262.50
Plant insurance and depreciation (value of machinery)
£11,000 (80/400) 2,200.00
Factory manager's salary (employee numbers) £7,000 (20/70) 2,000.00
4,462.50
The option of £1,837.50 apportions all of the costs on the basis of area. More
appropriate apportionment bases are available for some of the costs.
Similarly, the option of £6,000 apportions all of the costs on the basis of the number of
employees, and suffers from the same inadequacy.
If you selected £7,000 you simply apportioned the overhead costs evenly between the
departments. More appropriate apportionment bases are available.
If you selected £10.00 or £13.20 you calculated the correct absorption rate but you
should have then applied it to the labour hours worked on product K.
If you selected £14.00 you calculated an absorption rate based on the 13,500 total
budgeted production units. This rate takes no account of the different amounts of time
taken to produce one unit of each product, and hence of the different resources
consumed by each.
19 A (1) and (2) only
Statement (1) is correct because a constant unit absorption rate is used throughout the
period. Statement (2) is correct because 'actual' overhead costs, based on actual
overhead expenditure and actual activity for the period, cannot be determined until
after the end of the period. Statement (3) is incorrect because under/over absorption
of overheads is caused by the use of predetermined overhead absorption rates.
20 D Fixed overheads were under absorbed by £3,000, this being partly the difference
between budgeted and actual expenditure and partly the production shortfall of 1,000
units.
Overhead absorption rate = £150,000/30,000 = £5 per unit
£
Absorbed overhead (29,000 units £5) 145,000
Actual overheads 148,000
Under-absorbed overhead 3,000
The effect of the production shortfall was partly offset by the difference between
budgeted and actual expenditure.
21 D Budgeted capacity 11,250 hours, absorption rate per hour of £9.20
To calculate budgeted capacity, calculate the budgeted overheads and the overhead
absorption rate. To calculate the overhead absorption rate remember to use the
budgeted data.
The company sold fewer units than it produced is incorrect. It is the levels of
production which bring about under/over absorption.
The company sold fewer units than it produced and spent less than expected on fixed
overheads is incorrect. The company has under absorbed production overheads
because of lower production levels than expected.
Spending less than expected on fixed overheads would, in isolation, lead to over
absorption rather than to the under absorption that occurred.
The company produced fewer units than expected and spent less on fixed overheads
is incorrect. The company has under absorbed overheads because of lower production
levels than expected.
26 A 20,000
Actual overheads = £343,825
Over absorption = £14,025
Absorbed overheads = Actual overheads + over absorbed overheads
= £343,825 + £14,025
= £357,850
If the absorbed overheads = £357,850 then the budgeted overhead absorption rate =
Absorbed overheads/actual labour hours = £357,850/21,050 = £17 per labour hour.
If budgeted overheads for the period were £340,000 and the budgeted overhead
absorption rate is £17 per labour hour, then the budgeted labour hours = budgeted
overheads/overhead absorption rate = £340,000/£17 = 20,000 hours.
If you selected 20,225 hours you calculated the correct absorption rate but then you
divided this into the actual overhead cost. You should have divided it into the
budgeted overhead cost.
If you selected 21,700 hours you subtracted the over absorption to derive the
absorbed overheads. However, if overheads are over absorbed then the amount of
overhead absorbed must be greater than the actual overhead incurred.
27 A £4,000 under-absorbed
When expenditures are as budgeted, but actual and budgeted production activity
levels are different, only fixed overhead can be under or over absorbed.
Under-absorbed overhead = 1,000 hours £4 = £4,000.
Variable overhead absorbed would be (1,000 £2.50) = £2,500 less than in the
original budget, but variable overhead incurred would be £2,500 less as well, leaving
neither under nor over absorbed variable overheads.
28 C £3,400 under-absorbed
Overhead absorption rate = £54,500/((1,700 2) + (2,500 3))
= £5 per machine hour
If you calculated the under or over absorption as £900 you calculated the difference
between the budgeted and actual overheads without taking account of overhead
absorbed by the units produced.
29 C A factor which causes the costs of an activity
The cost driver is the factor which causes the costs of an activity to increase or
decrease. For example, a cost driver for materials handling costs could be the number
of production runs: the higher the number of production runs, the higher will be the
cost of material handling.
'A mechanism for accumulating the costs of an activity' is a description of a cost pool.
'An overhead costs that is caused as a direct consequence of an activity' is a
description of an overhead cost that is attributable to a particular activity.
'A cost relating to more than one product or service' describes a common cost that
must be apportioned.
30 D Activity based costing (ABC) involves tracing resource consumption and costing final
outputs
E Just-in-time (JIT) systems are referred to as 'pull' systems because demand from a
customer pulls products through the production process
JIT purchasing requires that materials are delivered by the supplier, in small quantities
not large quantities, just as they are needed in the production process.
ABC is concerned with all types of overhead cost, including the cost of non factory-
floor activities such as quality control and customer service. It therefore takes cost
accounting beyond its traditional factory floor boundaries.
ABC does not eliminate the need for arbitrary cost apportionment. Some
apportionment may still be required at the pooling stage for items such as rent and
rates.
31 B (1), (2), (3) and (4)
(1) JIT requires close integration of suppliers with the company's manufacturing
process.
(2) To respond immediately to customer requirements, production must be flexible
and in small batch sizes.
(3) JIT systems attempt to reduce set-up times in order to achieve fast throughput.
(4) Each component on a production line is produced only when needed for the next
stage.
32 A When target costing is used, the selling price of a product or service determines its
target cost
B An activity based costing (ABC) system makes some use of volume-related cost drivers
The target cost is derived by deducting the required profit margin from the selling
price.
£58,575 is the direct cost of job A, with no addition for overhead. £101,675 is the
direct cost of both jobs in progress, but with no addition for overhead.
£227,675 is the result of charging all of the overhead to the jobs in progress, but some
of the overhead must be absorbed by the completed job B.
SAMPLE PAPER
40 D £2,400
Idle time is 10% of the hours to be paid for. Hours to be paid for are therefore
= 270/0.9 = 300 hours
Therefore labour cost = 300 hours £8 = £2,400
The answer of 300 is the number of hours to be paid for. This needs to be evaluated at
the hourly rate of £8.
If you selected £2,160 you made no allowance for the extra payment for idle time.
The answer of £2,376 is derived by simply adding 10% to the active hours. However,
the idle time is calculated as a percentage of the total hours paid for, not as a
percentage of the active hours worked.
41 A,F,H
Oil refining involves a continuous manufacturing process of homogeneous output and
therefore is ideally suited to process costing.
Clothing would be manufactured using batches of material, for example of a certain
texture or colour. Production would be halted before the next batch of items of a
particular style is produced. The most appropriate costing method would therefore be
batch costing.
Car repair work would be very varied and each repair would be bespoke. Therefore
neither process nor batch costing would be appropriate but job/contract costing
would be a suitable costing method.
SAMPLE PAPER
If you answered £110,750 you deducted the over absorption instead of adding it to the
calculated profit. The option of £112,000 makes no allowance for the over absorption
and £112,250 is the marginal costing profit for the quarter.
7 D Profits measured using absorption costing may be the same as, or lower than, or
higher than profits measured using marginal costing.
Whether profits under absorption costing are the same as, lower than or higher than
profits under marginal costing depends entirely on opening and closing inventory
figures. For example, if there is no opening or closing inventory, then the two measures
of profit will be the same.
8 A Less operating profit than the absorption costing method
If the number of units in inventory increased then with absorption costing more fixed
overhead will be carried forward in inventory to the next period. Thus operating profits
will be higher than with the marginal costing method.
9 B £5,160 higher
Since production exceeded sales the inventory of 200 units carried forward to the next
period would include fixed production costs of (200 (£25,800/1,000)) = £5,160 with
absorption costing.
Under marginal costing these fixed costs would be charged against the revenue for the
period. Thus the absorption costing profit would be £5,160 higher.
If you selected £24,260 higher or lower you calculated the profit difference as the total
production cost of the 200 units in inventory. However, the difference in inventory
valuation is caused by the differing treatment of the fixed costs only.
Total Machining overhead is £120,000 or £120,000/6,000 per hour = £20 per hour
Machining overhead cost of a unit of Pye is £20 0.5 = £10
Number of hours in Assembly are:
Hours
Pye 4,000 0.20 = 800
Tan 4,000 0.25 = 1,000
1,800
Total Assembly overhead is £72,000 or £72,000/1,800 per hour = £40 per hour
Assembly overhead cost of a unit of Pye is £40 0.2 = £8
Total overhead cost of a unit of Pye is therefore £10 (Machining) + £8 (Assembly) = £18
If you calculated £20 you incorrectly either just used the total Machining overhead per
hour or added together the Machining overhead cost of a Pye and the Assembly
overhead cost of a Tan.
