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Contents
Page
Finding questions
Question index ..............................................................................................................................v
Helping you with your revision....................................................................................................... vii
Using your BPP Practice and Revision Kit...................................................................................... viii
Passing the FMA/F2 exam ............................................................................................................. ix
Approach to examining the syllabus ................................................................................................ ix
The Computer Based Examination ................................................................................................... x
Tackling Multiple Choice Questions................................................................................................. xi
Using your BPP products.............................................................................................................. xii
Questions and answers
Questions .................................................................................................................................... 3
Answers .................................................................................................................................. 149
Formula sheet and tables ............................................................................................................. 229
Exam practice
Mock exam 1 – Specimen Exam June 2014
Questions......................................................................................................................... 237
Answers........................................................................................................................... 253
ACCA's exam answers ....................................................................................................... 261
Mock exam 2
Questions......................................................................................................................... 267
Answers........................................................................................................................... 281
Review form
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FMA/F2 MANAGEMENT ACCOUNTING
iv
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QUESTION INDEX
v
Question index
Time
allocation
Page
Marks Mins Question Answer
Part A: The nature, source and purpose of
management information
1 Accounting for management 20 24 5 149
2 Sources of data 10 12 9 149
3 Cost classification 26 31 13 150
4 Cost behaviour 36 43 15 151
5 Presenting information 8 10 19 153
Part B: Cost accounting methods and systems
6 Accounting for materials 44 53 23 153
7 Accounting for labour 24 29 28 157
8 Accounting for overheads 48 58 35 159
9 Absorption and marginal costing 36 43 41 163
10 Job, batch and service costing 32 38 47 166
11 Process costing 30 36 50 168
12 Process costing, joint products and by-products 14 17 53 171
13 Alternative costing principles 16 19 55 172
Part C: Budgeting
14 Forecasting 64 77 59 173
15 Budgeting 20 24 65 177
16 The budgetary process 52 62 67 179
17 Making budgets work 12 14 72 182
18 Capital expenditure budgeting 8 10 77 183
19 Methods of project appraisal 48 58 77 183
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FMA/F2 MANAGEMENT ACCOUNTING
vi
Time
allocation
Page
Marks Mins Question Answer
Part D: Standard costing
20 Standard costing 14 17 85 187
21 Basic variance analysis 38 46 86 188
22 Further variance analysis 44 53 91 191
Part E: Performance measurement
23 Performance measurement 52 62 99 195
24 Applications of performance measurement 44 53 104 196
Mixed banks
25 Mixed Bank 1 40 48 109 197
26 Mixed Bank 2 40 48 115 201
27 Mixed Bank 3 40 48 119 203
28 Mixed Bank 4 30 36 124 205
29 Mixed Bank 5 20 24 128 208
Multi-task questions
30 Budgeting 80 96 131 211
31 Standard costing 80 96 138 217
32 Performance measurement 80 96 142 222
Mock exams
Mock Exam 1 (Specimen Exam June 2014) 100 120 237 251
Mock Exam 2 100 120 267 279
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USING YOUR PRACTICE AND REVISION KIT
vii
Helping you with your revision
BPP Learning Media – ACCA Approved Content Provider
As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use revision
materials reviewed by the ACCA examination team. By incorporating the ACCA examination team’s
comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning
Media Practice & Revision Kit provides excellent, ACCA-approved support for your revision.
Selecting questions
We provide signposts to help you plan your revision.
A full question index listing questions that cover each part of the syllabus, so that you can locate
the questions that provide practice on key topics, and see the different ways in which they might
be tested
Attempting mock exams
There are two mock exams that provide practice at coping with the pressures of the exam day. We
strongly recommend that you attempt them under exam conditions. Mock Exam 1 is the Specimen
Exam June 2014. Mock Exam 2 reflects the question styles and syllabus coverage of the exam.
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FMA/F2 MANAGEMENT ACCOUNTING
viii
Using your BPP Practice & Revision Kit
Aim of this Practice & Revision Kit
To provide the practice to help you succeed in both the paper based and computer based examinations
for Paper FMA/F2 Management Accounting.
To pass the examination you need a thorough understanding in all areas covered by the syllabus and
teaching guide.
Recommended approach
Make sure you are able to answer questions on everything specified by the syllabus and teaching
guide. You cannot make any assumptions about what questions may come up on your paper. The
examination team aim to discourage 'question spotting'.
Learning is an active process. Use the DO YOU KNOW? Checklists to test your knowledge and
understanding of the topics covered in FMA/F2 Management Accounting by filling in the blank
spaces. Then check your answers against the DID YOU KNOW? Checklists. Do not attempt any
questions if you are unable to fill in any of the blanks – go back to your BPP Interactive Text and
revise first.
When you are revising a topic, think about the mistakes that you know that you should avoid by
writing down POSSIBLE PITFALLS at the end of each DO YOU KNOW? Checklist.
Once you have completed the checklists successfully, you should attempt the questions on that
topic. Each section has a selection of MULTIPLE CHOICE QUESTIONS.
Each mark carries with it a time allocation of 1.2 minutes (including time for selecting and
reading questions). A 10 mark multi task question should therefore be completed in 12 minutes.
You should attempt each bank of MCQs to ensure you are familiar with their styles and to
practise your technique. Ensure you read Tackling Multiple Choice Questions on page xi to get
advice on how best to approach them.
Once you have completed all of the questions in the body of this Practice & Revision Kit, you
should attempt the MOCK EXAMS under examination conditions. Check your answers against our
answers to find out how well you did.
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PASSING THE FMA/F2 EXAM
ix
Passing the FMA/F2 exam
To access Foundations in Accounting syllabuses, visit the ACCA website
www2.accaglobal.com/students/fia
The exam
You can take this exam as a paper-based exam or by a computer-based exam (CBE). All questions in the
exam are compulsory. This means you cannot avoid any topic, but also means that you do not need to
waste time in the exam deciding which questions to attempt. There are 35 MCQs and three multi-task
questions in the paper based exam and a mixture of 35 MCQs and other types of objective test question
(OTQ) (for example, number entry, multiple response and multiple response matching) and three multitask
questions in the CBE. This means that the examination team are able to test most of the syllabus at
each sitting, and that is what they aim to do. So you need to have revised right across the syllabus for
this exam.
Revision
This kit has been reviewed by the FMA/F2 examining team and contains the Specimen Exam June
2014. Working through the questions in the Kit provides excellent preparation for the exam. It is
important to tackle questions under exam conditions. Allow yourself just the number of minutes shown
next to the questions in the index and don't look at the answers until you have finished. For questions
you answer incorrectly, think about your answer and the correct answer. If you require further
clarification, refer to the explanation of the topic provided in your Interactive Text. Question practice is
an essential part of your revision, don't neglect it.
Passing the exam
The following points will help you pass the exam:
Read the question carefully.
Don't spend more than the allotted time on each question. Don't become bogged down. If you are
having trouble with a question, stop, think, decide on your best option and answer the question.
Move on!
Approach to examining the syllabus
FMA/F2 is a two-hour paper. It can be taken as a paper based or a computer based examination.
The exam is structured as follows.
No of marks
35 compulsory objective test questions of 2 marks each 70
3 compulsory multi-task questions of 10 marks each 30
100
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FMA/F2 MANAGEMENT ACCOUNTING
x
The Computer Based Examination
Computer based examinations (CBEs) are available for the first seven Foundations in Accountancy
papers (not papers FAU, FTM or FFM), and the first three ACCA exams (F1, F2 and F3), in addition to
the conventional paper based examination.
Computer based examinations must be taken at an ACCA CBE Licensed Centre.
How do CBEs work?
Questions are displayed on a monitor.
Candidates enter their answer directly onto the computer.
Candidates have two hours to complete the examination.
When the candidate has completed their examination, the final percentage score is calculated
and displayed on screen.
Candidates are provided with a Provisional Result Notification showing their results before leaving
the examination room.
The CBE Licensed Centre uploads the results to the ACCA (as proof of the candidate's
performance) within 72 hours.
Candidates can check their exam status on the ACCA website by logging into my ACCA.
Benefits
Flexibility as a CBE can be sat at any time.
Resits can also be taken at any time and there is no restriction on the number of times a
candidate can sit a CBE.
Instant feedback as the computer displays the results at the end of the CBE.
Results are notified to ACCA within 72 hours.
CBE question types
Multiple choice – choose one answer from four options.
Number entry – key in a numerical response to a question.
Multiple response – select more than one response by clicking the appropriate tick boxes.
Multiple response matching – select a response to a number of related part questions by choosing
one option from a number of drop down menus.
For more information on computer-based exams, visit the ACCA website.
www.accaglobal.com/en/student/Exams/Computer-based-exams.html
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TACKLING MULTIPLE CHOICE QUESTIONS
xi
Tackling Multiple Choice Questions
This paper includes MCQs. You have to choose the option that best answers the question. The incorrect
options are called distracters. There is a skill in answering MCQs quickly and correctly. By practising
MCQs you can develop this skill, giving you a better chance of passing the exam.
You may wish to follow the approach outlined below, or you may prefer to adapt it.
Step 1 Skim read all the MCQs and identify what appear to be the easier questions.
Step 2 Attempt each question – starting with the easier questions identified in Step 1. Read
the question thoroughly. You may prefer to work out the answer before looking at the
options, or you may prefer to look at the options at the beginning. Adopt the method
that works best for you.
Step 3 Read the four options and see if one matches your own answer. Be careful with
numerical questions as the distracters are designed to match answers that incorporate
common errors. Check that your calculation is correct. Have you followed the
requirement exactly? Have you included every stage of the calculation?
Step 4 You may find that none of the options matches your answer.
Re-read the question to ensure that you understand it and are answering the
requirement
Eliminate any obviously wrong answers
Consider which of the remaining answers is the most likely to be correct and
select the option
Step 5 If you are still unsure make a note and continue to the next question.
Step 6 Revisit unanswered questions. When you come back to a question after a break you
often find you are able to answer it correctly straight away. If you are still unsure have a
guess. You are not penalised for incorrect answers, so never leave a question
unanswered!
After extensive practice and revision of MCQs, you may find that you recognise a question when you sit
the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar
read the requirement and options carefully – do not assume that it is identical.
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FMA/F2 MANAGEMENT ACCOUNTING
xii
Using your BPP products
This Kit gives you the question practice and guidance you need in the exam. Our other products can also help
you pass:
Interactive Text introduces and explains the knowledge required for your exam
Passcards provide you with clear topic summaries and exam tips.
You can purchase these products by visiting www.bpp.com/learningmedia.
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1
Questions
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FMA/F2 MANAGEMENT ACCOUNTING
2
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QUESTIONS
3
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
Good information should be ……….., ……….., ……….., and ……. It should inspire confidence, it
should be appropriately communicated, its volume should be manageable, it should be timely and its
cost should be less than the benefits it provides.
Information for management is likely to be used for
– ........................................................
– ........................................................
– ........................................................
The main objective of profit making organisations is to ………… ………... A secondary objective of
profit making organisations might be to increase ………… of its goods/services.
The main objective of non-profit making organisations is usually to ……… …….. and services. A
secondary objective of non-profit making organisations might be to minimise the ……. involved in
providing the goods/services.
Long-term ……… planning, also known as corporate planning, involves selecting appropriate …………
so as to prepare a long-term plan to attain the objectives.
Anthony divides management activities into ……….. planning, ………… control and …………. control.
Tactical (or management) control: 'the process by which managers assure that ……….. are obtained
and used effectively and efficiently in the accomplishment of the organisation's objectives'.
Operational control: 'the process of assuring that specific ……… are carried out ………. and ………….
…………… accounts are prepared for individuals external to an organisation: shareholders, customers,
suppliers, tax authorities, employees.
……………. accounts are prepared for internal managers of an organisation.
There is no legal requirement to prepare ………….. accounts.
……………. accounts are both an historical record and a future planning tool.
……………. accounts concentrate on the business as a whole, aggregating revenues and costs from
different operations, and are an end in themselves.
Cost accounting information is, in general, unsuitable for ……… ………..
Possible pitfalls
Write down the mistakes you know you should avoid.
Do you know? – Accounting for management
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FMA/F2 MANAGEMENT ACCOUNTING
4
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Good information should be relevant, complete, accurate, and clear. It should inspire confidence, it
should be appropriately communicated, its volume should be manageable, it should be timely and its
cost should be less than the benefits it provides.
Information for management is likely to be used for
– Planning
– Control
– Decision making
The main objective of profit making organisations is to maximise profits. A secondary objective of profit
making organisations might be to increase output of its goods/services.
The main objective of non-profit making organisations is usually to provide goods and services. A
secondary objective of non-profit making organisations might be to minimise the costs involved in
providing the goods/services.
Long-term strategic planning, also known as corporate planning, involves selecting appropriate
strategies so as to prepare a long-term plan to attain the objectives.
Anthony divides management activities into strategic planning, management control and operational
control.
Tactical (or management) control: 'the process by which managers assure that resources are obtained
and used effectively and efficiently in the accomplishment of the organisation's objectives'.
Operational control: 'the process of assuring that specific tasks are carried out effectively and efficiently'.
Financial accounts are prepared for individuals external to an organisation: shareholders, customers,
suppliers, tax authorities, employees.
Management accounts are prepared for internal managers of an organisation.
There is no legal requirement to prepare management accounts.
Management accounts are both an historical record and a future planning tool.
Financial accounts concentrate on the business as a whole, aggregating revenues and costs from
different operations, and are an end in themselves.
Cost accounting information is, in general, unsuitable for decision making.
Possible pitfalls
– Forgetting the differences between financial and management accounting
Did you know? – Accounting for management
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QUESTIONS
5
1 Accounting for management 24 mins
1.1 Which of the following statements about qualities of good information is false?
A It should be relevant for its purposes
B It should be communicated to the right person
C It should be completely accurate
D It should be timely (2 marks)
1.2 The sales manager has prepared a manpower plan to ensure that sales quotas for the forthcoming year
are achieved. This is an example of what type of planning?
A Strategic planning
B Tactical planning
C Operational planning
D Corporate planning (2 marks)
1.3 Which of the following statements about management accounting information is/are true?
(i) They must be stated in purely monetary terms.
(ii) Limited companies must, by law, prepare management accounts.
(iii) They serve as a future planning tool and are not used as an historical record.
A (i), (ii) and (iii)
B (i) and (ii)
C (ii) only
D None of the statements is true (2 marks)
1.4 Which of the following statements is/are correct?
(i) A management control system is a term used to describe the hardware and software used to drive
a database system which produces information outputs that are easily assimilated by
management.
(ii) An objective is a course of action that an organisation might pursue in order to achieve its
strategy.
(iii) Information is data that has been processed into a form meaningful to the recipient.
A (i), (ii) and (iii)
B (i) and (iii)
C (ii) and (iii)
D (iii) only (2 marks)
1.5 Good information should have certain qualities. Which of the following are qualities of good information?
(i) Complete
(ii) Extensive
(iii) Relevant
(iv) Accurate
A (i), (ii) and (iii)
B (i), (iii) and (iv)
C (ii) and (iv)
D All of them (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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1.6 Monthly variance reports are an example of which one of the following types of management
information?
A Tactical
B Strategic
C Non-financial
D Operational (2 marks)
1.7 Which of the following statements is/are correct?
(i) Information for decision-making should incorporate uncertainty in some way
(ii) The data used to prepare financial accounts and management accounts are the same
A (i) is true and (ii) is false
B (ii) is true and (i) is false
C Both are true
D Both are false (2 marks)
1.8 Which of the following processes occurs at the business planning stage?
A Obtaining data about actual results
B Taking corrective action
C Comparing actual performance with budget
D Establishing objectives (2 marks)
1.9 Which of the following statements is correct?
A Management accounting systems provide information for use in fulfilling legal requirements
B Management accounting systems provide information for the use of decision-makers within an
organisation
C Management accounting systems provide information for use by shareholders
D Management accounting systems provide information for use by tax authorities
(2 marks)
1.10 Which of the following would be data rather than information?
A Sales increase/decrease per product in last quarter
B Total sales value per product
C Sales made per salesman as a percentage of total sales
D Sales staff commission as a percentage of total sales
(2 marks)
(Total = 20 marks)
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QUESTIONS
7
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
Data may be ……….. (collected specifically for the purpose of a survey) or ………. (collected for some
other purpose).