If you calculated £28 you incorrectly added together the Machining overhead cost of a
Tan and the Assembly overhead cost of a Pye.
£24 was just an incorrect answer.
If you selected £271.45 you did not add the general overhead to determine the total
cost per unit.
If you selected £282.31 you simply added 30% (20% + 10%) to the total production
cost in order to determine the selling price. The two percentages should be added
separately and the 20% margin should be determined as a percentage of the selling
price, not as a percentage of cost.
The option of £286.66 is the price derived using a 20% mark up on a cost, rather than a
20% margin on the selling price.
2 B £51.84
Production overhead absorption rate per direct labour hour is:
£61,200/(4,000 2 hours + 6,000 1.5 hours) = £3.60
Product L
£ per unit
Materials 6.00
Labour 30.00
Production overhead (2 hours £3.60) 7.20
Total production cost 43.20
Profit mark up (20% £43.20) 8.64
Selling price 51.84
If you selected £47.52 you calculated the correct production overhead absorption rate
per hour but you forgot to multiply this by 2 to derive the overhead to be absorbed by
product L.
If you selected £54.00 you added a margin of 20% based on the selling price, rather
than a mark up of 20% based on the cost.
If you selected £61.56 you calculated the production overhead absorption rate based
only on the output of product L. However, some of the production overhead will be
absorbed by product T.
3 C £201.60
Since employees are paid on a per unit basis the wage cost is a variable cost, which will
increase in line with the number of binders.
The machine set-up cost and design costs are fixed costs for each batch, which will not
be affected by the number of binders in the batch.
If you selected £189.00 you calculated the cost correctly, but added a profit mark up of
25% of cost, instead of a margin of 25% of selling price.
If you selected £193.20 you failed to absorb the appropriate amount of fixed overhead.
If you selected £252.00 you treated all of the costs as variable costs, even though the
machine set up and design costs are fixed regardless of batch size.
4 C £84,963
£
Opening work in progress 42,790
Labour for period 3,500
Overheads (£3,500/£42,600) £126,000 10,352
Total cost 56,642
Profit (331/3% on sales) 28,321
84,963
If you selected £489 you deducted 30% from the selling price to derive the total cost of
the job.
£996 is the result of deducting the overhead from the selling price, but omitting to
deduct the profit margin.
£1,300 is the total cost of the job; you needed to deduct the overhead to derive the
prime cost.
If you selected £102.62 you included only £9.44 for production overhead. This hourly
rate should have been multiplied by the number of machine hours to determine the
total overhead absorbed.
If you selected £153.14 you forgot to include general overhead when you calculated
the total cost.
If you selected £163.91 you added a mark up of 14% to the total cost, instead of
determining a profit per unit based on the 14% required return on the capital invested.
If you calculated a £720 profit for division B you forgot to include the division's own
costs in the calculation.
If you calculated a £1,440 profit for division B you forgot to include the transfer cost in
the division's total costs.
If you selected the profit of £1,332 for division A and a loss for division B you calculated
the transfer price as £16.80 (£14 + 20%) per unit instead of £12 (£10 + 20%) per unit.
If you selected 1,392 units you deducted the budgeted opening inventory from the
budgeted sales volume and then added the budgeted reduction in inventory. This is
double-counting.
The option of 1,500 units is the budgeted sales volume. This would only be the correct
answer if there was no budgeted change in inventory. Because a reduction in inventory
is budgeted it is possible to produce fewer units in order to satisfy the sales demand.
If you selected 1,512 units you added the inventory reduction instead of deducting it.
As mentioned earlier, a budgeted reduction in inventory means that it is possible to
produce fewer units in order to satisfy the sales demand.
13 D 43,300 litres
Dec Jan Feb
Closing inventory of refined Litres Litres Litres
[30% of next month's sales] 12,000 15,000 9,000
Sales for the month 40,000 50,000
Less opening inventory of refined (12,000) (15,000)
Required refined chemical 43,000 44,000
Closing inventory of unrefined
[30% of next month's requirements of 12,900 13,200
refined]
Total production requirement 56,200
Less opening inventory (12,900)
Budgeted purchases 43,300
If you selected £18,250 you deducted the inventory increase instead of adding it. A
budgeted increase in inventory means that a higher level of purchases are required to
satisfy the sales demand as well as leaving sufficient inventory for the forthcoming
period.
If you selected £19,125 you deducted a profit margin from the £5,000 value of the
inventory. This is incorrect because inventory is valued at cost.
If you selected £25,500 you did not deduct the profit margin from the sales revenue
figure for June. This is incorrect because purchases are valued at cost.
17 D 16,000
Units
Budgeted sales 18,000
Budgeted reduction in finished goods (3,600)
Budgeted production of completed units 14,400
Allowance for defective units (10% of output = 1/9 of input) 1,600
Production budget 16,000
If you selected 12,960 you deducted a 10% allowance for defective units, instead of
adding it.
If you selected 14,400 then this makes no allowance for defective units at all.
If you selected 15,840 then you added 10% to the required completed units to allow
for the defective units, but then 10% should be based on the total number of units
output, ie, 10% of 16,000 = 1,600 units
18 C Raw materials inventories are budgeted to increase
Once the material usage budget has been prepared, based on the budgeted
production volume, the usage is adjusted for the budgeted change in materials
inventories in order to determine the required budgeted purchases. If purchases
exceed production requirements this means that raw material inventories are being
increased.
The first statement is incorrect because wastage would have been allowed for in
determining the material usage budget. A budgeted increase in finished goods
inventory would have been allowed for in determining the production budget and
hence the material usage budget.
If you selected £3,200 you charged a full year's deprecation on the non-current assets,
instead of only six months.
If you selected £3,950 you charged depreciation only from the date that the non-
current assets are paid for. However, depreciation should have been charged for all of
the six months that the assets were in use.
If you selected £8,200 you calculated the gross profit as 50% of the selling price,
instead of one third.
20 B £77,800
£
23% of opening receivables 13,800
40% of March sales 64,000
77,800
Note that an adjustment does not have to be made for the settlement discount in this
case as the question states that 60% of the sales will be settled, rather than that 60% of
the gross invoice value will be received.
21 B £51,592
Payables balance at end of March = February and March purchases
The purchases for each month are equal to the sales requirement for the following
month.
Payables balance at end of March = March and April cost of sales
= £(33,800 + 30,690) 0.8
= £51,592
If you selected £64,490 you calculated the sales value for March and April, rather than
the cost of sales for which credit is obtained.
22 B £6,975
£ £
Sales revenue £120,000 0.98 0.95 111,720
Variable materials cost £24,000 0.9 0.95 20,520
Variable labour cost £32,500 0.95 30,875
Variable overhead £13,000 0.95 12,350
Fixed overhead 41,000
104,745
Budgeted net profit 6,975
If you selected £3,620 you made the common mistake of failing to reduce all of the
variable costs by 5% in line with the reduction in sales volume.
If you selected £9,025 you reduced the budgeted fixed costs by 5%. The fixed costs do
not alter when activity levels change.
If you selected £9,375 you did not take account of the reduction in the selling price.
Be careful when you begin these calculations to ensure that you base them on the
highest and lowest production/output, and not the highest and lowest costs. This could
lead to a different answer, as the highest and lowest outputs do not necessarily
correspond to the highest and lowest costs.
If you selected £3,600 and £9.90 you omitted the fixed cost for department 2.
The combination of £4,000 and £11.70 treats the unit rate for 2,000 in department 1 as
wholly variable, but it is a semi-variable cost.
If you selected £7,600 and £7.50 you forgot to include the variable cost per unit for
department 1.
28 C All of the stated factors can affect the accuracy of any forecast
29 B The value of one variable can be predicted or estimated from the value of one other
variable
D What has happened in the past will provide a reliable guide to the future
Regression analysis assumes that a linear relationship exists (not a curvilinear relationship).
Two variables may have a perfect linear relationship (r = +1 or r = –1) but this is not
necessary for forecasting purposes.
30 A Fixed costs are £100. Variable costs per unit are £20
If C = 100 + 20P, then fixed costs are the constant, £100, and variable costs are £20 per
unit.
31 A Positive correlation means that low values of one variable are associated with low values
of the other, and high values of one variable are associated with high values of the other.
D Negative correlation means that low values of one variable are associated with high values
of the other, and high values of one variable are associated with low values of the other.
Positive correlation means that both variables move together from low to high.
Negative correlation means that as one variable increases, the other decreases.
32 C Diagram (a) represents perfect negative correlation; diagram (b) represents imperfect
positive correlation.
Diagram (a) shows perfect correlation because all the points lie on the line. The
correlation is negative because as X increases, Y decreases.
Diagram (b) shows imperfect correlation because not all the points lie on the line. The
correlation is positive because as X increases, Y increases.
33 A 0.52
2
The coefficient of determination, r , measures the proportion of the total variation in the
value of one variable that can be explained by variations in the value of the other variable.
2 2
r = 0.72 = 0.52
Therefore, only just over half of the variation in one variable can be explained by
variation in the other.
If you selected 0.85 you calculated the square root of 0.72, rather than squaring it to
derive the coefficient of determination.
If you selected 1.44, you multiplied 0.72 by 2 instead of squaring it.
3 C £17,600 inflow
Depreciation and profits and losses on sales are accounting entries only. The only
amount that will appear in the cash budget is the receipt of the £17,600 sale proceeds.
4 B £20,000
July receipts
(Ignore the discounts: the percentages add to 100 so discounts have already been
accounted for)
20% July sales = £5,000
60% June sales = £12,000
10% May sales = £3,000
Total = £20,000
5 A £338,025
Receipts for March:
£
50% March sales for cash (50% £215,000) 107,500
80% February credit sales less 4% discount
(50% 80% £580,500 96%) 222,912
15% January credit sales (50% 15% £101,500) 7,613
338,025
If you selected £347,313 you forgot that receivables who pay in the month after sale
are entitled to a 4% discount.
If you selected £568,550 you calculated the amount to be received from credit
customers as 80% and 15% respectively of total sales, rather than of the credit sales.
The option of £587,125 combines both of the errors discussed.
If you selected £215,675 you forgot to allow for the 4% settlement discount.
The option of £290,284 calculates the receipts on the assumption that the first
customers pay in the month of sale rather than in the month after sale.
If you selected £299,500 you combined both errors.
8 B £25,500
Production of Z Units
Sales requirement 10,000
Closing inventory 15,000
25,000
Opening inventory (14,000)
Budgeted production 11,000
Purchases of W Litres
Purchase requirement (11,000 units 2 litres) 22,000
Closing inventory 15,000
37,000
Opening inventory (20,000)
17,000
Cost at £1.50 per litre £25,500
If you selected £17,000 you forgot to value your answer in litres at a cost of £1.50 per
litre.
If you selected £33,000 you made no allowance for the reduction in materials
inventory.
If you selected £34,500 you reversed both the adjustments for changes in inventory.
If you selected £52,200 you deducted a profit margin of 40% to determine the cost of
goods sold, instead of deducting a 40% mark-up.
If you selected £64,286 you misinterpreted the timings of purchases and calculated the
payments as being the cost of goods sold in May.
If you selected £87,000 you interpreted the timings of purchases correctly but then you
forgot to deduct the profit mark up.
11 A £327,000
£'000
Cost of sales for month = £520,000 70% 364
Increase in trade payables (15)
Decrease in inventory (22)
Budgeted payment to trade payables 327
If you selected an incorrect option you did not deal correctly with the change in trade
payables and inventory balances.
An increase in trade payables will reduce the amount paid to suppliers, since more
credit is being taken. A decrease in inventory will also reduce the amount paid to
suppliers because required purchases will be lower.
If you selected £8,200 you reversed the opening and closing inventory figures for
Month 2.
The cost of sales of £10,000 for Month 3 is the incorrect figure.
If you selected £10,200 you have calculated the purchases figure for Month 3.
However, the question asks for the budgeted payment for Month 3, which represents
Month 2 purchases.
13 C £50,200
Payments in June will be in respect of May purchases.
May
Production requirements (8,400 units 3 kg) 25,200 kg
Closing inventory 4,100 kg
29,300 kg
Less opening inventory 4,200 kg
Purchase budget 25,100 kg
25,100 kg £2 per kg = payment for purchases in June £50,200
If you selected £25,100 this is the figure for quantity of material to be paid for, not its
value.
The option of £48,800 is the value of June purchases, which will be paid for in July.
If you selected £50,600 your adjustments for opening and closing material inventories
were the wrong way round.
14 B £231,000
£
75% May wages cost = 75% 8,400 £7 4 hours 176,400
25% April wages cost = 25% 7,800 £7 4 hours 54,600
Wage payments for May 231,000
If you selected £222,600 you calculated the payment the wrong way round as 25% of
May wages cost and 75% of April wages cost.
If you selected £233,800 you calculated the payment as 75% to be paid in the month
and 25% in advance for the following month.
The option of £235,200 is the labour cost for May, which makes no allowance for the
timing of cost payments.
If you selected £31,000 you calculated the effect of the 30 days increase in the
collection period based on only the increase in the sales revenue, rather than on all of
the sales revenue.
If you selected £95,000 you took no account at all of the increase in sales revenue and
if you selected £113,000 you reversed the adjustments for the changes in inventories
and trade payables. An increase in inventories means that more money will be invested
in working capital and the reverse applies for payables.
16 B,D,E
In order to improve cashflow, a business needs to decrease receivables, decrease
inventory and increase the credit period taken from suppliers.
17 C Arrange an overdraft
D Implement better credit control procedures
Arranging short-term finance in the form of an overdraft, and encouraging receivables
to pay sooner will alleviate the short-term cash deficit problem.
Paying payables early would exacerbate the situation and issuing shares is most
appropriate for long-term finance.
Replacing non-current assets would not provide any extra cash with immediate effect,
thereby making the situation worse in the short term.
18 D Maximum £12,000
End of June £8,000
Jan Feb Mar Apr May Jun
Payments to suppliers £'000 £'000 £'000 £'000 £'000 £'000
Current month 50%* 3 4 6 5 4 4
Following month 50% – 3 4 6 5 4
Revised payments 3 7 10 11 9 8
Payments in original
budget 6 8 12 10 8 4
Change in cash flow 3 1 2 (1) (1) (4)
Previous
inflow/(outflow) (5) (9) (5) – 2 7
Revised cash flow (2) (8) (3) (1) 1 3
Balance b/f 2 – (8) (11) (12) (11)
Revised balance c/f – (8) (11) (12) (11) (8)
If you selected £280,000 or £699,000 you valued the trade payables and the
inventories respectively at sales value. However, as far as the company's working
capital is concerned, their investment amounts to the cost value of these elements.
If you selected £567,000 you added the trade payables figure, but the availability of
trade credit reduces the required investment in working capital.
22 C 17 weeks
Weeks
Raw materials 3
Payables (6)
Production 2
Finished goods 7
Receivables 11
17
If you selected 29 weeks you added the payables period instead of deducting it.
However, the availability of credit from suppliers reduces the cash operating cycle.
If you calculated the operating cycle to be 174 days you made the common mistake of
basing the calculation for raw materials inventory and payables on the figure for cost of
goods sold. If the purchases figure is not available then this might be acceptable but
the use of the purchases figure is more accurate.
24 A Lower net operating cash inflow
D Slower inventory turnover
When the cash cycle lengthens, there will be a slow-down in operating cash inflows,
and net cash inflow will be lower. The reasons for a longer cash cycle could be a slower
inventory turnover, a lengthening of the average credit period taken by customers
and/or paying suppliers sooner. Net assets will be either increased or remain the same,
depending on how the extra working capital is financed. Net assets should not
decrease, however, and so net asset turnover should not rise.
25 B 66 days
Average inventory = £170,000
Inventory period = (170/2,000) 365 = 31.03 days
Sales value = £2,000,000 100/80 = £2,500,000
Credit sales = £1,250,000
Average receivables = £210,000
Receivables period = (210/1,250) 365 = 61.32 days
Purchases = cost of goods sold + inventory increase
= £2,000,000 + £100,000
= £2,100,000
Average payables = £150,000
Payables period = (150/2,100) 365 = (26.07) days
If you selected 65 days you based your payables calculation on the cost of goods sold.
Since credit is received on the purchases for the year, this should be the basis of the
calculation.
If you selected 68 days you miscalculated the sales revenue using a 20% mark up
rather than a 20% margin.
If you selected 118 days you added together the days for each element of working
capital. However, the payables period, during which the company takes credit from
suppliers, reduces the length of the cycle and hence should be deducted.
2 cd 2 64 10,000
EOQ = = = 1,600 boxes
h 0.5
44 C The ABC system is the most suitable. It aims to reduce the work involved in inventory
control in a business which may have several thousand types of inventory items. It is a
technique which divides inventory into sub-classifications based on their annual usage
and involves using different control systems for each classification.
45 D All businesses face a trade-off between being profitable (providing a return) and being
liquid (staying in business).