You will remember that primary data are data collected especially for a specific purpose. The advantage
of such data is that the investigator knows where the data …….. ……… and is aware of any
inadequacies or limitations in the data. Its disadvantage is that it can be very ………… to collect
primary data.
Secondary data sources may be satisfactory in certain situations, or they may be the only convenient
means of obtaining an item of data. It is essential that there is good reason to believe that the secondary
data used is ……… and ………..
The main sources of secondary data are:
– ........................................................ – ………………………………….
– ........................................................ – …………………………………..
– ........................................................ – …………………………………..
– ........................................................ – …………………………………..
In such situations where it is not possible to survey the whole population, a ……… is selected. The
results obtained from this are used to estimate the results of the whole population. In situations where
the whole population is examined, the survey is called a ……….. This situation is quite rare, which
means that the investigator must choose a sample.
A …………. sampling method is a sampling method in which there is a known chance of each member
of the population appearing in the sample.
A ……… ……… sample is a sample selected in such a way that every item in the population has an
equal chance of being included.
If random sampling is used then it is necessary to construct a ……… …….. Once a numbered list of all
items in the population has been made, it is easy to select a ……… sample, simply by generating a list
of random numbers.
………… random sampling is a method of sampling which involves dividing the population into strata or
categories. Random samples are then taken from each stratum or category. The main disadvantage of
stratification is that it requires ………. ……….. of each item in the population; sampling frames do not
always contain such information.
Systematic sampling is a sampling method which works by selecting every nth item after a random start.
The advantages of systematic sampling are ......................................... and
……………………………………..
Multistage sampling is a probability sampling method which involves dividing the ………. into a number
of …….-……….. and then selecting a small sample of these at random. Each …..-………. is then
divided further, and then a small sample is again selected at random. This process is repeated as many
times as is necessary.
………… sampling is a non-random sampling method that involves selecting one definable subsection
of the population as the sample, that subsection taken to be representative of the population in
question.
In quota sampling, ………… is forfeited in the interests of cheapness and administrative simplicity.
Investigators are told to interview all the people they meet up to a certain quota.
Possible pitfalls
Write down the mistakes you know you should avoid.
Do you know? – Sources of data
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FMA/F2 MANAGEMENT ACCOUNTING
8
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Data may be primary (collected specifically for the purpose of a survey) or secondary (collected for some
other purpose).
You will remember that primary data are data collected especially for a specific purpose. The advantage
of such data is that the investigator knows where the data came from and is aware of any inadequacies
or limitations in the data. Its disadvantage is that it can be very expensive to collect primary data.
Secondary data sources may be satisfactory in certain situations, or they may be the only convenient
means of obtaining an item of data. It is essential that there is good reason to believe that the secondary
data used is accurate and reliable.
The main sources of secondary data are: Governments; banks; newspapers; trade journals; information
bureaux; consultancies; libraries and information services.
In such situations where it is not possible to survey the whole population, a sample is selected. The
results obtained from this are used to estimate the results of the whole population. In situations where
the whole population is examined, the survey is called a census. This situation is quite rare, which
means that the investigator must choose a sample.
A probability sampling method is a sampling method in which there is a known chance of each member
of the population appearing in the sample.
A simple random sample is a sample selected in such a way that every item in the population has an
equal chance of being included.
If random sampling is used then it is necessary to construct a sampling frame. Once a numbered list of
all items in the population has been made, it is easy to select a random sample, simply by generating a
list of random numbers.
Stratified random sampling is a method of sampling which involves dividing the population into strata or
categories. Random samples are then taken from each stratum or category. The main disadvantage of
stratification is that it requires prior knowledge of each item in the population; sampling frames do not
always contain such information.
Systematic sampling is a sampling method which works by selecting every nth item after a random start.
The advantages of systematic sampling are that it is easy to use and it is cheap.
Multistage sampling is a probability sampling method which involves dividing the population into a
number of sub-populations and then selecting a small sample of these at random. Each sub-population
is then divided further, and then a small sample is again selected at random. This process is repeated as
many times as is necessary.
Cluster sampling is a non-random sampling method that involves selecting one definable subsection of
the population as the sample, that subsection taken to be representative of the population in question.
In quota sampling, randomness is forfeited in the interests of cheapness and administrative simplicity.
Investigators are told to interview all the people they meet up to a certain quota.
Possible pitfalls
– Mixing up the different types of sampling.
– Not knowing the advantages and disadvantages of the sampling methods.
Did you know? – Sources of data
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QUESTIONS
9
2 Sources of data 12 mins
2.1 Which of the following is/are primary sources of data?
(i) Historical records of transport costs to be used to prepare forecasts for budgetary planning
(ii) The Annual Abstract of Statistics, published by the Office for National Statistics in the United
Kingdom
(iii) Data collected by a bank in a telephone survey to monitor the effectiveness of the bank's
customer services
A (i) and (ii)
B (i) and (iii)
C (i) only
D (iii) only (2 marks)
2.2 The following statements relate to different types of data:
(i) Secondary data are data collected especially for a specific purpose
(ii) Discrete data can take on any value
(iii) Qualitative data are data that cannot be measured
(iv) Population data are data arising as a result of investigating a group of people or objects
Which of the statements are true?
A (i) and (ii) only
B (ii) and (iii) only
C (ii) and (iv) only
D (iii) and (iv) only (2 marks)
2.3 Which of the following statements are false?
(i) If a sample is selected using random sampling, it will be free from bias.
(ii) A sampling frame is a numbered list of all items in a sample.
(iii) In cluster sampling there is very little potential for bias.
(iv) In quota sampling, investigators are told to interview all the people they meet up to a certain
quota.
A (i), (ii), (iii) and (iv)
B (i), (ii) and (iii)
C (ii) and (iii)
D (ii) only (2 marks)
2.4 Government statistics can be a useful source of data and information.
Which one of the following types of data is most likely to be obtained from government statistics?
A Foreign exchange rates
B Population data
C Details of industry costs
D Interest rates (2 marks)
2.5 Which of the following explains the essence of quota sampling?
A Each element of the population has an equal chance of being chosen
B Every nth member of the population is selected
C Every element of one definable sub-section of the population is selected
D None of the above (2 marks)
(Total = 10 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
10
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QUESTIONS
11
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
A ……….. cost is a cost that can be traced in full to the product, service or department that is being
costed. An ……….. cost is a cost that is incurred in the course of making a product, providing a service
or running a department but which cannot be traced directly and in full to the product, service or
department.
In classification by function, costs are classified as follows
– ........................................................ These are associated with the factory.
– ........................................................ These are costs associated with general office
departments.
– ........................................................ These are costs associated with sales, marketing,
warehousing and transport departments.
A ………… cost is a cost which is incurred for a particular period of time and which, within certain
activity levels, is unaffected by changes in the level of activity. A ………... cost is a cost which tends to
vary with the level of activity. Many items of expenditure are part ………… and part ………… and are
called ………… costs.
The distinction between production and non-production costs is the basis of valuing ………
A ……….. centre is a department or organisational function whose performance is the direct
responsibility of a specific manager.
……….. centres are similar to cost centres but are accountable for costs and revenues.
An ……….. centre is a profit centre with additional responsibilities for capital investment and possibly
for financing, and whose performance is measured by its return on investment.
The basic principle of cost behaviour is that as the level of activity rises, costs will usually ….…...
The effect of increasing activity levels on unit costs is as follows. (Tick as appropriate)
Remains
Rises Falls constant
Variable cost per unit
Fixed cost per unit
Total cost per unit
The fixed and variable elements of semi-variable costs can be determined by the .........................
method.
Possible pitfalls
Write down the mistakes you know you should avoid.
Do you know? – Cost classification and cost behaviour
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FMA/F2 MANAGEMENT ACCOUNTING
12
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
A direct cost is a cost that can be traced in full to the product, service or department that is being
costed. An indirect cost is a cost that is incurred in the course of making a product, providing a service
or running a department but which cannot be traced directly and in full to the product, service or
department.
In classification by function, costs are classified as follows
– Production or manufacturing costs. These are associated with the factory.
– Administration costs. These are costs associated with general office departments.
– Marketing or selling and distribution costs. These are costs associated with sales, marketing,
warehousing and transport departments.
A fixed cost is a cost which is incurred for a particular period of time and which, within certain activity
levels, is unaffected by changes in the level of activity. A variable cost is a cost which tends to vary with
the level of activity. Many items of expenditure are part fixed and part variable and are called semivariable
costs.
The distinction between production and non-production costs is the basis of valuing inventory.
A responsibility centre is a department or organisational function whose performance is the direct
responsibility of a specific manager.
Profit centres are similar to cost centres but are accountable for costs and revenues.
An investment centre is a profit centre with additional responsibilities for capital investment and
possibly for financing, and whose performance is measured by its return on investment.
The basic principle of cost behaviour is that as the level of activity rises, costs will usually rise.
The effect of changing activity levels on unit costs is as follows. (Tick as appropriate)
Remains
Rises Falls constant
Variable cost per unit
Fixed cost per unit
Total cost per unit
The fixed and variable elements of semi-variable costs can be determined by the high-low method.
Possible pitfalls
– Getting confused between fixed and variable costs – particularly if they are expressed per unit.
– Not grasping the difference between direct and indirect costs.
Did you know? – Cost classification and cost behaviour
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QUESTIONS
13
3 Cost classification 31 mins
3.1 A firm has to pay a 20c per unit royalty to the inventor of a device which it manufactures and sells.
How would the royalty charge be classified in the firm's accounts?
A Selling expense
B Direct expense
C Production overhead
D Administrative overhead (2 marks)
3.2 Which of the following would be classed as indirect labour?
A Assembly workers in a company manufacturing televisions
B A stores assistant in a factory store
C Plasterers in a construction company
D A consultant in a firm of management consultants (2 marks)
3.3 A manufacturing firm is very busy and overtime is being worked.
How would the amount of overtime premium contained in direct wages normally be classed?
A Part of prime cost
B Factory overheads
C Direct labour costs
D Administrative overheads (2 marks)
3.4 A company makes chairs and tables. Which of the following items would be treated as an indirect cost?
A Wood used to make a chair
B Metal used for the legs of a chair
C Fabric to cover the seat of a chair
D The salary of the sales director of the company (2 marks)
3.5 Over which of the following is the manager of a profit centre likely to have control?
(i) Selling prices
(ii) Controllable costs
(iii) Apportioned head office costs
(iv) Capital investment in the centre
A All of the above
B (i), (ii) and (iii)
C (i), (ii) and (iv)
D (i) and (ii) (2 marks)
3.6 Which of the following best describes a controllable cost?
A A cost which arises from a decision already taken, which cannot, in the short run, be changed.
B A cost for which the behaviour pattern can be easily analysed to facilitate valid budgetary control
comparisons.
C A cost which can be influenced by its budget holder.
D A specific cost of an activity or business which would be avoided if the activity or business did
not exist. (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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3.7 Which of the following items might be a suitable cost unit within the credit control department of a
company?
(i) Stationery cost
(ii) Customer account
(iii) Cheque received and processed
A Item (i) only
B Item (ii) only
C Item (iii) only
D Items (ii) and (iii) only (2 marks)
3.8 Which of the following best describes a period cost?
A A cost that relates to a time period which is deducted as expenses for the period and is not
included in the inventory valuation.
B A cost that can be easily allocated to a particular period, without the need for arbitrary
apportionment between periods.
C A cost that is identified with a unit produced during the period, and is included in the value of
inventory. The cost is treated as an expense for the period when the inventory is actually sold.
D A cost that is incurred regularly every period, eg every month or quarter. (2 marks)
3.9 A company employs four supervisors to oversee the factory production of all its products. How would the
salaries paid to these supervisors be classified?
A As a direct labour cost
B As a direct production expense
C As a production overhead
D As an administration overhead (2 marks)
3.10 A company manufactures and sells toys and incurs the following three costs:
(i) Rental of the finished goods warehouse
(ii) Depreciation of its own fleet of delivery vehicles
(iii) Commission paid to sales staff
Which of these are classified as distribution costs?
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)
3.11 Which of the following describes a cost centre?
A A unit of output or service for which costs are ascertained
B A function or location for which costs are ascertained
C A segment of the organisation for which budgets are prepared
D An amount of expenditure attributable to a particular activity (2 marks)
3.12 The overhead expenses of a company are coded using a five digit coding system, an extract from which is
as follows:
Cost centre Code no Types of expense Code no
Machining 10 Indirect materials 410
Finishing 11 Depreciation of production machinery 420
Packing 12 Indirect wages 430
Stores 13 Maintenance materials 440
Maintenance 14 Machine hire costs 450
Depreciation of non-production equipment 460
The coding for the hire costs of a packing machine is 12450.
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QUESTIONS
15
Which is the coding for the issue of indirect materials issued from stores to the machining department?
A 10410
B 10440
C 13410
D 13440 (2 marks)
3.13 Which one of the following statements does NOT explain why coding systems are used?
A A code is more precise than a description so reduces ambiguity
B A code is briefer than a description so saves time
C A code is more suited to communicating wider issues than a description
D The use of codes facilitates data processing (2 marks)
(Total = 26 marks)
4 Cost behaviour 43 mins
4.1 Fixed costs are conventionally deemed to be which of the following?
A Constant per unit of output
B Constant in total when production volume changes
C Outside the control of management
D Easily controlled (2 marks)
4.2 The following data relate to the overhead expenditure of a contract cleaners at two activity levels.
Square metres cleaned 13,500 15,950
Overheads $84,865 $97,850
What is the estimate of the overheads if 18,300 square metres are to be cleaned?
A $96,990
B $110,305
C $112,267
D $115,039 (2 marks)
The following information relates to questions 4.3 to 4.7.
Which one of the above graphs illustrates the costs described in questions 4.3 to 4.7?
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FMA/F2 MANAGEMENT ACCOUNTING
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4.3 A linear variable cost – when the vertical axis represents cost incurred.
A Graph 1
B Graph 2
C Graph 4
D Graph 5 (2 marks)
4.4 A fixed cost – when the vertical axis represents cost incurred.
A Graph 1
B Graph 2
C Graph 3
D Graph 6 (2 marks)
4.5 A linear variable cost – when the vertical axis represents cost per unit.
A Graph 1
B Graph 2
C Graph 3
D Graph 6 (2 marks)
4.6 A semi-variable cost – when the vertical axis represents cost incurred.
A Graph 1
B Graph 2
C Graph 4
D Graph 5 (2 marks)
4.7 A step fixed cost – when the vertical axis represents cost incurred.
A Graph 3
B Graph 4
C Graph 5
D Graph 6 (2 marks)
4.8 A company has recorded the following data in the two most recent periods.
Total costs Volume of
of production production
$ Units
13,500 700
18,300 1,100
What is the best estimate of the company's fixed costs per period?
A $13,500
B $13,200
C $5,100
D $4,800 (2 marks)
4.9 A production worker is paid a salary of $650 per month, plus an extra 5 cents for each unit produced
during the month. How is this type of labour cost best described?
A A variable cost
B A fixed cost
C A step cost
D A semi-variable cost (2 marks)
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QUESTIONS
17
4.10 What type of cost is supervisor salary costs, where one supervisor is needed for every ten employees
added to the staff?
A A fixed cost
B A variable cost
C A mixed cost
D A step cost (2 marks)
4.11 The following information for advertising and sales has been established over the past six months:
Month Sales revenue Advertising expenditure
$'000 $'000
1 155 3
2 125 2.5
3 200 6
4 175 5.5
5 150 4.5
6 225 6.5
Using the high-low method which of the following is the correct equation for linking advertising and
sales from the above data?