46 A,C,F
Credit control – Yes
Short-term investment – Yes
Capital investment appraisal – No
Treasury management involves managing cash surpluses and deficits by making short-
term investments, and also managing working capital from day to day so as to optimise
cash flow, including inventory, receivables (credit control) and payables management.
Credit control in many businesses is managed jointly by the treasury management and
recording transactions (receivables ledger) departments, via a separate credit control
department. Management accounting will attend to capital investment appraisal.
32 A Although cloud accounting applications are designed for ease of use, a company will
still need trained accounting staff (option B), and it will still have its own internal
management reporting timetables to adhere to (option D). Internet access is vital for
cloud accounting applications (option D). However, it will no longer need to worry
about the management of accounting software updates, as the provider will include
that in its subscription fee (option A).
34 C, F
Options C and F focus on the internal customer. Number of complaints and reports
delivered to department heads on time will both measure customer satisfaction levels.
Cost per accounting transaction processed = financial perspective
Time saved updating payroll file for overtime payments = internal business perspective
Number of new projects set up = internal business perspective
Training days per employee = innovation and learning perspective
If you calculated the variance to be £286 you based your calculations on the materials
issued to production. However, the material inventory account is maintained at
standard cost, therefore the material price variance is calculated when the materials
are purchased. If you selected £328 favourable you calculated the size of the variance
correctly but you misinterpreted it as favourable. SAMPLE PAPER
5 B £152 adverse
870 units did use 7,150 kg
But should have used ( 8 kg) 6,960 kg
Usage variance in kg 190 (A)
Usage variance in £ = (190 kg standard price per kg £0.80) £152 A
If you selected £152 favourable you calculated the size of the variance correctly but
you misinterpreted it as favourable.
If you selected £159.60 adverse you evaluated the usage variance in kg at the actual
price per kg, instead of the standard price per kg.
The result of £280 adverse bases the calculation of standard usage on the budgeted
production of 850 units. This is not comparing like with like. The comparison should be
based on a flexed budget for the actual production level. SAMPLE PAPER
If you selected £415.80 (A) you valued the labour efficiency in hours at the actual rate
instead of the standard rate.
If you selected £420 (F) you calculated the correct money value of the variance but you
misinterpreted its direction.
The option of £710 favourable is the direct labour total variance.
8 B £672 adverse
Standard variable overhead cost per unit = £3,120/520 units = £6 per unit
£
Standard variable overhead cost for 560 units ( £6) 3,360
Actual variable overhead cost 4,032
672 adverse
If you selected £240 adverse you compared the standard cost for 560 units with the
standard cost for 520 units. This indicates the volume effect of the change in output
but it is not the variable production overhead total variance.
If you selected £672 favourable you calculated the correct money value of the variance
but you misinterpreted its direction.
The variance of £912 adverse is the difference between the standard cost for 520 units
and the actual cost for 560 units. This is not a valid comparison for control purposes
because of the different output volumes.
If you selected £448 adverse you calculated the correct money value of the variance
but you misinterpreted its direction.
The variance of £912 adverse is the difference between the standard cost for 520 units
and the actual cost for 560 units. This is not a valid comparison for control purposes
because of the different output volumes.
10 B £1,120 adverse
Standard time allowed for one unit = 1,560 hours/520 units
= 3 hours/unit
Standard variable production overhead cost per hour = £3,120/1,560
= £2/hour
560 units should take ( 3 hours) 1,680 hrs
But did take 2,240 hrs
Efficiency variance in hours 560 hrs (A)
Efficiency variance in £ = (Efficiency variance in hours standard
variable production overhead per hour £2) £1,120 (A)
If you selected £1,008 adverse you valued the efficiency variance in hours at the actual
variable production overhead rate per hour.
If you selected £1,120 favourable you calculated the correct money value of the
variance but you misinterpreted its direction.
If you selected £1,360 adverse you based your calculation on the difference between
the original budgeted hours for 520 units and the actual hours worked for 560 units.
This is not comparing like with like. You should have flexed the allowance for
comparison purposes.
11 A £1,200 adverse
£
Budgeted fixed overhead cost £10 1,000 10,000
Actual fixed overhead cost 11,200
Fixed overhead expenditure variance 1,200 (A)
If you calculated the variance to be £800 you flexed the budget cost allowance for
fixed overhead. By definition, the budgeted expenditure on fixed overhead does not
alter when the activity level changes.
If you calculated a sales price variance of £2,000 favourable you simply calculated the
extra sales revenue that would have been achieved if the budgeted sales volume had
been sold at the higher price. Variances must be based on a flexed budget for the
actual volume achieved.
If you calculated a sales volume variance of £2,000 adverse you calculated the
reduction in budgeted sales revenue due to the reduction in sales volume. However,
the sales volume variance measures the reduction in budgeted contribution due to the
actual sales volume being lower than budgeted.
13 A All sales variances and all marginal cost variances
Budgeted contribution is different from actual contribution because of all of the sales
and marginal cost variances which have arisen.
14 A £424,810
Favourable Adverse
£ £ £
Budgeted contribution 83,000 £8 664,000
Variances
Sales volume 42,400
Sales price 7,310
Material total 7,720
Labour total 6,450
Variable overhead total – 4,250
15,030 53,100 38,070 (A)
Actual contribution 625,930
Budgeted fixed overhead 210,000
Fixed overhead expenditure variance 8,880 (F)
201,120
Actual profit 424,810
If you calculated the profit to be £435,650 you double-counted the material price
variance, which would be included within the material total variance.
If you selected £483,190 you added the adverse variances to the budgeted
contribution and deducted the favourable variances. However, an adverse variance will
reduce the actual profit to a result below the budgeted profit and vice versa for
favourable variances.
If you selected £634,810 you forgot to deduct the budgeted fixed overhead.
If you selected £34,000 you adjusted for the fixed overheads under budget by
subtracting them instead of adding them to the actual expenditure. £66,000 is the
budgeted variable overhead expenditure for the actual production and £116,000 is the
total budgeted overhead for the period.
28 D (Actual output) (Standard machine hours per unit)
Absorption costing always uses the budgeted (or standard) production time, as flexed
by the actual output in a period. This means that the actual output is multiplied by the
standard machine hours per unit in order to establish a flexed budget of machine
hours for the actual production. The value of overheads absorbed would therefore be
the absorption rate multiplied by this flexed budget.
If you selected (planned output) (standard machine hours per unit) then the result
would be the budgeted level of absorbed overhead rather than the actual absorbed
overhead.
If you selected (actual output) (actual machine hours per unit) then the result would
include any production efficiencies or inefficiencies in the actual machine hours and
this would result in an incorrect calculation of absorbed overhead.
If you selected (planned output) (actual machine hours per unit) then you have
reversed the selections you should have made. SAMPLE PAPER
If you selected 2,000 units you divided the fixed cost by the selling price, but
remember that the selling price also has to cover the variable cost.
The option of 4,000 units is the margin of safety, and if you selected 6,000 units you
seem to have divided the fixed cost by the variable cost per unit.
4 A 20%
Breakeven point = Fixed costs/Contribution per unit
= £96,000/(£12 – £8)
= 24,000 units
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 259
5 A 2,000
Breakeven point = Fixed costs/Contribution ratio
= £76,800/0.40
= £192,000
Actual sales = £224,000
Margin of safety = £224,000 – £192,000
= £32,000
Margin of safety in units = £32,000/£16
= 2,000 units
If you selected 12,000 units you calculated the breakeven point in units, but forgot to
take the next step to calculate the margin of safety.
14,000 is the actual sales in units and 32,000 is the margin of safety in terms of sales
value.
6 C £300,000
Total fixed costs = £137,500 + £27,500
= £165,000
Contribution ratio = £275,000/£500,000
= 0.55
Breakeven sales revenue = Fixed costs/Contribution ratio
= £165,000/0.55
= £300,000
If you selected £250,000 you included only the fixed production costs in your
breakeven calculation. However, all fixed costs must be covered by the contribution in
order to breakeven.
If you selected £366,667 you misread the question and treated the £275,000 as
variable cost rather than as the budgeted contribution.
7 B £100,000
Margin of safety = 20% 5,000 units
= 1,000 units
Breakeven sales = Budget sales – Margin of safety
= (5,000 – 1,000) units
= 4,000 units
Breakeven sales volume = Total fixed costs/Contribution per unit
4,000 = Total fixed costs/£25
Total fixed costs = 4,000 £25
= £100,000
If you selected £25,000 or £125,000 you calculated the monthly profit and contribution
respectively, rather than the fixed costs.
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 261
11 A £330
Currently weekly contribution = 12% £280,000 = £33,600
£
Extra contribution from 5% increase in sales = 5% £33,600 1,680
Loss on product Z each week 3,000 (1.90 – 2.20 – 0.15) (1,350)
Weekly increase in profit 330
If you selected £780 you forgot to allow for the variable cost of distributing the 3,000
units of Z.
If you selected £5,700 you made no allowances for the variable costs of either product
Z or the extra sales of other products.
The option of £12,650 is based on a 5% increase in revenue from the other products;
however extra variable costs will be incurred, therefore the gain will be a 5% increase
in contribution.
12 C 7,132
Current profit = Total contribution – Fixed costs
= (8,000 £8) – £24,400
= £39,600
Required profit = £39,600
If the new production methods are implemented the required contribution will be:
Required contribution = Revised fixed costs + Required profit
= (£24,400 1.30) + £39,600
= £31,720 + £39,600
= £71,320
Contribution required
Required sales =
Contribution per unit (revised)
= £71,320/(£15 – £5)
= 7,132 units
If you selected 3,960 units you did not add the revised fixed costs to the required
contribution figure. The fixed costs must be covered before any profit can be earned.
If you selected 4,755 units you divided the required contribution by the selling price
but this does not take account of the need to cover the variable costs.
If you selected 8,915 units you assumed that a £1 change in both the variable cost and
the selling price would leave the contribution per unit unaltered.
13 B (1) and (3) only
Statement (1) is correct. The line which passes through the origin indicates the sales
revenue at various levels of activity. At an activity level of 10,000 units, the sales
revenue is £100,000 therefore the selling price is £10 per unit.
Statement (2) is incorrect. The sloping line which intercepts the vertical axis at £30,000
shows the total cost at various levels of activity. The total cost for 10,000 units is
£80,000, from which we subtract the £30,000 fixed costs to derive the variable cost of
10,000 units, which is £50,000. Therefore the variable cost per unit is £5.
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 263
17 A B then A then T
This answer ranks the products by contribution per kg of material (the limiting factor).
B A T Total
Maximum sales (units) 1,000 1,200 1,500 N/A
Material kg needed 1,000 2,400 4,500 7,900
Labour hours needed 2,000 2,400 4,500 8,900
Thus, labour is not a limiting factor but material is a limiting factor.
The products must be ranked according to their contribution per kg of material.
B A T
Contribution per unit (£) £50 £60 £55
Kg of material per unit 1 2 3
Contribution per kg of material (£) £50 £30 £18.33
Rank by contribution per kg of
material 1 2 3
18 C Contribution: £600,000, Profit: Insufficient information to calculate
To maximise contribution, we must produce the product with the greatest contribution
per £ spent on labour.
X Y Z
£ per unit £ per unit £ per unit
Contribution per unit 50 40 60
Labour cost per unit 30 10 5
Contribution per £ of labour 1.67 4 12
Ranking 3 2 1
Thus the company will make £50,000/5 = 10,000 units of Z.
This will produce 10,000 £60 = £600,000 of contribution.
Remember that the fixed costs per unit are based on budgeted production quantities
(not actual production) and as we do not know these quantities we cannot calculate
budgeted monthly fixed costs. Therefore there is insufficient information to calculate
the profit.
19 B £5,700
We begin by calculating the contribution per unit of limiting factor.
Priority
ranking
Scratch = £6/2 = £3 per labour hour 1
Purr = £7/3 = £2.33 per labour hour 3
Buzz = £8/3 = £2.66 per labour hour 2
Hours Contribution
Production priorities 1st Scratch
(700 units 2 hours) 1,400 (700 £6) £4,200
2nd Buzz
(400 units 3 hours) 1,200 (400 £8) £3,200
2,600 7,400
Less fixed costs (1,700)
Maximum profit £5,700
achievable
If you selected £5,062 you allocated the available hours according to the contribution
earned per unit of product. However, this does not take account of the limiting factor.
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 265
22 A X: 130 units, Y: 840 units, Z: 100 units
X Y Z
Unit contribution £82 £108 £100
Kg required per unit 2 kg 1 kg 3 kg
Contribution per kg £41 £108 £33.33
Ranking 2 1 3
kg used
Produce 100 units of Z for contract ( 3 kg) 300
Produce 130 units of Y for contract ( 1 kg) 130
430
Produce remaining (840 – 130) units of Y ( 1 kg) 710
Use balance to produce 130 units of X ( 2 kg) 260
1,400
If you decided not to produce any units of Z you took no account of the requirement to
produce 100 units of Z.
If you decided not to produce any units of X you ranked the products on the basis of
unit profit and took no account of the contract.
If you decided to produce only one unit of X you ranked the products on the basis of
contribution per unit.
23 D Alpha: Produce 4,000 units
Beta: Produce 2,000 units, Buy in 2,000 units
The units subcontracted should be those which add least to the costs of Green Ltd. The
cheapest policy is to subcontract work which adds the least extra cost per machine
hour saved.
Alpha Beta
£ £
Variable cost of internal manufacture 20 36
Variable cost of buying 29 40
Extra variable cost of buying 9 4
Machine hours saved by buying 3 hours 2 hours
Extra cost of buying, per hour saved £3 £2
It is cheaper to buy Betas than to buy Alphas. Therefore the priority for making the
components in-house will be to allocate the available hours to the manufacture of
Alphas.
Production Hours Hours
Component Units per unit allocated
Alpha 4,000 3 12,000
Beta 2,000 2 4,000
16,000
The remaining 2,000 units of Beta should be purchased from the sub-contractor.
SAMPLE PAPER
It is cheaper to buy Auras than to buy Ventas. Therefore the priority for making the
components in-house will be to allocate the available hours to the manufacture of
Ventas.
Production Hours Hours
Component Units per unit allocated
Venta 400 20 8,000
Aura 233 30 7,000
15,000
The remaining 167 units of Aura should be purchased from the sub-contractor.
25 D X 4,000 Y 3,000 Z 4,500
This question relates to limiting factor analysis. The key to these questions is ranking
the contribution per unit of the limiting factor, in this case Grunch. In this question the
contribution per unit of Grunch will be calculated pre-fixed costs, as these will be
constant whatever production schedule is chosen.
Product X: Contribution = £1.50 and £1.50/0.3 = £5 contribution per kg of Grunch
Product Y: Contribution = £1.60 and £1.60/0.40 = £4 contribution per kg of Grunch
Product Z: Contribution = £2.40 and £2.40/0.80 = £3 contribution per kg of Grunch
The ranking of the products is therefore X, Y, Z.
The production schedule that will maximise profit will therefore be:
4,000 units of X (maximum demand), utilising 4,000 0.3 kg of Grunch, ie, 1,200kg
3,000 units of Y (maximum demand), utilising 3,000 0.4 kg of Grunch, ie, 1,200kg
This is a total of 2,400 kg and therefore 3,600 kg of the 6,000 kg will be available to
manufacture Product Z. This will produce 3,600/0.8 units = 4,500 units.
Any other production schedule will not maximise profit. SAMPLE PAPER
ICAEW 2019 Chapter 10: Breakeven analysis and limiting factor analysis 267
26 D 11,967 units
The first step is to calculate the profit achieved in 20X7. Contribution is £120 per unit
and 12,000 units were produced and sold generating £120 12,000 = £1,440,000.
Fixed costs were £20 10,000 (per the budget) = £200,000 meaning the net profit was
£1,240,000.
In 20X8 the unit selling price will be £200 1.05 = £210. Unit variable costs will be £80
1.1 = £88. The unit contribution is therefore (£210 – £88) = £122. In 20X8 fixed costs
will be £200,000 1.1 = £220,000.
Profits in 20X8 are the same as 20X7, ie, £1,240,000, meaning the contribution must be
£1,240,000 + £220,000 = £1,460,000. The number of units sold to generate this
contribution will be £1,460,000/£122 = 11,967.
If you calculated the number of units as 12,000 then you probably incorrectly
calculated the fixed costs in 20X7 as £20 12,000 = £240,000 and the 20X7 profits as
£1,200,000. This would mean that you calculated the 20X8 fixed costs as £240,000
1.1 = £264,000 and therefore the required contribution in 20X8 as £1,464,000. At a
unit contribution of £122 this would mean 12,000 units.
If you calculated the number of units as 11,639 then you probably also incorrectly
calculated the fixed costs in 20X7 as £20 12,000 = £240,000 and the 20X7 profits as
£1,200,000. However, in 20X8 you correctly calculated the fixed costs as 10,000 £20
1.1 = £220,000 and therefore the required contribution in 20X8 as £1,420,000. At a
unit contribution of £122 this would mean 11,639 units.
If you selected an NPV of £3,013 you treated the £5,000 cash flow as occurring in Year
1 and discounted it. Cash flows occurring 'now' should not be discounted.