A Sales revenue = 62,500 + (25 × advertising expenditure)
B Advertising expenditure = – 2,500 + (0.04 × sales revenue)
C Sales revenue = 95,000 + (20 × advertising expenditure)
D Advertising expenditure = – 4,750 + (0.05 × sales revenue) (2 marks)
4.12 A total cost is described as staying the same over a certain activity range and then increasing but
remaining stable over a revised activity range in the short term.
What type of cost is this?
A A fixed cost
B A variable cost
C A semi-variable cost
D A stepped fixed cost (2 marks)
4.13 A company incurs the following costs at various activity levels:
Total cost Activity level
$ Units
250,000 5,000
312,500 7,500
400,000 10,000
Using the high-low method what is the variable cost per unit?
A $25
B $30
C $35
D $40 (2 marks)
4.14 The following diagram represents the behaviour of one element of cost:
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FMA/F2 MANAGEMENT ACCOUNTING
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Which ONE of the following statements is consistent with the above diagram?
A Annual factory power cost where the electricity supplier sets a tariff based on a fixed charge plus
a constant unit cost for consumption but subject to a maximum annual charge.
B Weekly total labour cost when there is a fixed wage for a standard 40 hour week but overtime is
paid at a premium rate.
C Total direct material cost for a period if the supplier charges a lower unit cost on all units once a
certain quantity has been purchased in that period.
D Total direct material cost for a period where the supplier charges a constant amount per unit for
all units supplied up to a maximum charge for the period. (2 marks)
4.15 An organisation manufactures a single product. The total cost of making 4,000 units is $20,000 and
the total cost of making 20,000 units is $40,000. Within this range of activity the total fixed costs
remain unchanged.
What is the variable cost per unit of the product?
A $0.80
B $1.20
C $1.25
D $2.00 (2 marks)
4.16 When total purchases of raw material exceed 30,000 units in any one period then all units purchased,
including the initial 30,000, are invoiced at a lower cost per unit.
Which of the following graphs is consistent with the behaviour of the total materials cost in a period?
0
£
30,000
UNITS
B
0
UNITS
30,000
A
0
£
30,000
UNITS
D
0
UNITS
30,000
C
(2 marks)
$ $
$ $
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QUESTIONS
19
4.17 The total cost of production for two levels of activity is as follows:
Level 1 Level 2
Production (units) 3,000 5,000
Total cost ($) 6,750 9,250
The variable production cost per unit and the total fixed production cost both remain constant in the
range of activity shown.
What is the level of fixed costs?
A $2,000
B $2,500
C $3,000
D $3,500 (2 marks)
4.18 The following question is taken from the December 2011 exam paper.
The following shows the total overhead costs for given levels of a company's total output.
Cost Output
$ Units
4,000 1,000
7,000 2,000
10,000 3,000
9,500 4,000
A step up in fixed costs of $500 occurs at an output level of 3,500 units.
What would be the variable overhead cost per unit (to the nearest $0.01) using the high-low technique?
A $1.67 per unit
B $1.83 per unit
C $2.75 per unit
D $3.00 per unit (2 marks)
(Total = 36 marks)
5 Presenting information 10 mins
5.1 The cost of materials for product A are as follows.
Material W: $2,250
Material X: $3,000
Material Y: $3,600
Material Z: $150
If the material proportions were displayed on a pie chart, how many degrees would material Y represent?
A 90 degrees
B 120 degrees
C 144 degrees
D 204 degrees (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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The following information relates to questions 5.2 to 5.3.
Number of ice-creams sold
April May June July
Mint choc chip 600 760 725 900
Chocolate 300 335 360 525
Strawberry 175 260 310 475
Blueberry 75 90 100 90
5.2 The data may be illustrated by the following chart. What type of chart is it?
0
200
400
600
800
1,000
No. of ice-creams sold
Mint-choc Chocolate Strawberry Blueberry
April
May
June
July
A Simple bar chart
B Multiple bar chart
C Component bar chart
D Ogive (2 marks)
5.3 Which one of the following statements is true?
A Sales of mint choc chip rose steadily over the four months
B Total sales fell in the month of July
C In June, the gap between sales of strawberry and sales of chocolate reduced
D Sales of blueberry rose in May and July (2 marks)
5.4 The table below shows a company's sales figures for the first six months of the year.
Jan Feb Mar Apr May June Total
Product $'000 $'000 $'000 $'000 $'000 $'000 $'000
A 800 725 725 400 415 405 3,470
B 210 210 180 150 175 160 1,085
C 25 50 60 95 125 140 495
Total 1,035 985 965 645 715 705 5,050
What kind of graph or chart would you use to show the fluctuations of total monthly sales figures across
the six months?
A Percentage component bar chart
B Scatter diagram
C Line graph
D Pie chart (2 marks)
(Total = 8 marks)
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QUESTIONS
21
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
FIFO prices materials issues at the prices of the newest/oldest items in inventory, and values closing
inventory at the value of the most recent/oldest items in inventory. (Delete as appropriate)
LIFO prices materials issues at the prices of the newest/oldest items in inventory and values closing
inventory at the value of the most recent/oldest items. (Delete as appropriate)
………………………… is usually carried out annually, when all items of inventory are counted on a
specific date. ………………………………… involves counting and checking a number of inventory
items on a regular basis so that each item is checked at least once a year.
Inventory control levels are calculated in order to maintain inventory at the optimum level. The four
critical control levels are as follows.
………………….….. (maximum usage maximum lead time)
……………………… (quantity of inventory to be reordered when inventory reaches reorder level)
……………………… (reorder level – (average usage average lead time))
……………………… (reorder level + reorder quantity – (min usage min lead time))
The ………………………….. is the ordering quantity which minimises inventory costs (holding costs
and ordering costs), and is calculated as follows.
EOQ = 2C0D
Ch
Where Ch = …………………………………..
Co = …………………………………..
D = …………………………………..
EOQ = …………………………………..
Labour attendance time is recorded on an ……………… or on a ………………. Job time is recorded on
the following documents:
…………..…
……….…….
…….……….
Possible pitfalls
Write down the mistakes you know you should avoid.
Do you know? – Materials and labour
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FMA/F2 MANAGEMENT ACCOUNTING
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
FIFO prices materials issues at the prices of the newest/oldest items in inventory, and values closing
inventory at the value of the most recent/oldest items in inventory.
LIFO prices materials issues at the prices of the newest/oldest items in inventory and values closing
inventory at the value of the most recent/oldest items.
Periodic inventory taking is usually carried out annually, when all items of inventory are counted on a
specific date. Continuous inventory taking involves counting and checking a number of inventory items
on a regular basis so that each item is checked at least once a year.
Inventory control levels are calculated in order to maintain inventory at the optimum level. The four
critical control levels are as follows.
Reorder level (maximum usage maximum lead time)
Reorder quantity (quantity of inventory to be reordered when inventory reaches reorder level)
Minimum inventory level (reorder level – (average usage average lead time))
Maximum inventory level (reorder level + reorder quantity – (min usage min lead time))
The economic order quantity is the ordering quantity which minimises inventory costs (holding costs
and ordering costs), and is calculated as follows.
EOQ =
2C0D
Ch
Where Ch = holding costs of one unit of inventory for one year
Co = cost of ordering a consignment
D = annual demand
EOQ = economic order quantity
Labour attendance time is recorded on an attendance card or on a clock card. Job time is recorded on
the following documents.
Daily time sheets
Weekly time sheets
Job cards
Possible pitfalls
– Confusing FIFO with LIFO.
– Not being able to reproduce the inventory control formulae.
– Confusing the meaning of 'c', 'd', and 'h' in the economic order quantity equation.
Did you know? – Materials and labour
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QUESTIONS
23
6 Accounting for materials 53 mins
6.1 Which of the following functions are fulfilled by a goods received note (GRN)?
(i) Provides information to update the inventory records on receipt of goods
(ii) Provides information to check the quantity on the supplier's invoice
(iii) Provides information to check the price on the supplier's invoice
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i) only (2 marks)
6.2 There are 27,500 units of Part Number X35 on order with the suppliers and 16,250 units outstanding
on existing customers' orders.
If the free inventory is 13,000 units, what is the physical inventory?
A 1,750
B 3,250
C 24,250
D 29,250 (2 marks)
The following information relates to questions 6.3 and 6.4.
A domestic appliance retailer with multiple outlets sells a popular toaster known as the Autocrisp 2000, for
which the following information is available:
Average sales 75 per day
Maximum sales 95 per day
Minimum sales 50 per day
Lead time 12-18 days
Reorder quantity 1,750
6.3 Based on the data above, at what level of inventory would a replenishment order be issued?
A 600 units
B 1,125 units
C 1,710 units
D 1,750 units (2 marks)
6.4 Based on the data above, what is the maximum inventory level?
A 1,750 units
B 2,275 units
C 2,860 units
D 2,900 units (2 marks)
6.5 The annual demand for an item of inventory is 2,500 units. The cost of placing an order is $80 and the
cost of holding an item in stock for one year is $15. What is the economic order quantity, to the nearest
unit?
A 31 units
B 115 units
C 163 units
D 26,667 units (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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6.6 Which of the following is correct with regard to inventories?
(i) Stock-outs arise when too little inventory is held
(ii) Safety inventories are the level of units maintained in case there is unexpected demand
(iii) A re-order level can be established by looking at the maximum usage and the maximum leadtime
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)
6.7 What is the economic batch quantity used to establish?
Optimal
A reorder quantity
B recorder level
C order quantity
D inventory level for production (2 marks)
6.8 The demand for a product is 12,500 units for a three month period. Each unit of product has a
purchase price of $15 and ordering costs are $20 per order placed.
The annual holding cost of one unit of product is 10% of its purchase price.
What is the Economic Order Quantity (to the nearest unit)?
A 577
B 816
C 866
D 1,155 (2 marks)
6.9 A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ)
model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of
ordering a batch of raw material?
EOQ Total annual holding cost
A Higher Lower
B Higher Higher
C Lower Higher
D Lower Lower (2 marks)
6.10 Data relating to a particular stores item are as follows:
Average daily usage 400 units
Maximum daily usage 520 units
Minimum daily usage 180 units
Lead time for replenishment of inventory 10 to 15 days
Reorder quantity 8,000 units
What is the reorder level (in units) which avoids stockouts (running out of inventory)?
A 5,000
B 6,000
C 7,800
D 8,000 (2 marks)
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QUESTIONS
25
6.11 The material stores control account for a company for March looks like this:
MATERIAL STORES CONTROL ACCOUNT
$ $
Balance b/d 12,000 Work in progress 40,000
Suppliers 49,000 Overhead control 12,000
Work in progress 18,000 Balance c/d 27,000
79,000 79,000
Balance b/d 27,000
Which of the following statements are correct?
(i) Issues of direct materials during March were $18,000
(ii) Issues of direct materials during March were $40,000
(iii) Issues of indirect materials during March were $12,000
(iv) Purchases of materials during March were $49,000
A (i) and (iv) only
B (ii) and (iv) only
C (ii), (iii) and (iv) only
D All of them (2 marks)
6.12 A manufacturing company uses 25,000 components at an even rate during a year. Each order placed
with the supplier of the components is for 2,000 components, which is the economic order quantity.
The company holds a buffer inventory of 500 components. The annual cost of holding one component in
inventory is $2.
What is the total annual cost of holding inventory of the component?
A $2,000
B $2,500
C $3,000
D $4,000 (2 marks)
6.13 A company wishes to minimise its inventory costs. Order costs are $10 per order and holding costs are
$0.10 per unit per month. Fall Co estimates annual demand to be 5,400 units.
What is the economic order quantity?
A 949 units
B 90,000 units
C 1,039 units
D 300 units (2 marks)
6.14 For a particular component, the re-order quantity is 6,000 units and the average inventory holding is
3,400 units.
What is the level of safety inventory (in whole units)?
A 400
B 3,400
C 3,000
D 6,400 (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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6.15 The following data relates to component L512:
Ordering costs $100 per order
Inventory holding costs $8 per unit per annum
Annual demand 1,225 units
What is the economic order quantity (to the nearest whole unit)?
A 175 units
B 62 units
C 44 units
D 124 units (2 marks)
6.16 The following data relate to inventory item A452:
Average usage 100 units per day
Minimum usage 60 units per day
Maximum usage 130 units per day
Lead time 20-26 days
EOQ 4,000 units
What is the maximum inventory level?
A 3,380 units
B 6,180 units
C 7,380 units
D 8,580 units (2 marks)
6.17 ACB Co gradually receives its re-supply of inventory at a rate of 10,000 units a week. Other information
is available as follows.
Weekly demand 5,000 units
Set-up costs for each production run $125
Weekly cost of holding one unit $0.0025
What is the economic production run?
A 1,577 units
B 7,071 units
C 31,623 units
D 894,427 units (2 marks)
6.18
Total cost
Holding cost
Ordering cost
Order quantity (units)
Cost
$
A
C
B
D
Where on the graph would you read off the value for the economic order quantity?
A At point A
B At point B
C At point C
D At point D (2 marks)
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QUESTIONS
27
6.19 A company uses an item of inventory as follows.
Purchase price $25 per unit
Annual demand 1,800 units
Ordering cost $32
Annual holding cost $4.50 per unit
EOQ 160 units
What is the minimum total cost assuming a discount of 2% applies to the purchase price and to holding
costs on orders of 300 and over?
A $45,720.00
B $44,953.50
C $45,000.00
D $44,967.00 (2 marks)
The following information relates to questions 6.20 and 6.21.
G Co makes the following purchases and sales.
1 January Purchases 4,000 units for $10,000
31 January Purchases 1,000 units for $2,000
15 February Sales 3,000 units for $13,000
28 February Purchases 1,500 units for $3,750
14 March Sales 500 units for $1,200
6.20 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 (2 marks)
6.21 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 (2 marks)
6.22 A wholesaler had opening inventory of 300 units of product Emm valued at $25 per unit at the
beginning of January. The following receipts and sales were recorded during January.
Date 2 Jan 12 Jan 21 Jan 29 Jan
400
Issues 250 200 75
The purchase cost of receipts was $25.75 per unit. Using a weighted average method of valuation,
calculate the value of closing inventory at the end of January.
A $11,550
B $4,492
C $4,192
D $9,550 (2 marks)
(Total = 44 marks)
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7 Accounting for labour 29 mins
The following information relates to questions 7.1 and 7.2.
Budgeted and actual production data for the year that has just ended are as follows.
Product Budgeted production Actual production
Units Standard machine hours Units
W 15,000 3,000 12,000
X 20,000 8,000 25,000
Y 14,000 7,000 16,000
Z 6,000 9,000 5,000
Total machine hours worked in the period amounted to 29,000 hours.
7.1 What was the capacity ratio in the year, as a percentage to one decimal place?
A 93.1%
B 103.3%
C 105.5%
D 107.4% (2 marks)
7.2 What was the efficiency ratio in the year, as a percentage to one decimal place?
A 96.2%
B 103.3%
C 103.9%
D 107.4% (2 marks)
7.3 What does the labour cost graph below depict?
A A piece rate scheme with a minimum guaranteed wage
B A straight piece rate scheme
C A straight time rate scheme
D A differential piece rate scheme (2 marks)
7.4 The following data relate to work in the finishing department of a certain factory.
Normal working day 7 hours
Basic rate of pay per hour $5
Standard time allowed to produce 1 unit 4 minutes
Premium bonus payable at the basic rate 60% of time saved
On a particular day one employee finishes 180 units. What is his gross pay for the day?
A $35
B $50
C $56
D $60 (2 marks)
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QUESTIONS
29
7.5 An employee is paid on a piecework basis. The basis of the piecework scheme is as follows:
1 to 100 units – $0.20 per unit
101 to 200 units – $0.30 per unit
201 to 299 units – $0.40 per unit
with only the additional units qualifying for the higher rates. Rejected units do not qualify for payment.
During a particular day the employee produced 210 units of which 17 were rejected as faulty.
What did the employee earn for their day's work?
A $47.90
B $54.00
C $57.90
D $63.00 (2 marks)
7.6 Employee A is a carpenter and normally works 36 hours per week. The standard rate of pay is $3.60
per hour. A premium of 50% of the basic hourly rate is paid for all overtime hours worked. During the
last week of October, Employee A worked for 42 hours. The overtime hours worked were for the
following reasons:
Machine breakdown: 4 hours
To complete a special job at the request of a customer: 2 hours
How much of Employee A's earnings for the last week of October would have been treated as direct
wages?
A $162.00
B $129.60
C $140.40
D $151.20 (2 marks)
7.7 Which of the following statements is/are true about group bonus schemes?
(i) Group bonus schemes are appropriate when increased output depends on a number of people all
making extra effort
(ii) With a group bonus scheme, it is easier to award each individual's performance
(iii) Non-production employees can be rewarded as part of a group incentive scheme
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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7.8 X Co has recorded the following wages costs for direct production workers for November.
$
Basic pay 70,800
Overtime premium 2,000
Holiday pay 500
Gross wages incurred 73,300
The overtime was not worked for any specific job.
What are the accounting entries for these wages costs?
Debit Credit
$ $
A Work in progress account 72,800
Overhead control account 500
Wages control account 73,300
B Work in progress account 70,800
Overhead control account 2,500
Wages control account 73,300
C Wages control account 73,300
Work in progress account 70,800
Overhead control account 2,500
D Wages control account 73,300
Work in progress account 72,800
Overhead control account 500
(2 marks)
7.9 A company had 30 direct production employees at the beginning of last year and 20 direct production
employees at the end of the year. During the year, a total of 15 direct production employees had left the
company to work for a local competitor. What is the labour turnover rate for last year?
A 16.7%
B 20.0%
C 25.0%
D 60.0% (2 marks)
7.10 Jane works as a member of a three-person team in the assembly department of a factory. The team is
rewarded by a group bonus scheme whereby the team leader receives 40 per cent of any bonus earned
by the team, and the remaining bonus is shared evenly between Jane and the other team member.
Details of output for one day are given below.
Hours worked by team 8 hours
Team production achieved 80 units
Standard time allowed to produce one unit 9 minutes
Group bonus payable at $6 per hour 70% of time saved
What is the bonus element of Jane's pay for this particular day?
A $5.04
B $7.20
C $10.08
D $16.80 (2 marks)
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QUESTIONS
31
7.11 In a typical cost ledger, what is the double entry for indirect labour cost incurred?
A DR Wages control CR Overhead control
B DR Admin overhead control CR Wages control
C DR Overhead control CR Wages control
D DR Wages control CR Admin overhead control
(2 marks)
7.12 A company has 4,000 staff at the start of 20X6 and at the end this had reduced to 3,800 due to
redundancies being made. 210 staff took voluntary redundancy which was 10 more than the company
had anticipated and these 10 employees were replaced.
What is the labour turnover rate per year?
A 0.26%
B 5.38%
C 25.64%
D 5.13% (2 marks)
(Total = 24 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
32
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QUESTIONS
33
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
Costs incurred during production or while providing a service that cannot be traced directly and in full to
the product or service are known as ………………….., and the four main types of …………….. are
production, administration, ……………….. and distribution.
The three stages of calculating the costs of overheads to be charged to manufactured output are as
follows: ………………………. ; ………………………. ; and ……………………….
The procedure whereby indirect costs (overheads) are spread fairly between cost centres is known as
………………………….. Service cost centres may be apportioned to production cost centres by the
……………………… method or by the .................... method of reapportionment.
The three main types of overhead absorption rate are as follows.
……………………………………………………. (calculated by dividing budgeted overhead by budgeted
level of activity)
……………………………………………………. (or blanket overhead absorption rate, which is used
throughout a factory for all jobs and units of output irrespective of the department in which they were
produced)
…………………………………………………………… (a fairer rate which is representative of the costs
of the resources put into making products)
Under and over absorption of overhead occurs when actual overhead incurred is different to absorbed
overhead. ……………-absorbed overhead occurs when actual overhead is less than absorbed overhead,
and therefore too …………….. overhead has been charged to production. ………-absorbed overhead
occurs when actual overhead is greater than absorbed overhead, and therefore too ……….. overhead
has been charged to production. Under or over absorption of overheads occurs because the
predetermined overhead absorption rates are based on forecasts (estimates).
Marginal cost is the ………………… cost of one unit of product or service. ……………… is the
difference between the sales value and the marginal cost of one unit of product or service.
In marginal costing, fixed production costs are treated as …………… costs and are written off as they
are incurred. In absorption costing fixed production costs are …….…………….. the cost of units and are
carried forward in inventory to be charged against the sales revenue for the next period. Inventory values
using absorption costing are therefore …………… than those calculated using marginal costing.
Marginal costing and absorption costing will report different profit figures if there is any change in the
volume of inventory during the period. If closing inventory is greater than opening inventory, absorption
costing will report a …………. profit than marginal costing. If opening inventory is greater than closing
inventory (ie inventory levels …………….), then absorption costing will report a ………….. profit than
marginal costing.
Possible pitfalls
Write down the mistakes you know you should avoid.
Do you know? – Absorption costing and marginal costing
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FMA/F2 MANAGEMENT ACCOUNTING
34
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Costs incurred during production or while providing a service that cannot be traced directly and in full to
the product or service are known as overheads, and the four main types of overhead are production,
administration, selling and distribution.
The three stages of calculating the costs of overheads to be charged to manufactured output are as
follows: allocation; apportionment; and absorption.
The procedure whereby indirect costs (overheads) are spread fairly between cost centres is known as
apportionment. Service cost centres may be apportioned to production cost centres by the direct method
or by the step down method of reapportionment.
The three main types of overhead absorption rate are as follows.
Predetermined overhead absorption rate (calculated by dividing budgeted overhead by budgeted level of
activity)
Single factory-wide absorption rate (or blanket overhead absorption rate, which is used throughout a
factory for all jobs and units of output irrespective of the department in which they were produced)
Separate departmental overhead absorption rate (a fairer rate which is representative of the costs of the
resources put into making products)
Under and over absorption of overhead occurs when actual overhead incurred is different to absorbed
overhead. Over-absorbed overhead occurs when actual overhead is less than absorbed overhead, and
therefore too much overhead has been charged to production. Under-absorbed overhead occurs when
actual overhead is greater than absorbed overhead, and therefore too little overhead has been charged
to production. Under or overabsorption of overheads occurs because the predetermined overhead
absorption rates are based on forecasts (estimates).
Marginal cost is the variable cost of one unit of product or service. Contribution is the difference
between the sales value and the marginal cost of one unit of product or service.
In marginal costing, fixed production costs are treated as period costs and are written off as they are
incurred. In absorption costing fixed production costs are absorbed into the cost of units and are carried
forward in inventory to be charged against the sales revenue for the next period. Inventory values using
absorption costing are therefore greater than those calculated using marginal costing.
Marginal costing and absorption costing will report different profit figures if there is any change in the
volume of inventory during the period. If closing inventory is greater than opening inventory, absorption
costing will report a higher profit than marginal costing. If opening inventory is greater than closing
inventory (ie inventory levels decrease), then absorption costing will report a lower profit than marginal
costing.
Possible pitfalls
– Including an element of fixed overheads in the inventory valuation in marginal costing statements.
– Selecting inappropriate bases when calculating overhead absorption rates.
– Confusing under recovery and over recovery of overheads.
Did you know? – Absorption costing and marginal costing
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QUESTIONS
35
8 Accounting for overheads 58 mins
8.1 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, what is the total
overhead cost of the packing department, to the nearest $?
A $1,200
B $9,968
C $10,080
D $10,160 (2 marks)
The following information relates to questions 8.2 and 8.3.
Budgeted information relating to two departments in a company for the next period is as follows.
Production Direct Direct Direct Machine
Department overhead material cost labour cost labour hours hours
$ $ $
1 27,000 67,500 13,500 2,700 45,000
2 18,000 36,000 100,000 25,000 300
Individual direct labour employees within each department earn differing rates of pay, according to their skills,
grade and experience.
8.2 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 (2 marks)
8.3 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 (2 marks)
8.4 Which of the following statements about predetermined overhead absorption rates are true?
(i) Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally
high or low overhead expenditure or activity levels
(ii) Using a predetermined absorption rate offers the administrative convenience of being able to
record full production costs sooner
(iii) Using a predetermined absorption rate avoids problems of under/over absorption of overheads
because a constant overhead rate is available
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D All of them (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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8.5 Over-absorbed overheads occur when
A Absorbed overheads exceed actual overheads
B Absorbed overheads exceed budgeted overheads
C Actual overheads exceed absorbed overheads
D Actual overheads exceed budgeted overheads (2 marks)
The following information relates to questions 8.6 and 8.7.
A company has the following actual and budgeted data for year 4.
Budget Actual
Production 8,000 units 9,000 units
Variable production overhead per unit $3 $3
Fixed production overheads $360,000 $432,000
Sales 6,000 units 8,000 units
Overheads are absorbed using a rate per unit, based on budgeted output and expenditure.
8.6 What was the fixed production overhead absorbed amount during year 4?
A $384,000
B $405,000
C $432,000
D $459,000 (2 marks)
8.7 By how much was the fixed production overhead under or over absorbed?
A Under absorbed by $27,000
B Under absorbed by $72,000
C Under absorbed by $75,000
D Over absorbed by $27,000 (2 marks)
8.8 Which of the following would be the most appropriate basis for apportioning machinery insurance costs
to cost centres within a factory?
A The number of machines in each cost centre
B The floor area occupied by the machinery in each cost centre
C The value of the machinery in each cost centre
D The operating hours of the machinery in each cost centre (2 marks)
8.9 Factory overheads can be absorbed by which of the following methods?
(i) Direct labour hours
(ii) Machine hours
(iii) As a percentage of prime cost
(iv) $x per unit
A (i), (ii), (iii) and (iv)
B (i) and (ii) only
C (i), (ii) and (iii) only
D (ii), (iii) and (iv) only (2 marks)
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QUESTIONS
37
8.10 The production overhead control account for R Limited at the end of the period looks like this.
PRODUCTION OVERHEAD CONTROL ACCOUNT
$ $
Stores control 22,800 Work in progress 404,800
Wages control 180,400 Profit and loss 8,400
Expense creditors 210,000
413,200 413,200
Which of the following statements are correct?
(i) Indirect material issued from inventory was $22,800
(ii) Overhead absorbed during the period was $210,000
(iii) Overhead for the period was over absorbed by $8,400
(iv) Indirect wages costs incurred were $180,400
A (i), (ii) and (iii)
B (i), (iii) and (iv)
C (i) and (iv)
D All of them (2 marks)
8.11 Which of the following is correct when considering the allocation, apportionment and reapportionment of
overheads in an absorption costing situation?
A Only production related costs should be considered
B Allocation is the situation where part of an overhead is assigned to a cost centre
C Costs may only be reapportioned from production centres to service centres
D Any overheads assigned to a single department should be ignored (2 marks)
8.12 A company has over-absorbed fixed production overheads for the period by $6,000. The fixed
production overhead absorption rate was $8 per unit and is based on the normal level of activity of
5,000 units. Actual production was 4,500 units.
What was the actual fixed production overheads incurred for the period?
A $30,000
B $36,000
C $40,000
D $42,000 (2 marks)
8.13 A company manufacturers two products, X and Y, in a factory divided into two production cost centres,
Primary and Finishing. The following budgeted data are available:
Cost centre Primary Finishing
Allocated and apportioned fixed overhead costs $96,000 $82,500
Direct labour minutes per unit:
– Product X 36 25
– Product Y 48 35
Budgeted production is 6,000 units of product X and 7,500 units of product Y. Fixed overhead costs are
to be absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product Y?
A $11
B $12
C $14
D $15 (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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8.14 A company uses an overhead absorption rate of $3.50 per machine our, based on 32,000 budgeted
machine hours for the period. During the same period the actual total overhead expenditure amounted to
$108,875 and 30,000 machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A Under absorbed by $3,875
B Under absorbed by $7,000
C Over absorbed by $3,875
D Over absorbed by $7,000 (2 marks)
8.15 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The
total allocated and apportioned overhead for each is as follows:
P Q X Y
$95,000 $82,000 $46,000 $30,000
It has been estimated that each service cost centre does work for the other cost centres in the following
proportions:
P Q X Y
Percentage of service cost centre X to 40 40 – 20
Percentage of service cost centre Y to 30 60 10 –
After the reapportionment of service cost centre costs has been carried out using a method that fully
recognises the reciprocal service arrangements in the factory, what is the total overhead for production
cost centre P?
A $122,400
B $124,716
C $126,000
D $127,000 (2 marks)
8.16 The following data is available for a paint department for the latest period.
Budgeted production overhead $150,000
Actual production overhead $150,000
Budgeted machine hours 60,000
Actual machine hours 55,000
Which of the following statements is correct?
A There was no under or over absorption of overhead
B Overhead was $13,636 over absorbed
C Overhead was $12,500 over absorbed
D Overhead was $12,500 under absorbed (2 marks)
8.17 Actual overheads $496,980
Actual machine hours 16,566
Budgeted overheads $475,200
Based on the data above, and assuming that the budgeted overhead absorption rate was $32 per hour,
what were the budgeted number of hours (to the nearest hour) budgeted to be worked?
A 14,850
B 15,531
C 16,566
D 33,132 (2 marks)
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QUESTIONS
39
8.18
Budgeted overheads $690,480
Budgeted machine hours 15,344
Actual machine hours 14,128
Actual overheads $679,550
Based on the data above, what is the machine hour absorption rate (to the nearest $)?
A 44 per machine hour
B 45 per machine hour
C 48 per machine hour
D 49 per machine hour (2 marks)
8.19 A company absorbs overheads on machine hours. In a period, actual machine hours were 22,435,
actual overheads were $496,500 and there was over absorption of $64,375.
What was the budgeted overhead absorption rate per machine hour (to the nearest $)?
A 19
B 22
C 25
D 27 (2 marks)
8.20 A company absorbs fixed production overheads in one of its departments on the basis of machine hours.
There were 100,000 budgeted machine hours for the forthcoming period. The fixed production overhead
absorption rate was $2.50 per machine hour.
During the period, the following actual results were recorded:
Standard machine hours 110,000
Fixed production overheads $300,000
What was the fixed production overhead under/over absorption amount?
A Over absorbed by $25,000
B Under absorbed by $50,000
C Over absorbed by $50,000
D Under absorbed by $25,000 (2 marks)
8.21 Consider the following statements, regarding the reapportionment of service cost centre overheads to
production cost centres, where reciprocal services exist:
(i) The direct method results in costs being reapportioned between service cost centres
(ii) If the direct method is used, the order in which the service cost centre overheads are
reapportioned is irrelevant
(iii) The step down method results in costs being reapportioned between service cost centres
(iv) If the step down method is used, the order in which the service cost centre overheads are
reapportioned is irrelevant
Which statement(s) is/are correct?
A (i), (ii) and (iv)
B (i), (iii) and (iv)
C (ii) only
D (ii) and (iii) (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
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8.22 CTF Co has two service centres serving two production departments. Overhead costs apportioned to
each department are as follows.
Production
departments
Service
centres
Mixing Stirring Stores Canteen
$ $ $ $
Allocated and apportioned overheads 216,400 78,800 181,600 47,200
Estimated work done by the service
centres for other departments
Stores 50% 30% – 20%
Canteen 45% 40% 15% –
The business uses the direct method of apportionment.
After the apportionment of the service centres to the production departments, what will the total
overhead cost be for the mixing department?
A $328,440
B $342,041
C $351,416
D $354,888 (2 marks)
8.23 HMF Co has two service centres serving two production departments. Overhead costs apportioned to
each department are as follows.