This is the present value of the cash flows without any revenue from the contract. The
minimum acceptable contract price is the terminal value (TV) at the end of Year 2.
TV 10% discount factor for Year 2 = PV
TV = £150,696/0.826
= £182,441
If you selected £151,000 you calculated the correct present value of the cash flows but
did not allow for the fact that the contract revenue was to be received at the end of
Year 2.
16 B Project I because it has the higher net present value
The NPV method is superior to all the other criteria for investment appraisal.
17 A True and True
Consider the following three projects.
Time A B C
£ £ £
0 (200) (200) (200)
1 100 50 40
2 100 50 40
3 100 50 40
4 100 50 40
Ranking under:
Payback (2 years) 1 (4 years) 2 (–) 3
NPV at 10% (£117) 1 (– £41) 2 (–£73) 3
IRR (+35%) 1 (0%) 2 (–8%) 3
NPV NPV
24 B Six years
This is calculated as follows:
Cumulative
Year Cashflow cashflow
£ £
0 (400,000) (400,000)
1 70,000 (330,000)
2 70,000 (260,000)
3 70,000 (190,000)
4 70,000 (120,000)
5 70,000 (50,000)
6 50,000 0
This means the payback period is exactly six years.
25 C 6.25 years
The discounted payback period is calculated as follows:
Cumulative
Discounted discounted
Year Cashflow DCF cashflow cashflow
£ £ £
0 (300,000) 1.000 (300,000) (300,000)
1–5 70,000 3.791 265,370 (34,630)
6 50,000 0.564 28,200 (6,430)
7 50,000 0.513 25,650 19,220
This means the discounted payback period is 6 + [£6,430/£25,650] years = 6.25 years
26 A,E A project's IRR is the return at which the net present value (NPV) of the cash flows is
zero. The IRR is therefore independent of a company's cost of capital. The revision to
the cost of capital by the project analyst will therefore not impact on the IRR, hence
there is no change.
A project's DPP is the period of time taken for the project's cumulative discounted cash
flows to turn from the initial negative outflow to a cumulative positive position. The
revision to the cost of capital from 10% to 12% will reduce each future discounted cash
inflow, and therefore increase the time taken for the cumulative discounted cash flows
to become positive. SAMPLE PAPER
10% %
7% %
£ Project Z
5% 50%
£22,600 ¸ £60,000 = 38%, ie, incorrect using the initial investment and average cash
flow SAMPLE PAPER
31 C £50,000
The cash flows for the project are:
T0 –£200,000
T1 +£20,000
T2 +£25,000 and each year thereafter
The T0 outflow is not discounted.
The T1 inflow is discounted for one year at 8%, giving a NPV of £20,000/(1.08) =
£18,519
Thereafter we have a perpetuity at a discount rate of 10% starting after one year. The
perpetuity factor is 1/0.1 = 10, and therefore the NPV is £25,000 10/1.08 = £231,481.
The NPV of the project is therefore (–£200,000 + £18,519 + £231,481) = £50,000
B Incorrectly discounting the perpetuity back from T1 at 10% (rather than 8%) gives
£25,000 10/1.1 = £227,273 + £18,519 – £200,000 =
£45,792 ie, £45,800
£25,000 10
Discounting the perpetuity as = £210,438
1.1 1.08
1 Sunshine Ltd
Calculate the total value of the closing inventory for each product under marginal costing:
£ Workings*
Standard 14,000 1,000 × (6 + 6 + 2)
Calculate the fixed overhead absorption rate per labour hour for April:
£ per labour hour
Fixed overhead 10
absorption rate
3 marks
WORKINGS
Labour hours = (6/10 10,000) + (2/10 6,000) + (4/10 4,000)
= 8,800 hours
Fixed overhead absorption rate = Fixed overheads/Labour hours
= £88,000/8,800 hours
= £10 per hour
Calculate the total value of the closing inventory for May for each product under absorption
costing.
£ Workings*
Standard 33,000 19,500 + (6/10 15) 1,500
3 Numan Ltd
Calculate the budgeted prime cost per Gazza for March:
£296 2.5 marks Direct materials + direct labour = 48 × 5 + 16 × 3.5
Calculate the actual absorption cost per Gazza for March:
£580 (or £581) 2.5 marks 4.5 × 52 + 16 × 3.5 + 6 × 3.5 + 4.5 × 52 × 1.15
Calculate the selling price per Gazza in April:
£888 2.5 marks 592/0.666667
Calculate the actual absorption cost per Gazza in May:
£469 (or £470) 2.5 marks (4.5 × 52 + 16 × 3 + 6 × 3) + (4.5 × 52 + 16 × 3) × 0.6
Calculate the actual marginal cost per Gazza in June:
£282 3 marks 5 × 48 × 0.9 + 3 × 16 + 3 × 6
Using a corrected marginal cost of £302 and a target mark-up on absorption cost of 22%,
calculate the selling price for July:
£437 (or £436) 2 marks (302 + 56) × 1.22
Calculate the difference in the selling price of Gazzas that results from switching from a fixed
overhead absorption rate based on Gazza's labour hours to a blanket fixed overhead
absorption rate based on all of Numan's products:
£12 (or £11) 3 marks *441.64 – 453.84 = 12.2
*Fixed overhead rate based on labour hours = 3 × £82,650/3 × 1,450 = £57 per unit
Fixed overhead per unit + variable cost per unit = £57 + £305 = £362. Price per unit = £362
1.22 = £441.64
Blanket overhead rate = £1,239,500/18,500 = £67 per unit
Overhead per unit + variable cost per unit = £67 + £305 = £372. Price per unit = £372 × 1.22 =
£453.84
Calculate the total under or over absorption of fixed overheads for all of Numan's products
using the blanket rate in August:
£13,875 2 marks, 1 for 13,875 1,239,500 – 18,500 ×
Under absorption and 1 for under 66.25 = 13,875
6 Basket Ltd
Calculate the budgeted prime cost per Large Hamper for January:
£54 2 marks Direct materials + direct labour = 6 × 5 + 3 × 8
Calculate the actual absorption cost per Medium Hamper in January:
£144 3 marks 6 × 4 + 8 × 3 + 2 × 3 + £90*
*Hours worked relating to the Medium Hamper = 2,400 hours/3 = 800 hours
Fixed overhead cost per hour = £24,000/800 hours = £30 per hour
Fixed overhead cost per Medium Hamper = £30 × 3 = £90
Calculate the total under or over absorption of fixed overheads for all three hamper sizes using
Basket's wide blanket absorption rate in April:
£26,000 2 marks, 1 for 26,000 88,000 – (3 × 1,000) × 38
Over absorption and 1 for over = 26,000
8 Borehole Ltd
Calculate the total value of the cost of sales for each pump for May using marginal costing:
£ Workings
High load 46,350 (250 – 25) × (150 + 36 + 20)
Standard load 66,230 (400 – 30) × (125 + 36 + 18)
Low load 71,540 (500 – 10) × (100 + 30 + 16)
1 mark each item, maximum 3 marks
Calculate the fixed overhead absorption rate as a percentage of the labour cost for May:
% of labour cost Workings
Fixed overhead absorption 57 (or 58) 22,000/(250 × 36 + 400 × 36 + 500 × 30)
rate
3 marks (give 1 mark for
an answer of 0.57 or 0.58)
Calculate the total value of the closing inventory for each pump type for June using marginal
costing.
£ Workings
High load 4,168 4,600 – 20 × (36/10) × 6
Standard load 5,352 6,000 – 30 × (36/10) × 6
Low load 710 800 – 5 × (30/10) × 6
0.5 mark each item, maximum 1.5 marks
Assuming there was a total of £1,170 of fixed production overheads included in the absorption
costing value of opening inventory, complete the table below which calculates Borehole's
profit for July under both marginal costing and absorption costing.