Production
departments
Service
centres
Mixing Stirring Stores Canteen
$ $ $ $
Allocated and apportioned overheads 216,400 78,800 181,600 47,200
Estimated work done by the service
centres for other departments
Stores 50% 30% – 20%
Canteen 45% 40% 15% –
The business uses the step down method of apportionment.
After the apportionment of the service centres to the production departments, what will the total
overhead cost be for the mixing department?
A $325,968
B $344,784
C $351,416
D $354,888 (2 marks)
8.24 The following question is taken from the June 2012 exam paper.
A company uses standard absorption costing to value inventory. Its fixed overhead absorption rate is
$12 per labour hour and each unit of production should take four hours. In a recent period where there
was no opening inventory of finished goods, 20,000 units were produced using 100,000 labour hours.
18,000 units were sold. The actual profit was $464,000.
What profit would have been earned under a standard marginal costing system?
A $368,000
B $440,000
C $344,000
D $560,000 (2 marks)
(Total = 48 marks)
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QUESTIONS
41
9 Absorption and marginal costing 43 mins
9.1 The following data is available for period 9.
Opening inventory 10,000 units
Closing inventory 8,000 units
Absorption costing profit $280,000
What would be the profit for period 9 using marginal costing?
A $278,000
B $280,000
C $282,000
D Impossible to calculate without more information (2 marks)
9.2 The overhead absorption rate for product T is $4 per machine hour. Each unit of T requires 3 machine
hours. Inventories of product T last period were:
Units
Opening inventory 2,400
Closing inventory 2,700
Compared with the marginal costing profit for the period, the absorption costing profit for product T will
be which of the following?
A $1,200 higher
B $3,600 higher
C $1,200 lower
D $3,600 lower (2 marks)
9.3 In a period where opening inventories were 15,000 units and closing inventories were 20,000 units, a
firm had a profit of $130,000 using absorption costing. If the fixed overhead absorption rate was $8 per
unit, the profit using marginal costing would be which of the following?
A $90,000
B $130,000
C $170,000
D Impossible to calculate without more information (2 marks)
The following information relates to questions 9.4 and 9.5.
Cost and selling price details for product Z are as follows.
$ per unit
Direct materials 6.00
Direct labour 7.50
Variable overhead 2.50
Fixed overhead absorption rate 5.00
21.00
Profit 9.00
Selling price 30.00
Budgeted production for the month was 5,000 units although the company managed to produce 5,800 units,
selling 5,200 of them and incurring fixed overhead costs of $27,400.
9.4 What is the marginal costing profit for the month?
A $45,400
B $46,800
C $53,800
D $72,800 (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
42
9.5 What is the absorption costing profit for the month?
A $45,200
B $45,400
C $46,800
D $48,400 (2 marks)
9.6 In a period, a company had opening inventory of 31,000 units and closing inventory of 34,000 units.
Profits based on marginal costing were $850,500 and on absorption costing were $955,500.
If the budgeted total fixed costs for the company was $1,837,500, what was the budgeted level of
activity in units?
A 32,500
B 52,500
C 65,000
D 105,000 (2 marks)
9.7 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 (2 marks)
9.8 Which of the following are acceptable bases for absorbing production overheads?
(i) Direct labour hours
(ii) Machine hours
(iii) As a percentage of the prime cost
(iv) Per unit
A Methods (i) and (ii) only
B Methods (iii) and (iv) only
C Methods (i), (ii), (iii) and (iv)
D Methods (i), (ii) or (iii) only (2 marks)
9.9 Under absorption costing, the total cost of a product will include:
A Direct costs only
B Variable costs only
C All direct and indirect costs excluding a share of fixed overhead
D All direct and indirect costs (2 marks)
9.10 A company has established a marginal costing profit of $72,300. Opening inventory was 300 units and
closing inventory is 750 units. The fixed production overhead absorption rate has been calculated as
$5/unit.
What was the profit under absorption costing?
A $67,050
B $70,050
C $74,550
D $77,550 (2 marks)
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QUESTIONS
43
9.11 A company produces and sells a single product whose variable cost is $6 per unit.
Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been
calculated as $2 per unit.
The current selling price is $10 per unit.
How much profit is made under marginal costing if the company sells 250,000 units?
A $500,000
B $600,000
C $900,000
D $1,000,000 (2 marks)
9.12 A company which uses marginal costing has a profit of $37,500 for a period. Opening inventory was
100 units and closing inventory was 350 units.
The fixed production overhead absorption rate is $4 per unit.
What is the profit under absorption costing?
A $35,700
B $35,500
C $38,500
D $39,300 (2 marks)
9.13 A company manufactures and sells a single product. For this month the budgeted fixed production
overheads are $48,000, budgeted production is 12,000 units and budgeted sales are 11,720 units.
The company currently uses absorption costing.
If the company used marginal costing principles instead of absorption costing for this month, what
would be the effect on the budgeted profit?
A $1,120 higher
B $1,120 lower
C $3,920 higher
D $3,920 lower (2 marks)
9.14 A company operates a standard marginal costing system. Last month its actual fixed overhead
expenditure was 10% above budget resulting in a fixed overhead expenditure variance of $36,000.
What was the actual expenditure on fixed overheads last month?
A $324,000
B $360,000
C $396,000
D $400,000 (2 marks)
9.15 Last month, when a company had an opening inventory of 16,500 units and a closing inventory of
18,000 units, the profit using absorption costing was $40,000. The fixed production overhead rate was
$10 per unit.
What would the profit for last month have been using marginal costing?
A $15,000
B $25,000
C $55,000
D $65,000 (2 marks)
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FMA/F2 MANAGEMENT ACCOUNTING
44
9.16 Last month a manufacturing company's profit was $2,000, calculated using absorption costing
principles. If marginal costing principles has been used, a loss of $3,000 would have occurred. The
company's fixed production cost is $2 per unit. Sales last month were 10,000 units.
What was last month's production (in units)?
A 7,500
B 9,500
C 10,500
D 12,500 (2 marks)
9.17 HMF Co produces a single product. The budgeted fixed production overheads for the period are
$500,000. The budgeted output for the period is 2,500 units. Opening inventory at the start of the
period consisted of 900 units and closing inventory at the end of the period consisted of 300 units. If
absorption costing principles were applied, the profit for the period compared to the marginal costing
profit would be which of the following?
A $125,000 higher
B $125,000 lower
C $120,000 higher
D $120,000 lower (2 marks)
9.18 The following question is taken from the June 2013 exam paper.
A company has the following budgeted costs and revenues:
$ per unit
Sales price 50
Variable production cost 18
Fixed production cost 10
In the most recent period, 2,000 units were produced and 1,000 units were sold. Actual sales price,
variable production cost per unit and total fixed production costs were all as budgeted. Fixed production
costs were over-absorbed by $4,000. There was no opening inventory for the period.
What would be the reduction in profit for the period if the company has used marginal costing rather
than absorption costing?
A 4,000
B 6,000
C 10,000
D 14,000 (2 marks)
(Total = 36 marks)
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QUESTIONS
45
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
Process costing is a costing method used where it is not possible to identify separate units of production
usually because of the continuous nature of the production processes involved.
................... loss is the loss expected during a process and it is not given a cost. If it has a scrap value
then it is valued at this amount.
.................... loss is the extra loss resulting when actual loss is greater than the loss anticipated. It is
given a cost.
Loss may have a scrap value. Revenue from normal scrap is treated as a reduction in costs.
When there is closing work in progress at the end of a period, it is necessary to calculate the
........................................ of production in order to determine the cost of a completed unit.
The costs of labour and overhead are sometimes referred to as ..................... costs.
............. products are two or more products separated in a process, each of which has a significant
value compared to the other.
A .............................. is an incidental product from a process which has an insignificant value
compared to the main product.
The point at which joint and by-products become separately identifiable is known as the
.................................................. or the ..................................... point.
Job costing is the costing method used where each cost unit is separately identifiable. Costs for each job
are collected on a ……………………... or …………. Overhead is absorbed into the cost of jobs using
the …………………………………………….. rate.
Batch costing is similar to job costing in that each batch of similar articles is separately identifiable. The
cost per unit manufactured in a batch is calculated by dividing the ……………………………….. by the
……………………………. in the batch.
Service costing is used by companies operating in a service industry or by companies wishing to
establish the cost of services carried out by some of their departments.
...............................
...............................
...............................
...............................
If a service is a function of two activity variables, a .................. cost unit might be appropriate.
A difficulty with service costing is the selection of an appropriate cost unit. The cost per unit is
calculated by dividing the ………………….………………… for the period by the
………………………………………... in the period.
Activity based costing involves the identification of factors, called cost .........., which cause costs.
...... ...... costing tracks and accumulates costs and revenues attributable to each product over the entire
.......... ........... ...........
Possible pitfalls
Write down the mistakes you know you should avoid.
Characteristics of services
Do you know? – Process, job, batch, service and alternative costing
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FMA/F2 MANAGEMENT ACCOUNTING
46
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Process costing is a costing method used where it is not possible to identify separate units of production
usually because of the continuous nature of the production processes involved.
Normal loss is the loss expected during a process and it is not given a cost. If it has a scrap value then it
is valued at this amount.
Abnormal loss is the extra loss resulting when actual loss is greater than the loss anticipated. It is given
a cost.
Loss may have a scrap value. Revenue from normal scrap is treated as a reduction in costs.
When there is closing work in progress at the end of a period, it is necessary to calculate the equivalent
units of production in order to determine the cost of a completed unit.
The costs of labour and overhead are sometimes referred to as conversion costs.
Joint products are two or more products separated in a process, each of which has a significant value
compared to the other.
A by-product is an incidental product from a process which has an insignificant value compared to the
main product.
The point at which joint and by-products become separately identifiable is known as the point of
separation or the split-off point.
Job costing is the costing method used where each cost unit is separately identifiable. Costs for each job
are collected on a job cost sheet or job card. Overhead is absorbed into the cost of jobs using the
predetermined overhead absorption rate.
Batch costing is similar to job costing in that each batch of similar articles is separately identifiable. The
cost per unit manufactured in a batch is calculated by dividing the total batch cost by the number of
units in the batch.
Service costing is used by companies operating in a service industry or by companies wishing to
establish the cost of services carried out by some of their departments.
Characteristics of services: Intangibility, Simultaneity, Perishability, Heterogeneity
If a service is a function of two activity variables, a composite cost unit might be appropriate.
A difficulty with service costing is the selection of an appropriate cost unit. The cost per unit is
calculated by dividing the total costs for the period by the number of service units in the period.
Activity based costing involves the identification of factors, called cost drivers, which cause costs.
Life cycle costing tracks and accumulates costs and revenues attributable to each product over the
entire product life cycle
Possible pitfalls
– Forgetting that units arising from abnormal loss are included as equivalent units, whereas those
arising from normal loss are not.
– Not using the suggested four-step approach when answering process costing questions.
Did you know? – Process, job, batch, service and alternative costing
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QUESTIONS
47
10 Job, batch and service costing 38 mins
10.1 Which of the following costing methods is most likely to be used by a company involved in the
manufacture of liquid soap?
A Batch costing
B Service costing
C Job costing
D Process costing (2 marks)
10.2 A company calculates the prices of jobs by adding overheads to the prime cost and adding 30% to total
costs as a mark up. Job number Y256 was sold for $1,690 and incurred overheads of $694. What was
the prime cost of the job?
A $489
B $606
C $996
D $1,300 (2 marks)
10.3 A company operates a job costing system.
The estimated costs for job 173 are as follows.
Direct materials 5 metres @ $20 per metre
Direct labour 14 hours @ $8 per hour
Variable production overheads are recovered at the rate of $3 per direct labour hour.
Fixed production overheads for the year are budgeted to be $200,000 and are to be recovered on the
basis of the total of 40,000 direct labour hours for the year.
Other overheads, in relation to selling, distribution and administration, are recovered at the rate of $80 per job.
What is the total cost of job 173?
A $404
B $300
C $254
D $324 (2 marks)
The following information relates to questions 10.4 and 10.5.
A firm makes special assemblies to customers' orders and uses job costing.
The data for a period are:
Job number Job number Job number
AA10 BB15 CC20
$ $ $
Opening WIP 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.
Job number BB15 was completed on the last day of the period.
10.4 What overhead should be added to job number CC20 for the period?
A $65,157
B $69,290
C $72,761
D $126,000 (2 marks)
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10.5 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 (2 marks)
10.6 The following items may be used in costing batches.
(i) Actual material cost
(ii) Actual manufacturing overheads
(iii) Absorbed manufacturing overheads
(iv) Actual labour cost
Which of the above are contained in a typical batch cost?
A (i), (ii) and (iv) only
B (i) and (iv) only
C (i), (iii) and (iv) only
D (i), (ii), (iii) and (iv) (2 marks)
10.7 Which of the following would be appropriate cost units for a passenger coach company?
(i) Vehicle cost per passenger-kilometre
(ii) Fuel cost for each vehicle per kilometre
(iii) Fixed cost per kilometre
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D (ii) and (iii) only (2 marks)
10.8 The following information is available for a hotel company for the latest thirty day period.
Number of rooms available per night 40
Percentage occupancy achieved 65%
Room servicing cost incurred $3,900
What was the room servicing cost per occupied room-night last period, to the nearest cent?
A $3.25
B $5.00
C $97.50
D $150.00 (2 marks)
10.9 Annie is to set up a small hairdressing business at home. She anticipates working a 35-hour week and
taking four weeks' holiday per year. Her expenses for materials and overheads are expected to be
$3,000 per year, and she has set herself a target profit of $18,000 for the first year.
Assuming that only 90% of her working time will be chargeable to clients, what price should she charge
for a 'colour and cut' which would take 3 hours?
A $13.89
B $35.71
C $37.50
D $41.67 (2 marks)
10.10 Which of the following is NOT a characteristic of service costing?
A High levels of direct costs as a proportion of total costs
B Intangibility of output
C Use of composite cost units
D Can be used for internal services as well as external services (2 marks)
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10.11 Which of the following are likely to use service costing?
(i) A college
(ii) A hotel
(iii) A plumber
A (i), (ii) and (iii)
B (i) and (ii)
C (ii) only
D (ii) and (iii) only (2 marks)
10.12 Which of the following would be considered a service industry?
(i) An airline company
(ii) A railway company
(iii) A firm of accountants
A (i) and (ii) only
B (i) and (iii) only
C (i), (ii) and (iii)
D (ii) and (iii) only (2 marks)
10.13 The following information relates to a management consultancy organisation:
$
Salary cost per hour for senior consultants 40
Salary cost per hour for junior consultants 25
Overhead absorption rate per hour applied to all hours 20
The organisation adds 40% to total cost to arrive at the final fee to be charged to a client.
Assignment number 789 took 54 hours of a senior consultant's time and 110 hours of junior consultants'
time.
What is the final fee to be charged for Assignment 789?
A $6,874
B $10,696
C $11,466
D $12,642 (2 marks)
10.14 A company operates a job costing system. Job number 1012 requires $45 of direct materials and $30
of direct labour. Direct labour is paid at the rate of $7.50 per hour. Production overheads are absorbed
at a rate of $12.50 per direct labour hour and non-production overheads are absorbed at a rate of 60%
of prime cost.
What is the total cost of job number 1012?
A $170
B $195
C $200
D $240 (2 marks)
10.15 Last year, Bryan Air carried excess baggage of 250,000 kg over a distance of 7,500 km at a cost of
$3,750,000 for the extra fuel.
What is the cost per kg-km?
A $0.002 per kg-km
B $2.00 per kg-km
C $33.33 per kg-km
D $500.00 per kg-km (2 marks)
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10.16 The following question is taken from the December 2012 exam paper.
A truck delivered sand to two customers in a week. The following details are available.
Customer Weight of goods
delivered (kilograms)
Distance covered
(kilometres)
X 500 200
Y 180 1,200
680 1,400
The truck cost $3,060 to operate in the week. Each customer delivery was carried out separately, and
the truck made no other deliveries in the week.