Marginal Workings Absorption Workings Do not
costing costing score items
£ £ marked *
Sales revenue
High load 86,400 270 × 320 86,400* 1 mark
Standard load 98,900 230 × 430 98,900* 1 mark
Low load 117,975 195 × 605 117,975* 1 mark
Total sales 303,275* 303,275*
revenue
Total marginal (224,230) 256,400 –
cost of sales 31,000 –
1,170 ie,
remove
fixed
overheads
from
absorption
cost of sales
9 Hector plc
Allocate and apportion the overheads to the four departments:
Service 1 Service 2 Canteen Administration Marks Workings
£ £ £ £
Rent and 150,000 200,000 75,000 75,000 0.5 each 3,000:4,000:
business rates (2 marks total) 1,500:1,500
Fixtures 240,000 160,000 100,000 200,000 0.5 each 120:80:50:
depreciation (2 marks total) 100
Electricity, gas 52,500 70,000 26,250 26,250 0.5 each 3,000:4,000:
and water (2 marks total) 1,500:1,500
Supervisors' 300,000 225,000 37,500 187,500 0.5 each 40:30:5:25
salaries (2 marks total)
Canteen costs 0 0 50,000 0 2 (for Direct
50,000) allocation net
and all three of takings
others either 0 (60,000 –
or – 10,000)
Calculate the budgeted overhead absorption rate as a percentage of labour cost in Service 2:
33% (or 34%) 1 mark 980/2,940 × 100
Calculate the under or over absorption of overheads in Service 1:
£82,560 1 mark for £82,560 (5,344 – 5,000) ×
Over absorption 1 mark for over 1,200,000/5,000
Calculate the budgeted overhead absorption rate as a percentage of labour cost in the
Cabinets department:
533% 1 mark 400,000/(75,000)
(0.5 mark for 5.33 or 534 or 5.34)
Calculate the under or over absorption of overheads in the Worktops department:
–8,175 1 mark for –8,175 (allow 8,175) (33,365 – 35,000) 5
Under absorption 1 mark for under
11 Jitinder plc
Calculate the profit or loss for February using both absorption costing and marginal costing:
Enter costs as negative values.
Absorption Marginal Marks Workings
£ £ £ £
Sales 132,000 132,000 1, 0.5 (max 1.5) 440 × 300
Variable 46,200 46,200 0.5, 0.5 allow 420 × (4 × 15 +
production –ves (max 1) 2.5 × 16 + 10)
costs
Fixed 16,800 0 1.5 allow –ve, 420 ×
production 0.5 for 0 or 192,000/4,800
costs dash (max 2)
absorbed
Opening 8,250 6,050 0.5, 0.5 allow 55 × (4 × 15 +
inventory –ves (max 1) 2.5 × 16 + 10 +
192,000/ 4,800)
and 55 × (4 × 15
+ 2.5 × 16 + 10)
Closing (5,250) (3,850) 1, 1 allow +ves 35 × (4 × 15 +
inventory (max 2) 2.5 × 16 + 10 +
192,000/ 4,800)
and (35 × 4 × 15
+ 2.5 × 16 + 10)
Production (66,000) (48,400) 0.5 each Opg + prodn –
cost of sales (max 1) clsg
Under/over 426 0 2 for 426, 1 for 16,374 – 420 ×
absorption –426, 1 for 0 or (192,000/4,800)
dash (max 3)
Variable (3,080) (3,080) 1, 0.5 for –ves 7 × 440
selling, or 0.5, 0.5 for
administration +ves (max 1.5)
and
distribution
12 Flag Ltd
Calculate Flag's profit or loss for the quarter September to November under both marginal
costing and absorption costing:
Enter costs as negative values.
Absorption Marginal Marks Workings
£ £ £ £
Sales 147,525 147,525 1, 0.5 4,215 × 35
(1.5 max)
Variable 46,200 46,200 0.5, 0.5 4,200 × (3.5 + 6.5
production allow –ves + 1)
costs (1 max)
Fixed 16,800 0 1.5 allow 4,200 × 4
production –ve, 0.5 for
costs 0 or dash
absorbed (2 max)
Opening 1,725 1,265 0.5, 0.5 115 × (3.5 + 6.5 +
inventory allow –ves 1 + 4) and 115 ×
(1 max) (3.5 + 6.5 + 1)
Closing (1,500) (1,100) 1, 1 allow 100 × (3.5 + 6.5 +
inventory +ves (2 max) 1 + 4) and 100 ×
(3.5 + 6.5 + 1)
Production cost (63,225) (46,365) 0.5 each for Opening +
of sales –ve (1 max) Production
– Closing
Under/over (800) 0 2 for –740 or (4,200 – 4,400) × 4
absorption 1 for 740,
1 for 0 or
dash (3 max)
13 Hexabeast plc
Complete the table below to generate the operating statement for August:
Make one entry (adverse or favourable) for each variance and enter a zero or dash in the other
column.
Enter the net total of adverse and favourable variances as either a positive number (favourable
total) or negative number (adverse total) in the final column.
Operating statement for August
Favourable Adverse Marks Workings
£ £ £
Budgeted 111,600 2 1,200 × (199.50 – 24 – 66 –
contribution 16.50)
Sales volume 8,370 0 1.5 (1,290 – 1,200) × (199.50 – 24
variance – 66 – 16.50)
14 Yarn & Co
Complete the operating statement table below for the month of November:
Make one entry (adverse or favourable) for each variance and enter a zero or dash in the other
column.
Enter the net total of adverse and favourable variances as either a positive number (favourable
total) or negative number (adverse total) in the final column.
Favourable Adverse Marks Workings
£ £ £
Budgeted 30,000 1.5 1,200 × (105 – 40 – 24 –
contribution 16)
Materials price – 3,280 2 allow –ve (2,200 adv – fav usage var
below of 1,080) = –3,280
Labour variances
The information in the question allows us to calculate the labour efficiency variance:
Labour efficiency variance
1,320 units should have taken ( 4 hours) 5,280 hrs
but did take 5,200 hrs
Efficiency variance in hours 80 hrs (F)
Standard rate per hour × £10
Efficiency variance in £ £800 (F)
We are given the total variance in the question and now we know the usage variance. We can
calculate the price variance because usage + price = total variance.
Total variance = £1,080 (F) + price = £2,200 (A)
Price variance = £2,200 (A) + £1,080 = £3,280 (A)
Variable overhead expenditure variance
£
5,200 hours of variable overhead should cost ( £4.00) 20,800
but did cost 23,400
Variable overhead expenditure variance 2,600 (A)
16 Kaytering plc
Calculate the number of meals (to the nearest whole meal) that would need to be sold to earn
a profit of £4,000 per week.
Number of meals per week 772 3 marks
Number of meals sold per week = £42,000/£60 = 700
Variable cost per meal = (£23,100 + £4,200 + (£5,100 – £3,000))/700
= £42.00
Contribution per meal = £60.00 – £42.00 = £18.00
Number of meal sales to reach target profit = Fixed costs + target profit/Contribution per unit
= (£6,900 + £3,000 + £4,000)/£18.00
= 772 (to the nearest whole meal)
Calculate the additional profit or loss that the restaurant would earn per week from introducing
take-away meals.
Additional profit/(loss) per week (1,050) 2 marks
1,080 (18.0 – 10.5) – 9,150 = (1,050) loss
If the three additional items are allowed for in the appraisal of the take-away meals proposal,
then they would result in an
additional profit 0.5 mark
of (to the nearest £)
£ 1,878 or 1,877 per week 1.5 marks
(0.125 23,100) – (1,080 0.75) – 200
= 1,877.50
17 DeeSplay Ltd
Prepare the cash budget for each of the three months ending 31 December.
You should make an entry in every box in the cash budget. Enter a zero or dash where
applicable. Do not leave any boxes blank.
October November December
£ £ £
Receipts workings marks
Cash sales 5,400 4,200 3,600 W1 0.5 each, 1.5 total
Credit sales 18,228 21,168 16,464 W2 Oct =2 marks
Nov/Dec=0.5
each, 3 total
Sale of obsolete 0 250 0 1 mark
materials
Revaluation of 0 0 0 0.5 mark all zeros
buildings
Scrap value of 0 0 0 0.5 mark all zeros
machinery
Scrap value of 0 0 0 0.5 mark all zeros
delivery vehicle
Last year’s taxable 0 0 0 0.5 mark all zeros
profits
Payments
General provision 0 0 0 0.5 mark all zeros
for bad debts
Payment to 7,200 5,600 4,800 W3 0.5 mark each, 1.5
suppliers total, allow –ves
Loss on sale of 0 0 0 0.5 mark all zeros
obsolete materials
Labour 3,500 3,000 5,000 W4 0.5 each, 1.5 total,
allow –ves
Variable production 3,600 2,800 2,400 W5 0.5 each, 1.5 total,
overheads allow –ves
Variable selling 2,400 2,700 2,100 W6 0.5 each, 1.5 total,
expenses allow –ves
Fixed expenses 800 800 1,300 Excl 0.5 each, 1.5 total,
depn, lag allow –ves
1 month
Delivery vehicle 25,000 0 0 0.5 mark, allow
purchase –ves
Machinery purchase 0 5,000 5,000 1 mark, allow –ves
Delivery vehicle plus 0 0 0 0.5 mark all zeros
machinery total
depreciation
£
Materials £8 17 metres 310 units = 42,160
Labour 75% 310 units 14 hours £22 = 71,610
Labour overtime 25% 310 units 14 hours £22 1.4 = 33,418
Variable overheads 6,510
Total 153,698
If the budgeted fixed overhead absorption rate per labour hour for the Standard is £23,
calculate the budgeted total fixed overheads for the Standard for February.