What is the cost per kilogram/kilometre of sand delivered in the week (to the nearest $0.001)?
A $0.003
B $0.010
C $2.186
D $4.500
(2 marks)
(Total = 32 marks)
11 Process costing 36 mins
11.1 A chemical process has a normal wastage of 10% of input. In a period, 2,500 kgs of material were
input and there was an abnormal loss of 75 kgs.
What quantity of good production was achieved?
A 2,175 kgs
B 2,250 kgs
C 2,325 kgs
D 2,425 kgs (2 marks)
The following information relates to questions 11.2 and 11.3.
A company manufactures Chemical X, in a single process. At the start of the month there was no work-inprogress.
During the month 300 litres of raw material were input into the process at a total cost of $6,000.
Conversion costs during the month amounted to $4,500. At the end of the month 250 litres of Chemical X
were transferred to finished goods inventory. The remaining work-in-progress was 100% complete with respect
to materials and 50% complete with respect to conversion costs. There were no losses in the process and there
is no scrap value available during months when losses occur.
11.2 What are the equivalent units for closing work-in-progress at the end of the month?
Material Conversion costs
A 25 litres 25 litres
B 25 litres 50 litres
C 50 litres 25 litres
D 50 litres 50 litres
(2 marks)
11.3 If there had been a normal process loss of 10% of input during the month what would the value of this
loss have been?
A Nil
B $450
C $600
D $1,050 (2 marks)
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QUESTIONS
51
11.4 In a particular process, the input for the period was 2,000 units. There were no inventories at the
beginning or end of the process. Normal loss is 5% of input. In which of the following circumstances is
there an abnormal gain?
(i) Actual output = 1,800 units
(ii) Actual output = 1,950 units
(iii) Actual output = 2,000 units
A (i) only
B (ii) only
C (i) and (ii) only
D (ii) and (iii) only (2 marks)
11.5 In a process account, how are abnormal losses valued?
A At their scrap value
B The same as good production
C At the cost of raw materials
D The same as normal losses (2 marks)
11.6 A company needs to produce 340 litres of Chemical X. There is a normal loss of 10% of the material
input into the process. During a given month the company did produce 340 litres of good production,
although there was an abnormal loss of 5% of the material input into the process.
How many litres of material were input into the process during the month?
A 357 litres
B 374 litres
C 391 litres
D 400 litres (2 marks)
The following information relates to questions 11.7 and 11.8.
A company produces a certain food item in a manufacturing process. On 1 November, there was no opening
inventory of work in process. During November, 500 units of material were input to the process, with a cost of
$9,000. Direct labour costs in November were $3,840. Production overhead is absorbed at the rate of 200%
of direct labour costs. Closing inventory on 30 November consisted of 100 units which were 100% complete
as to materials and 80% complete as to labour and overhead. There was no loss in process.
11.7 What is the full production cost of completed units during November?
A $10,400
B $16,416
C $16,800
D $20,520 (2 marks)
11.8 What is the value of the closing work in progress on 30 November?
A $2,440
B $3,720
C $4,104
D $20,520 (2 marks)
The following information relates to questions 11.9 and 11.10.
A company makes a product in two processes. The following data is available for the latest period,
for process 1.
Opening work in progress of 200 units was valued as follows.
Material $2,400
Labour $1,200
Overhead $400
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No losses occur in the process.
Units added and costs incurred during the period:
Material $6,000 (500 units)
Labour $3,350
Overhead $1,490
Closing work in progress of 100 units had reached the following degrees of completion:
Material 100%
Labour 50%
Overhead 30%
The company uses the weighted average method of inventory valuation.
11.9 How many equivalent units are used when calculating the cost per unit in relation to overhead?
A 500
B 600
C 630
D 700 (2 marks)
11.10 What is the value of the units transferred to process 2?
A $7,200
B $13,200
C $14,840
D $15,400 (2 marks)
11.11 A company uses process costing to establish the cost per unit of its output.
The following information was available for the last month:
Input units 10,000
Output units 9,850
Opening inventory 300 units, 100% complete for materials and
70% complete for conversion costs
Closing inventory 450 units, 100% complete for materials and
30% complete for conversion costs
The company uses the weighted average method of valuing inventory.
What were the equivalent units for conversion costs?
A 9,505 units
B 9,715 units
C 9,775 units
D 9,985 units (2 marks)
11.12 A company uses process costing to value its output. The following was recorded for the period:
Input materials 2,000 units at $4.50 per unit
Conversion costs 13,340
Normal loss 5% of input valued at $3 per unit
Actual loss 150 units
There were no opening or closing inventories.
What was the valuation of one unit of output to one decimal place?
A $11.8
B $11.6
C $11.2
D $11.0 (2 marks)
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QUESTIONS
53
11.13 A company operates a continuous process into which 3,000 units of material costing $9,000 was input
in a period. Conversion costs for this period were $11,970 and losses, which have a scrap value of
$1.50, are expected at a rate of 10% of input. There were no opening or closing inventories and output
for the period was 2,900 units.
What was the output valuation?
A $20,271
B $20,520
C $20,970
D $22,040 (2 marks)
11.14 The following information relates to a company's polishing process for the previous period.
Output to finished goods 5,408 units valued at $29,744
Normal loss 276 units
Actual loss 112 units
All losses have a scrap value of $2.50 per unit and there was no opening or closing work in progress.
What was the value of the input during the period?
A $28,842
B $29,532
C $29,744
D $30,434 (2 marks)
11.15 Which of the following statements about process losses are correct?
(i) Units of normal loss should be valued at full cost per unit
(ii) Units of abnormal loss should be valued at their scrap value
A (i) only
B (ii) only
C Both of them
D Neither of them (2 marks)
(Total = 30 marks)
12 Process costing, joint products and by-products 17 mins
The following data relates to questions 12.1 and 12.2.
A company manufactures two joint products, P and R, in a common process. Data for June are as follows.
$
Opening inventory 1,000
Direct materials added 10,000
Conversion costs 12,000
Closing inventory 3,000
Production Sales Sales price
Units Units $ per unit
P 4,000 5,000 5
R 6,000 5,000 10
12.1 If costs are apportioned between joint products on a sales value basis, what was the cost per unit of
product R in June?
A $1.25
B $2.22
C $2.50
D $2.75 (2 marks)
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12.2 If costs are apportioned between joint products on a physical unit basis, what was the total cost of
product P production in June?
A $8,000
B $8,800
C $10,000
D $12,000 (2 marks)
12.3 Which of the following statements is/are correct?
(i) A by-product is a product produced at the same time as other products which has a relatively low
volume compared with the other products
(ii) Since a by-product is a saleable item it should be separately costed in the process account, and
should absorb some of the process costs
(iii) Costs incurred prior to the point of separation are known as common or joint costs
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (iii) only (2 marks)
12.4 A company manufactures two joint products and one by-product in a single process. Data for November
are as follows.
$
Raw material input 216,000
Conversion costs 72,000
There were no inventories at the beginning or end of the period.
Output Sales price
Units $ per unit
Joint product E 21,000 15
Joint product Q 18,000 10
By-product X 2,000 2
By-product sales revenue is credited to the process account. Joint costs are apportioned on a sales value
basis. What were the full production costs of product Q in November (to the nearest $)?
A $102,445
B $103,273
C $104,727
D $180,727 (2 marks)
12.5 A company manufactures three joint products and one by-product from a single process.
Data for May are as follows.
Opening and closing inventories Nil
Raw materials input $180,000
Conversion costs $50,000
Output
Sales price
Units $ per unit
Joint product L 3,000 32
M 2,000 42
N 4,000 38
By-product R 1,000 2
By-product sales revenue is credited to the sales account. Joint costs are apportioned on a sales value
basis.
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QUESTIONS
55
What were the full production costs of product M in May (to the nearest $)?
A $57,687
B $57,844
C $58,193
D $66,506 (2 marks)
12.6 Two products G and H are created from a joint process. G can be sold immediately after split-off. H
requires further processing before it is in a saleable condition. There are no opening inventories and no
work in progress. The following data are available for last period:
$
Total joint production costs 384,000
Further processing costs (product H) 159,600
Product Selling price Sales Production
per unit Units Units
G $0.84 400,000 412,000
H $1.82 200,000 228,000
Using the physical unit method for apportioning joint production costs, what was the cost value of the
closing inventory of product H for last period?
A $36,400
B $37,520
C $40,264
D $45,181 (2 marks)
12.7 Two products (W and X) are created from a joint process. Both products can be sold immediately after
split-off. There are no opening inventories or work in progress. The following information is available for
last period:
Total joint production costs $776,160
Product Production units Sales units Selling price per unit
W 12,000 10,000 $10
X 10,000 8,000 $12
Using the sales value method of apportioning joint production costs, what was the value of the closing
inventory of product X for last period?
A $310,464
B $388,080
C $155,232
D $77,616 (2 marks)
(Total = 14 marks)
13 Alternative costing principles 19 mins
13.1 Which of the following statements is not correct?
A Activity based costing is an alternative to traditional volume-based costing methods
B Activity based costs provide an approximation of long-run variable unit costs
C Activity based costing cannot be used to cost services
D Activity based costing is a form of absorption costing (2 marks)
13.2 A product is in the stage of its life cycle which is typified by falling prices but good profit margins due to
high sales volumes. What stage is it in?
A Growth
B Maturity
C Introduction
D Decline (2 marks)
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13.3 In what stage of the product life cycle are initial costs of the investment in the product typically
recovered?
A Introduction
B Decline
C Growth
D Maturity (2 marks)
13.4 How is target cost calculated?
A Desired selling price – actual profit margin
B Market price – desired profit margin
C Desired selling price – desired profit margin
D Market price – standard profit margin (2 marks)
13.5 Which stage of the product life cycle do the following characteristics refer to?
New competitors
Customer feedback received
New distribution outlets being found
Product quality improvements made
A Growth
B Decline
C Maturity
D Introduction (2 marks)
13.6 A new product is being developed. The development will take one year and the product is expected to
have a life cycle of two years before it is replaced.
Which of the following statements are true of life cycle costing?
Statement 1 It is useful for assessing whether new products have been successful.
Statement 2 The individual profitability for products is less accurate.
A Both statements are true
B Both statements are false
C Statement 1 is true and statement 2 is false
D Statement 2 is true and statement 1 is false (2 marks)
13.7 A chain of coffee shops has implemented a Total Quality Management system to ensure high quality and
consistency across all outlets. As part of the scheme, the chain offers a free replacement drink to any
customer not completely satisfied with their purchase.
Which of the following BEST describes the cost of providing replacement drinks?
A An external failure cost
B An internal failure cost
C A prevention cost
D An appraisal cost (2 marks)
13.8 Which costing method is based around a calculation involving a desired profit margin and a competitive
market price?
A Activity Based Costing
B Total Quality Management
C Target costing
D Life cycle costing (2 marks)
(Total = 16 marks)
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QUESTIONS
57
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
A .............. is a plan of what the organisation is aiming to achieve and what it has set as a target
whereas a .............. is an estimate of what is likely to occur in the future.
The degree of correlation between two variables is measured by the .............. ............. .
r = +1 means that the variables are .............. ................. correlated.
r = –1 means that the variables are .............. ................. correlated.
r = 0 means that the variables are ..............
The square of the correlation coefficient is called the .............. of ................. It measures the
.............. of the total variation in the value of one variable that can be explained by variations in the
value of the other variable.
Linear regression analysis is one method used for estimating a line of ........ ..... As with all forecasting
techniques, the results from regression analysis will not be wholly reliable. There are a number of factors
which affect the reliability of forecasts made using regression analysis. For example, it assumes that a
.............. ................. exists between the two variables.
A time series is a series of figures or values recorded over time. The time series analysis forecasting
technique is usually used to ................. ...............
There are four components of a time series: ..........., .............. ............, ........... ............ and
……..... …………..
One way of finding the trend is to use .............. .............
Management accountants will use spreadsheet software in activities such as budgeting, forecasting,
reporting performance and variance analysis. Spreadsheet packages have the facility to perform .......-...
calculations at great speed.
The ........... .............. ............ should be identified at the beginning of the budgetary process and the
budget for this is prepared before all others.
........... budgets include production budgets, marketing budgets, sales budgets, personnel budgets,
purchasing budgets and research and development budgets.
Possible pitfalls
Write down the mistakes you know you should avoid.
Do you know? – Forecasting and budgeting
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FMA/F2 MANAGEMENT ACCOUNTING
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
A budget is a plan of what the organisation is aiming to achieve and what it has set as a target whereas
a forecast is an estimate of what is likely to occur in the future.
The degree of correlation between two variables is measured by the correlation coefficient.
r = +1 means that the variables are perfectly positively correlated
r = -1 means that the variables are perfectly negatively correlated
r = 0 means that the variables are uncorrelated
The square of the correlation coefficient is called the coefficient of determination. It 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.
Linear regression analysis is one method used for estimating a line of best fit. As with all forecasting
techniques, the results from regression analysis will not be wholly reliable. There are a number of factors
which affect the reliability of forecasts made using regression analysis. For example, it assumes that a
linear relationship exists between the two variables.
A time series is a series of figures or values recorded over time. The time series analysis forecasting
technique is usually used to forecast sales.
There are four components of a time series: trend, seasonal variations, cyclical variations and random
variations.
One way of finding the trend is to use moving averages.
Management accountants will use spreadsheet software in activities such as budgeting, forecasting,
reporting performance and variance analysis. Spreadsheet packages have the facility to perform what-if
calculations at great speed.
The principal budget factor should be identified at the beginning of the budgetary process and the
budget for this is prepared before all others.
Functional budgets include production budgets, marketing budgets, sales budgets, personnel budgets,
purchasing budgets and research and development budgets.
Possible pitfalls
– Not knowing the difference between a budget and a forecast.
– Not understanding the meanings of correlation coefficient and coefficient of determination.
– Forgetting that linear regression gives an estimate only. It is not wholly reliable.
Did you know? – Forecasting and budgeting
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QUESTIONS
59
14 Forecasting 77 mins
14.1 The following four data pairs have been obtained: (1, 5), (2, 6), (4, 9), (5, 11). Without carrying out
any calculations, which of the following correlation coefficients best describes the relationship between x
and y?
A –0.98
B –0.25
C 0.98
D 0.25 (2 marks)
14.2 A company's management accountant is analysing the reject rates achieved by 100 factory operatives
working in identical conditions. Reject rates, Y%, are found to be related to months of experience, X, by
this regression equation: Y = 20 – 0.25X. (The correlation coefficient was r = –0.9.)
Using the equation, what is the predicted reject rate for an operative with 12 months' experience?
A 17%
B 19%
C 20%
D 23% (2 marks)
14.3 A regression equation Y = a + bX is used to forecast the value of Y for a given value of X. Which of the
following increase the reliability of the forecast?
(i) A correlation coefficient numerically close to 1
(ii) Working to a higher number of decimal places of accuracy
(iii) Forecasting for values of X outside the range of those used in the sample
(iv) A large sample is used to calculate the regression equation
A (i) only
B (i) and (ii) only
C (i) and (iii) only
D (i) and (iv) only (2 marks)
14.4 If x = 12, y = 42, x2 = 46, y2 = 542, xy = 157 and n = 4, what is the correlation coefficient?
A 0.98
B –0.98
C 0.26
D 0.008 (2 marks)
14.5 Using data from twelve European countries, it has been calculated that the correlation between the level
of car ownership and the number of road deaths is 0.73. Which of the statements shown follow from
this?
(i) High levels of car ownership cause high levels of road deaths
(ii) There is a strong relationship between the level of car ownership and the number of road deaths
(iii) 53% of the variation in the level of road deaths from one country to the next can be explained by
the corresponding variation in the level of car ownership
(iv) 73% of the variation in the level of road deaths from one country to the next can be explained by
the corresponding variation in the level of car ownership
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (ii) and (iv) only (2 marks)
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14.6 The regression equation Y = 3 + 2X has been calculated from 6 pairs of values, with X ranging from 1
to 10. The correlation coefficient is 0.8. It is estimated that Y = 43 when X = 20. Which of the
following are true?
(i) The estimate is not reliable because X is outside the range of the data
(ii) The estimate is not reliable because the correlation is low
(iii) The estimate is reliable
(iv) The estimate is not reliable because the sample is small
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iv) only
D (i) and (iv) only (2 marks)
14.7 In calculating the regression equation linking two variables, the standard formulae for the regression
coefficients are given in terms of X and Y. Which of the following is true?
A X must be the variable which will be forecast
B It does not matter which variable is which
C Y must be the dependent variable
D Y must be the variable shown on the vertical axis of a scatter diagram (2 marks)
14.8 A company uses regression analysis to establish a total cost equation for budgeting purposes.
Data for the past four months is as follows:
Month Total cost Quantity produced
$'000 $'000
1 57.5 1.25
2 37.5 1.00
3 45.0 1.50
4 60.0 2.00
200.0 5.75
The gradient of the regression line is 17.14.
What is the value of a?
A 25.36
B 48.56
C 74.64
D 101.45 (2 marks)
14.9 Regression analysis is being used to fine the line of best fit (y = a + bx) from eleven pairs of data. The
calculations have produced the following information:
x = 440, y = 330, x2 = 17,986, y2 = 10,366 and xy = 13,467
What is the value of 'a' in the equation for the line of best fit (to 2 decimal places)?
A 0.63
B 0.69
C 2.33
D 5.33 (2 marks)
14.10 Which of the following is a feasible value for the correlation coefficient?
A – 2.0
B – 1.2
C 0
D + 1.2 (2 marks)
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14.11 Over an 18-month period, sales have been found to have an underlying linear trend of y = 7.112 +
3.949x, where y is the number of items sold and x represents the month. Monthly deviations from trend
have been calculated and month 19 is expected to be 1.12 times the trend value.
What is the forecast number of items to be sold in month 19?
A 91
B 92
C 93
D 94 (2 marks)
14.12 Based on the last 15 periods the underlying trend of sales is y = 345.12 – 1.35x. If the 16th period
has a seasonal factor of –23.62, assuming an additive forecasting model, what is the forecast for that
period, in whole units?
A 300
B 301
C 324
D 325 (2 marks)
14.13 Unemployment numbers actually recorded in a town for the second quarter of the year 2000 were
4,700. The underlying trend at this point was 4,300 people and the seasonal factor is 0.92. Using the
multiplicative model for seasonal adjustment, what is the seasonally-adjusted figure (in whole numbers)
for the quarter?
A 3,932
B 3,956
C 5,068
D 5,109 (2 marks)
14.14 Monthly sales have been found to follow a linear trend of y = 9.82 + 4.372x, where y is the number of
items sold and x is the number of the month. Monthly deviations from the trend have been calculated
and follow an additive model. In month 24, the seasonal variation is estimated to be plus 8.5.
What is the forecast number of items to be sold in month 24? (to the nearest whole number.)
A 106
B 115
C 123
D 152 (2 marks)
14.15 Which of the following are necessary if forecasts obtained from a time series analysis are to be reliable?
(i) There must be no unforeseen events
(ii) The model used must fit the past data
(iii) The trend must be increasing
(iv) There must be no seasonal variation
A (i) only
B (i) and (ii) only
C (i), (ii) and (iii) only
D (i), (ii), (iii) and (iv) (2 marks)
14.16 What is the purpose of seasonally adjusting the values in a time series?
A To obtain an instant estimate of the degree of seasonal variation
B To obtain an instant estimate of the trend
C To ensure that seasonal components total zero
D To take the first step in a time series analysis of the data (2 marks)
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14.17 The following data represents a time series:
X 36 Y 41 34 38 42
A series of three point moving averages produced from this data has given the first two values as 38 and 39.
What are the values of (X, Y) in the original time series?
A (38, 39)
B (38, 40)
C (40, 38)
D (39, 38) (2 marks)
14.18 Using an additive time series model, the quarterly trend (Y) is given by Y = 65 + 7t, where t is the
quarter (starting with t = 1 in the first quarter of 20X5). If the seasonal component in the fourth quarter
is –30, what is the forecast for the actual value for the fourth quarter of 20X6, to the nearest whole
number?
A 63
B 546
C 85
D 91 (2 marks)
14.19 The trend for monthly sales ($Y) is related to the month (t) by the equation Y = 1,500 – 3t where t = 1
in the first month of 20X8. What are the forecast sales (to the nearest dollar) for the first month of 20X9
if the seasonal component for that month is 0.92 using a multiplicative model?
A $1,377
B $17,904
C $1,344
D $1,462 (2 marks)
14.20 Which of the following are necessary if forecasts obtained from a time series analysis are to be reliable?
(i) The trend must not be increasing or decreasing
(ii) The trend must continue as in the past
(iii) Extrapolation must not be used
(iv) The same pattern of seasonal variation must continue as in the past
A (i) only
B (i) and (ii) only
C (ii) and (iv) only
D (i) and (iii) only (2 marks)
14.21 Under which of the following circumstances would a multiplicative model be preferred to an additive
model in time series analysis?
A When a model easily understood by non-accountants is required
B When the trend is increasing or decreasing
C When the trend is steady
D When accurate forecasts are required (2 marks)
14.22 A company's annual profits have a trend line given by Y = 20t – 10, where Y is the trend in $'000 and t
is the year with t = 0 in 20X0.
What are the forecast profits for the year 20X9 using an additive model if the cyclical component for
that year is –30?
A $160,000
B $140,000
C $119,000
D $60,000 (2 marks)
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14.23 In January, the unemployment in Ruritania is 567,800. If the seasonal factor using an additive time
series model is +90,100, what is the seasonally-adjusted level of unemployment (to the nearest whole
number)?
A 90,100
B 477,700
C 567,800
D 657,900 (2 marks)
14.24 The following statements relate to Paasche and Laspeyre indices.
(i) Constructing a Paasche index is generally more costly than a Laspeyre index
(ii) With a Laspeyre index, comparisons can only be drawn directly between the current year and the
base year
Which statements are true?
A Both statements are true
B Both statements are false
C (i) is true and (ii) is false
D (ii) is true and (i) is false (2 marks)
14.25 The following information is available for the price of materials used at P Co.
Laspeyre index for price in 20X5 (with base year of 20X0) 150.0
Corresponding Paasche index 138.24
What is Fisher's ideal index?
A 12.00
B 16.98
C 144.00
D 288.24 (2 marks)
14.26 A large bag of cement cost $0.80 in 20X3. The price indices are as follows.
20X3 91
20X4 95
20X5 103
20X6 106
How much does a bag of cement cost in 20X6?
A $0.69
B $0.85
C $0.93
D $0.95 (2 marks)
14.27 Four years ago material X cost $5 per kg and the price index most appropriate to the cost of material X
stood at 150.
The same index now stands at 430.
What is the best estimate of the current cost of material X per kg?
A $1.74
B $9.33
C $14.33
D $21.50 (2 marks)
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14.28 Six years ago material M cost $10 per kg and the price index most appropriate to the cost of material M
was 130. The same index now stands at 510.
What is the best estimate of the current cost of material M per kg?
A $2.55
B $29.23
C $39.23
D $51.00 (2 marks)
14.29 Which of the following are common applications of spreadsheets used by management accountants?
(i) Variance analysis
(ii) Cash flow budgeting and forecasting
(iii) Preparation of financial accounts
A (i) and (ii) only
B (i) and (iii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)
14.30 A spreadsheet is unlikely to be used for which of the following tasks?
A Cash flow forecasting
B Monthly sales analysis by market
C Writing a memo
D Calculation of depreciation (2 marks)
14.31 The following question is taken from the December 2012 exam paper.
The following data relates to a company's overhead cost.
Time
(units)
Output Overhead
cost ($)
Price
index
2 years ago 1,000 3,700 121
Current year 3,000 13,000 155
Using the high low technique, what is the variable cost per unit (to the nearest $0.01) expressed in
current year prices?
A $3.22
B $4.13
C $4.65
D $5.06 (2 marks)
14.32 The following question is taken from the June 2013 exam paper.
An additive time series has the following trend and seasonal variations:
Trend Y=4,000 + 6X where Y= sales in units
X is the number of quarters, with the first quarter of 2014 being 1, the second quarter of 2014 being 2 etc.
Seasonal variation
Quarter 1 2 3 4
Quarterly variation (units) –4 –2 +1 +5
What is the forecast sales volume for the fourth quarter of 2015?
A 4,029
B 4,043
C 4,048
D 4,053 (2 marks)
(Total = 64 marks)
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15 Budgeting 24 mins
15.1 Which of the following may be considered to be objectives of budgeting?
(i) Co-ordination
(ii) Communication
(iii) Expansion
(iv) Resource allocation
A All of them
B (i), (ii) and (iv)
C (ii), (iii) and (iv)
D (ii) and (iv) (2 marks)
15.2 What does the statement 'sales is the principal budget factor' mean?
A The level of sales will determine the level of cash at the end of the period
B The level of sales will determine the level of profit at the end of the period
C The company's activities are limited by the level of sales it can achieve
D Sales is the largest item in the budget (2 marks)
15.3 QT Co manufactures a single product and an extract from their flexed budget for production costs is as
follows.
Activity level
80% 90%
$ $
Direct material 2,400 2,700
Labour 2,120 2,160
Production overhead 4,060 4,080
8,580 8,940
What would the total production cost allowance be in a budget flexed at the 83% level of activity? (to
the nearest $)
A $6,266
B $6,888
C $8,586
D $8,688 (2 marks)
15.4 Which of these statements is untrue?
A Spreadsheets make the calculation and manipulation of data easier and quicker
B Spreadsheets are very useful for word-processing
C Budgeting can be done very easily using spreadsheets
D Spreadsheets are useful for plotting graphs (2 marks)
The following data applies to questions 15.5 to 15.7.
A B C D F G
1 Jan Feb Mar Apr May
2 Sales 15,000 13,400 16,100 17,200 15,300
3 Cost of sales 11,090 10,060 12,040 13,000 11,100
4 Gross profit 3,910 3,340 4,060 4,200 4,200
5 Expenses 1,500 1,500 1,500 1,500 1,500
6 Net profit 2,410 1,840 2,560 2,700 2,700
7
8 Net profit %
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15.5 The formula =C2-C3 will give the contents of which cell?
A C6
B C4
C C5
D C1 (2 marks)
15.6 What would be the formula for March net profit?
A =D2–D3
B =B6+C6
C =D4–D5
D =D3*D8 (2 marks)
15.7 What will be the formula to go in G8?
A =G6/G2*100
B =G4/100*G6
C =G2/G6*100
D =G6/G4*100 (2 marks)
15.8 A company manufactures a single product. In a computer spreadsheet the cells F1 to F12 contain the
budgeted monthly sales units for the twelve months of next year in sequence, with January sales in cell
F1 and finishing with December sales in F12. The company policy is for the closing inventory of finished
goods each month to be 10% of the budgeted sales units for the following month.
Which of the following formulae will generate the budgeted production (in units) for March next year?
A =[F3 + (0.1*F4)]
B =[F3 – (0.1*F4)]
C =[(1.1*F3) – (0.1*F4)]
D =[(0.9*F3) + (0.1*F4)] (2 marks)
15.9 Misty Co's budgetary control report for last month is as follows:
Fixed budget Flexed budget Actual results
$ $ $
Direct costs 61,100 64,155 67,130
Production overhead 55,000 56,700 54,950
Other overhead 10,000 10,000 11,500
126,100 130,855 133,580
What was the volume variance for last month?
A $4,755 (A)
B $2,725 (A)
C $4,755 (F)
D $2,725 (F) (2 marks)
15.10 Misty Co's budgetary control report for last month is as follows:
Fixed budget Flexed budget Actual results
$ $ $
Direct costs 61,100 64,155 67,130
Production overhead 55,000 56,700 54,950
Other overhead 10,000 10,000 11,500
126,100 130,855 133,580
What was the expenditure variance for last month?
A $7,480 (F)
B $2,725 (F)
C $7,480 (A)
D $2,725 (A) (2 marks)
(Total = 20 marks)
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16 The budgetary process 62 mins
16.1 What does a master budget comprise?
A The budgeted statement of profit or loss
B The budgeted cash flow, budgeted statement of profit or loss and budgeted statement of financial
position
C The budgeted cash flow
D The entire set of budgets prepared (2 marks)
16.2 Which of the following is NOT a functional budget?
A Production budget
B Distribution cost budget
C Selling cost budget
D Cash budget (2 marks)
16.3 If a company has no production resource limitations, in which order would the following budgets be prepared?
(i) Material usage budget (iv) Finished goods inventory budget
(ii) Sales budget (v) Production budget
(iii) Material purchase budget (vi) Material inventory budget
A (v), (iv), (i), (vi), (iii), (ii)
B (ii), (iv), (v), (i), (vi), (iii),
C (ii), (iv), (v), (i), (iii), (vi)
D (ii), (v), (iv), (i), (vi), (iii) (2 marks)
16.4 In a situation where there are no production resource limitations, which of the following items of
information must be available for the production budget to be completed?
(i) Sales volume from the sales budget
(ii) Material purchases from the purchases budget
(iii) Budgeted change in finished goods inventory
(iv) Standard direct labour cost per unit
A (i), (ii) and (iii)
B (i), (iii) and (iv)
C (i) and (iii)
D All of them (2 marks)
16.5 When preparing a production budget, what does the quantity to be produced equal?
A Sales quantity + opening inventory of finished goods + closing inventory of finished goods
B Sales quantity – opening inventory of finished goods + closing inventory of finished goods
C Sales quantity – opening inventory of finished goods – closing inventory of finished goods
D Sales quantity + opening inventory of finished goods – closing inventory of finished goods
(2 marks)
16.6 The quantity of material in the material purchases budget is greater than the inferred from quantity of
material in the material usage budget. Which of the following statements can be 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 (2 marks)
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16.7 A company plans to sell 24,000 units of product R next year. Opening inventory of R is expected to be
2,000 units and PQ Co plans to increase inventory by 25 per cent by the end of the year. How many
units of product R should be produced next year?
A 23,500 units
B 24,000 units
C 24,500 units
D 30,000 units (2 marks)
16.8 Each unit of product Alpha requires 3 kg of raw material. Next month's production budget for product
Alpha is as follows.
Opening inventories:
Raw materials 15,000 kg
Finished units of Alpha 2,000 units
Budgeted sales of Alpha 60,000 units
Planned closing inventories:
Raw materials 7,000 kg
Finished units of Alpha 3,000 units
How many kilograms of raw materials should be purchased next month?
A 172,000
B 175,000
C 183,000
D 191,000 (2 marks)
16.9 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. What is the production budget for X for December?
A 12,960 units
B 14,400 units
C 15,840 units
D 16,000 units (2 marks)
16.10 A company manufactures a single product, M. Budgeted production output of product M during August
is 200 units. Each unit of product M requires 6 labour hours for completion and PR Co anticipates 20
per cent idle time. Labour is paid at a rate of $7 per hour. What is the direct labour cost budget for
August?
A $6,720
B $8,400
C $10,080
D $10,500 (2 marks)
16.11 Each unit of product Echo takes five direct labour hours to make. Quality standards are high, and 8% of
units are rejected after completion as sub-standard. Next month's budgets are as follows.
Opening inventories of finished goods 3,000 units
Planned closing inventories of finished goods 7,600 units
Budgeted sales of Echo 36,800 units
All inventories of finished goods must have successfully passed the quality control check.
What is the direct labour hours budget for the month?
A 190,440 hours
B 207,000 hours
C 223,560 hours
D 225,000 hours (2 marks)
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16.12 Budgeted production in a factory for next period is 4,800 units. Each unit requires five labour hours to
make. Labour is paid $10 per hour. Idle time represents 20% of the total labour time.