Budgeted total fixed £99,820 0.5 mark 310 14 23
overheads for the
Standard for February
Using the high low method, calculate the budgeted total fixed overheads and variable
overheads per unit for the Deluxe.
Total fixed overheads £15,000 1.5 marks 16,680 – 70 24
Variable overheads £24 1.5 marks (16,680 – 16,200)/(70 – 50)
per unit
Prepare the following cash budget extracts for the period May to July.
You should make an entry in every box in the cash budget. Enter a zero or dash where
applicable. Do not leave any boxes blank. All figures should be entered to the nearest £.
May June July
£ £ £ marks
Receipts from 172,375 184,687 or 184,688 197,000 0.5 mark
cash sales (W1) each
Receipts from 498,750 498,750 525,000 1.5 marks
credit sales (W2) each first 2
and 2 marks
for Jul
Payments for the 42,650 43,982 46,648 Allow –ves
Standard 1 mark each
materials
purchases (W3)
Payments for the 100,100 104,720 112,420 Allow –ves
Standard labour 1 mark each
costs (W4)
19 McCarthy plc
Calculate the breakeven number of units (to the nearest whole unit) for March.
Breakeven (units) 18,261 3 marks
Total cost for 40,000 units = 40,000 £95 = £3,800,000
Total cost for 60,000 units = 60,000 £88 = £5,280,000
Use high low method to calculate variable cost per unit:
(£5,280,000 – £3,800,000)/(60,000 – 40,000) = £74
Therefore fixed cost = £5,280,000 – (60,000 £74) = £840,000
Breakeven point = Fixed cost/contribution per unit = £840,000/(£120 – £74) = 18,261
X Y Z
Contribution per unit £10 £15 £20
Material per unit 4 kg (£8/£2) 3 kg (£6/£2) 2 kg (£4/£2)
Contribution per limiting factor 2.5 5 10
Ranking 3 2 1
We know from the optimum planned production given in the question that we need 15,000
units of X and 4,000 more units of Y in order to fulfil demand.
Product Y is ranked more highly than product X so we want to use the available 20,000 on
Product Y first.
Product Y: 4,000 units 3 kg = 12,000 kg
Leaving 20,000 kg – 12,000 kg = 8,000 kg available for Product X.
8,000 kg/4 kg = 2,000 units of Product X.
Maximum price = contribution from 4,000 units of Product Y and 2,000 units of Product X less
the cost of the material already included in the contribution figure. To remove the material cost
from the contribution we need to add it back.
Maximum price = (4,000 £15) + (2,000 £10) + (20,000 £2) = £120,000
20%
–800 + 280 2.106 + 360
0.482 = (36,800)
10 + [142,240/142,240 +
36,800] [20 – 10] = 17.94
Calculate the difference (to the nearest whole % point) between the Accounting Rate of Return
(ARR) based on the initial investment and the ARR based on the average investment for
machine M8.
Difference in ARRs 13 3 marks Avg profit:
(% points) Allow –13 120 + 130 + 140 + 110/4 = 125
125/400 = 31.25
125/680 = 18.38
Diff 12.87
Calculate the Net Present Value (NPV) (to the nearest £1,000) for machine M8 at a discount
rate of 15% pa.
NPV (£) 146,000 2 marks Add 140 depn to each profit to
get CF
–680
+260 0.870
+270 0.756
+280 0.658
+(250 + 120) 0.572 = 146,200
WORKINGS
(1) Cash sales are 30% of total sales
May June July August September
£ £ £ £ £
Sales revenue 21,000 22,000 24,000 23,000 35,000
Cash sales (30%) 6,300 6,600 7,200 6,900 10,500
Credit sales (70%) 14,700 15,400 16,800 16,100 24,500
21 Treeze Ltd
Calculate the breakeven point for the quarter (to the nearest whole unit):
763 units 2 marks (Allow 762)
Admin fixed costs = £6,250 × 60% = £3,750
Total fixed costs = £11,500 + £3,750 = £15,250
Admin variable cost per unit = (£6,250 × 40%)/5,000 = £0.50
Total variable cost per unit = £10 + £4.50 + £0.50 = £15
Contribution per unit = £35 – £15 = £20
Breakeven point = Fixed costs/contribution per unit
= £15,250/£20
= 762.5 units
Calculate the sales price per unit required to achieve a profit of £80,000 in quarter 2.
£33 2 marks
(£18,300 + £80,000)/(SP – £14) = 5,200 units
£98,300/5,200 = SP – £14
SP = £33 per unit
Calculate the total sales revenue required to achieve the target profit in quarter 3 (to the
nearest £100).
£246,700 2 marks
Sales revenue required = (Fixed costs + target profit)/Contribution ratio
(£16,000 + £95,000)/0.45 = £246,666.67
Barc Leaffe
Variable cost of making £15.00 £20.00
Variable cost of buying £17.00 £23.00
Extra variable cost of buying £2.00 £3.00
Labour hours saved by buying 0.25 0.40
Extra variable cost of buying per £8.00 £7.50
hour saved
Priority for making in-house 1 2
Number of units of Barc made in-house = 1,500 hours/0.25 = 6,000 units
Therefore need to purchase 500 Barcs to make demand of 6,500 and need to purchase all 4,000
units of Leaffe to meet demand.
Calculate the payback period (to the nearest whole year) for the machine.
2 years 1 mark
0 (250,000) (250,000)
1 110,000 (140,000)
2 130,000 (10,000)
3 110,000 10,000/110,000 = 0.09
Payback = 2.09 years
Calculate the difference (to the nearest whole percentage point) between the accounting rate
of return (ARR) based on the initial investment and the ARR based on the average investment
for the machine.
16 % points 3 marks (also allow –16)
Depreciation per year = (£250,000 – £20,000)/4 = 57,500
Year Cash flow Profit
£ £
1 110,000 52,500
2 130,000 72,500
3 110,000 52,500
4 70,000 12,500
190,000 Average profit per year = £190,000/4 = £47,500
Average investment = (Initial investment + scrap value)/2 = £135,000
ARR based on initial investment = £47,500/£250,000 = 19%
ARR based on average investment = £47,500/£135,000 = 35%
Difference = 35 – 19 = 16
Discount
factor @
10% and
Year Cash flow 12% PV
£ £
0 (250,000) 1 (250,000)
1 110,000 0.909 99,990
2 130,000 0.826 107,380
3 110,000 0.712 78,320
4 90,000 0.636 57,240
NPV: 92,930
If the scrap value of £20,000 is incorrectly missed off in Year 4, the NPV will be £80,210, ie,
£80,000 to the nearest £10,000.
Calculate the constant annual profit that the alternative machine should generate in order to
be indifferent between the two machines.
£ 51,000 3 marks (or 2 marks for £120,000)
PV of net cash inflows of alternative machine = revised NPV of original machine plus initial outlay
of alternative machine = £67,840 + £274,800 = £342,640
Annuity for four years to obtain a PV of £342,640 = £342,640/2.855 = £120,014 (= cash inflow)
Depreciation per year = £274,800/4 = £68,700
Profit per year = £120,014 – £68,700 = £51,314
The following matrix contains three sets of questions, selected from within this Question Bank.
Each one contains an appropriate balance of questions which form an 'Illustrative Paper' for you
to attempt. Note that the question topics listed here are only examples of the nature of
questions which may be included – the actual exam questions may be on different topics.
19 Ch 7; Q36 Ch 9; Q5 Ch 9; Q7
20 Ch 7; Q16 Ch 9; Q11 Ch 9; Q12
21 Ch 8; Q29 Ch 8; Q32 Ch 10; Q5
22 Ch 8; Q30 Ch 8; Q34 Ch 10; Q6
23 Ch 10; Q3 Ch 10; Q7 Ch 10; Q19
24 Ch 10; Q4 Ch 10; Q8 Ch 10; Q22
25 Ch 10; Q17 Ch 10; Q18 Ch 11; Q3
26 Ch 10; Q20 Ch 10; Q21 Ch 11; Q5
27 Ch 11; Q1 Ch 11; Q2 Ch 11; Q18
28 Ch 11; Q4 Ch 11; Q8 Ch 11; Q37
29 Ch 11; Q9 Ch 11; Q15 Ch 11; Q39
30 Ch 11; Q6 Ch 11: Q7 Ch 11; Q14
31 Ch 11; Q26 Ch 11; Q36 Ch 8; Q31
32 Ch 11; Q10 Ch 11; Q12 Ch 8; Q33
Your ratings, comments and suggestions would be appreciated on the following areas of
this Question Bank