What is the budgeted total labour cost for the next period?
A $192,000
B $240,000
C $288,000
D $300,000 (2 marks)
16.13 Which of the following statements are true?
(i) A flexed budget allows businesses to evaluate a manager's performance more fairly
(ii) A fixed budget is useful for defining the broad objectives of the organisation
(iii) Relying on fixed budgets alone would usually give rise to massive variances
A (i) and (iii) only
B (i) and (ii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)
16.14 A Local Authority is preparing a cash budget for its refuse disposal department.
Which of the following items would NOT be included in the cash budget?
A Capital cost of a new collection vehicle
B Depreciation of the refuse incinerator
C Operatives' wages
D Fuel for the collection vehicles (2 marks)
16.15 The following details have been extracted from the receivables collection records of C Co.
Invoices paid in the month after sale 60%
Invoices paid in the second month after sale 25%
Invoices paid in the third month after sale 12%
Bad debts 3%
Invoices are issued on the last day of each month.
Customers paying in the month after sale are entitled to deduct a 2% settlement discount.
Credit sales values for June to September are budgeted as follows.
June July August September
$35,000 $40,000 $60,000 $45,000
What is the amount budgeted to be received from credit sales in September?
A $46,260
B $49,480
C $50,200
D $50,530 (2 marks)
16.16 BDL plc is currently preparing its cash budget for the year to 31 March 20X8. An extract from its sales
budget for the same year shows the following sales values.
$
March 60,000
April 70,000
May 55,000
June 65,000
40% of its sales are expected to be for cash. Of its credit sales, 70% are expected to pay in the month
after sale and take a 2% discount; 27% are expected to pay in the second month after the sale, and the
remaining 3% are expected to be bad debts.
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What is the value of sales receipts to be shown in the cash budget for May 20X7?
A $60,532
B $61,120
C $66,532
D $86,620 (2 marks)
The following information relates to questions 16.17 and 16.18.
Each unit of product Zeta requires 3 kg of raw material and 4 direct labour hours. Material costs $2 per kg and
the direct labour rate is $7 per hour.
The production budget for Zeta for April to June is as follows.
April May June
Production units 7,800 8,400 8,200
16.17 Raw material opening inventories are budgeted as follows.
April May June
3,800 kg 4,200 kg 4,100 kg
The closing inventory budgeted for June is 3,900 kg.
Material purchases are paid for in the month following purchase. What is the figure to be included in the
cash budget for June in respect of payments for purchases?
A $25,100
B $48,800
C $50,200
D $50,600 (2 marks)
16.18 Wages are paid 75% in the month of production and 25% in the following month. What is the figure to
be included in the cash budget for May in respect of wages?
A $222,600
B $231,000
C $233,800
D $235,200 (2 marks)
16.19 An extract from a company's sales budget is as follows:
$
October 224,000
November 390,000
December 402,000
Ten per cent of sales are paid for immediately in cash. Of the credit customers, 30 per cent pay in the
month following the sale and are entitled to a one per cent discount. The remaining customers pay two
months after the sale is made.
What is the value of sales receipts shown in the company's cash budget for December?
A $285,567
B $286,620
C $290,430
D $312,830 (2 marks)
16.20 Extracts from a company's budget are as follows:
August September
Production units 12,600 5,500
Fixed production overhead cost incurred $9,440 $7,000
The standard variable production overhead cost per unit is $5. Variable production overhead is paid 70
per cent in the month incurred and 30 per cent in the following month.
Fixed production overhead cost is paid in the month following that in which it is incurred and includes
depreciation of $2,280 per month.
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QUESTIONS
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What is the payment for total production overhead cost shown in the cash budget for September?
A $32,220
B $42,870
C $45,310
D $47,590 (2 marks)
16.21 The following extract is taken from the production cost budget of S Co.
Production (units) 2,000 3,000
Production cost ($) 11,100 12,900
What is the budget cost allowance for an activity level of 4,000 units?
A $7,200
B $7,500
C $13,460
D $14,700 (2 marks)
16.22 The following details have been extracted from the payables' records of X Co:
Invoices paid in the month of purchase 25%
Invoices paid in the first month after purchase 70%
Invoices paid in the second month after purchase 5%
Purchases for July to September are budgeted as follows:
July $250,000
August $300,000
September $280,000
For suppliers paid in the month of purchase, a settlement discount of 5% is received. What is the
amount budgeted to be paid to suppliers in September?
A $278,500
B $280,000
C $289,000
D $292,500 (2 marks)
16.23 Which of the following control actions could be taken to help eliminate an adverse direct labour
efficiency variance?
(i) Employ more highly skilled labour
(ii) Ensure stricter supervision of labour workers
(iii) Ask employees to work paid overtime
A (i) and (iii) only
B (i) and (ii) only
C (i), (ii) and (iii)
D (ii) and (iii) only (2 marks)
16.24 X department is a division of W Plc. X department usually has a quarterly wages cost of $4,500,000.
Quarterly material costs are usually around $2,000,000. W Plc made a central decision to award all
employees a wages increase of 2%.
Which of the following variances for the latest quarter are worth investigating?
(i) Direct material price variance $400 (A)
(ii) Labour rate variance $90,000 (A)
(iii) Sales volume variance $4,000,000 (F)
A (i) and (iii) only
B (i) and (ii) only
C (i), (ii) and (iii)
D (iii) only (2 marks)
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16.25 Which of the following BEST describes the purpose of a flexible budget?
A To ensure managers are motivated
B To facilitate control by establishing a budget relevant to actual activity levels
C To facilitate control by preventing discretionary expenditure
D To enable accurate reforecasting when actual costs are known (2 marks)
16.26 The following statements relate to fixed budgets and flexible budgets.
(i) If production levels far exceed those anticipated, relying on a fixed budget is likely to result in
massive variances
(ii) Flexible budgets assist management control by providing dynamic, comparable information
(iii) Flexible budgets are always superior to fixed budgets
Which statements are true?
A (i) only
B (i) and (ii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)
(Total = 52 marks)
17 Making budgets work 14 mins
17.1 Participation by staff in the budgeting process is often seen as an aid to the creation of a realistic budget
and to the motivation of staff. There are, however, limitations to the effectiveness of such participation.
Which of the following illustrates one of these limitations?
A Participation allows staff to buy into the budget
B Staff suggestions may be ignored leading to de-motivation
C Staff suggestions may be based on local knowledge
D Budgetary slack can be built in by senior manager as well as staff (2 marks)
17.2 Which of the following statements about budgeting and motivation are true?
(i) A target is more motivating than no target at all
(ii) The problem with a target is setting an appropriate degree of difficulty
(iii) Employees who are challenged tend to withdraw their commitment
A All of them
B (ii) and (iii) only
C (i) and (ii) only
D (iii) only (2 marks)
17.3 Which of the following best describes a top-down budget?
A A budget which has been set by scaling down individual expenditure items until the total
budgeted expenditure can be met from available resources
B A budget which is set by delegating authority from top management, allowing budget holders to
participate in setting their own budgets
C A budget which is set without permitting the ultimate budget holder to participate in the
budgeting process
D A budget which is set within the framework of strategic plans determined by top management
(2 marks)
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17.4 In which of the following situations would the use of imposed budgets NOT be appropriate?
A In times of crisis, when the organisation’s survival is at stake
B During periods of economic hardship, when ‘every cent counts’
C In a very small business
D In a large organisation with a flat management structure and ‘empowered’ employees
(2 marks)
17.5 In which of the following circumstances is the use of a participative budgeting process appropriate?
(i) In decentralised organisations
(ii) When acceptance of the budget as fair and equitable is essential
(iii) When an organisation's different units act autonomously
A All of (i), (ii) and (iii)
B (ii) and (iii) only
C (i) and (ii) only
D (iii) only (2 marks)
17.6 Which of the following best describes a controllable cost?
A A cost which can be easily forecast and is therefore readily controllable using budgetary control
techniques
B A cost which can be specifically identified with a particular cost object
C A cost which is easily controlled because it is not affected by fluctuations in the level of activity
D A cost which can be influenced by its budget holder (2 marks)
(Total = 12 marks)
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QUESTIONS
75
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
The basic principle of ............................ involves calculating the present value of an investment. The
present value of an investment is the amount of money which must be invested now (for a number of
years) in order to earn a future sum (at a given rate of interest).
A constant sum of money received or paid each year for a given number of years is known as an
................... . If this constant sum lasts forever, then it is known as a ......................... .
Annuity annuity factor = ............................................................
Annuity interest rate = ...............................................................
NPV
The two main discounted cash flow methods
IRR
– Net present value (NPV) method. If an investment has a ............... NPV then it is acceptable.
An investment with a .................... NPV should be rejected.
– Internal rate of return (IRR) method. This method determines the rate of interest at which the
NPV of the investment = ..... . The project is viable if the IRR exceeds the minimum acceptable
return.
The IRR formula is as follows.
IRR = a% +
A
(b a)
A B
%
Where a = ...........................................
b = ...........................................
A = ...........................................
B = ...........................................
The time that is required for the cash inflows from a capital investment project to equal the cash
outflows is known as the ................................................ .
Possible pitfalls
Write down the mistakes you know you should avoid.
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76
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
The basic principle of discounting involves calculating the present value of an investment. The present
value of an investment is the amount of money which must be invested now (for a number of years) in
order to earn a future sum (at a given rate of interest).
A constant sum of money received or paid each year for a given number of years is known as an
annuity. If this constant sum lasts forever, then it is known as a perpetuity.
Annuity annuity factor = present value of an annuity
Annuity interest rate = present value of a perpetuity
NPV
The two main discounted cash flow methods
IRR
– Net present value (NPV) method. If an investment has a positive NPV then it is acceptable. An
investment with a negative NPV should be rejected.
– Internal rate of return (IRR) method. This method determines the rate of interest at which the
NPV of the investment = zero. The project is viable if the IRR exceeds the minimum acceptable
return.
The IRR formula is as follows.
IRR = a% +
A
(b a)
A B
%
Where a = one interest rate
b = the other interest rate
A = NPV at rate a
B = NPV at rate b
The time that is required for the cash inflows from a capital investment project to equal the cash
outflows is known as the payback period.
Possible pitfalls
– Not being able to calculate and distinguish between the nominal rate of interest and the effective
annual rate of interest.
– Not being able to calculate the IRR of an investment, even when given the IRR formula. (You
must remember what the symbols in the formula mean so that you can use the correct figures in
your calculations.)
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QUESTIONS
77
18 Capital expenditure budgeting 10 mins
18.1 You are currently employed as a Management Accountant in an insurance company. You are
contemplating starting your own business. In considering whether or not to start your own business,
what would your current salary level be?
A A sunk cost
B An incremental cost
C An irrelevant cost
D An opportunity cost (2 marks)
18.2 In decision making, costs which need to be considered are said to be relevant costs. Which of the
following are characteristics associated with relevant costs?
(i) Future costs
(ii) Unavoidable costs
(iii) Incremental costs
(iv) Differential costs
A (i) and (iii) only
B (i) and (ii) only
C (i), (iii) and (iv) only
D All of them (2 marks)
18.3 A machine owned by a company has been idle for some months but could now be used on a one year
contract which is under consideration. The net book value of the machine is $1,000. If not used on this
contract, the machine could be sold now for a net amount of $1,200. After use on the contract, the
machine would have no saleable value and the cost of disposing of it in one year's time would be $800.
What is the total relevant cost of the machine to the contract?
A $400
B $800
C $1,200
D $2,000 (2 marks)
18.4 Which of the following would be part of the capital expenditure budget?
(i) Purchase of a new factory premises
(ii) Replacement of existing machinery
(iii) Refurbishment of existing factory premises
(iv) Purchases of raw materials
A (i) and (ii) only
B (iii) and (iv) only
C (i), (ii) and (iii) only
D (ii) and (iv) only (2 marks)
(Total = 8 marks)
19 Methods of project appraisal 58 mins
19.1 A building society adds interest monthly to investors' accounts even though interest rates are expressed
in annual terms. The current rate of interest is 6% per annum.
An investor deposits $1,000 on 1 January. How much interest will have been earned by 30 June?
A $30.00
B $30.38
C $60.00
D $300 (2 marks)
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19.2 A one-year investment yields a return of 15%. The cash returned from the investment, including
principal and interest, is $2,070. What is the interest?
A $250
B $270
C $300
D $310.50 (2 marks)
19.3 If a single sum of $12,000 is invested at 8% per annum with interest compounded quarterly, what is
the amount to which the principal will have grown by the end of year three? (approximately)
A $15,117
B $9,528
C $15,219
D $30,924 (2 marks)
19.4 Which is worth most, at present values, assuming an annual rate of interest of 8%?
A $1,200 in exactly one year from now
B $1,400 in exactly two years from now
C $1,600 in exactly three years from now
D $1,800 in exactly four years from now (2 marks)
19.5 A bank offers depositors a nominal 4% pa, with interest payable quarterly. What is the effective annual
rate of interest?
A 1%
B 4%
C 1.025%
D 4.06% (2 marks)
19.6 A project requiring an investment of $1,200 is expected to generate returns of $400 in years 1 and 2
and $350 in years 3 and 4. If the NPV = $22 at 9% and the NPV = –$4 at 10%, what is the IRR for
the project?
A 9.15%
B 9.85%
C 10.15%
D 10.85% (2 marks)
19.7 A sum of money was invested for 10 years at 7% per annum and is now worth $2,000. What was the
original amount invested (to the nearest $)?
A $1,026
B $1,017
C $3,937
D $14,048 (2 marks)
19.8 House prices rise at 2% per calendar month. What is the annual rate of increase correct to one decimal
place?
A 24%
B 26.8%
C 12.7%
D 12.2% (2 marks)
19.9 What is the present value of ten annual payments of $700, the first paid immediately and discounted at
8%, giving your answer to the nearest $?
A $4,697
B $1,050
C $4,435
D $5,073 (2 marks)
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QUESTIONS
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19.10 An investor is to receive an annuity of $19,260 for six years commencing at the end of year 1. It has a
present value of $86,400.
What is the rate of interest (to the nearest whole percent)?
A 4%
B 7%
C 9%
D 11% (2 marks)
19.11 How much should be invested now (to the nearest $) to receive $24,000 per annum in perpetuity if the
annual rate of interest is 5%?
A $1,200
B $25,200
C $120,000
D $480,000 (2 marks)
19.12 The net present value of an investment at 12% is $24,000, and at 20% is –$8,000. What is the
internal rate of return of this investment?
A 6%
B 12%
C 16%
D 18%
State your answer to the nearest whole percent. (2 marks)
The following data is relevant for questions 19.13 and 19.14.
Diamond Ltd has a payback period limit of three years and is considering investing in one of the following
projects. Both projects require an initial investment of $800,000. Cash inflows accrue evenly throughout the
year.
Project Alpha Project Beta
Year Cash inflow Year Cash inflow
$ $
1 250,000 1 250,000
2 250,000 2 350,000
3 400,000 3 400,000
4 300,000 4 200,000
5 200,000 5 150,000
6 50,000 6 150,000
The company's cost of capital is 10%.
19.13 What is the non-discounted payback period of Project Beta?
A 2 years and 2 months
B 2 years and 4 months
C 2 years and 5 months
D 2 years and 6 months (2 marks)
19.14 What is the discounted payback period of Project Alpha?
A Between 1 and 2 years
B Between 3 and 4 years
C Between 4 and 5 years
D Between 5 and 6 years (2 marks)
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19.15 A capital investment project has an initial investment followed by constant annual returns.
How is the payback period calculated?
A Initial investment ÷ annual profit
B Initial investment ÷ annual net cash inflow
C (Initial investment – residual value) ÷ annual profit
D (Initial investment – residual value) ÷ annual net cash inflow (2 marks)
19.16 A machine has an investment cost of $60,000 at time 0. The present values (at time 0) of the expected
net cash inflows from the machine over its useful life are:
Discount rate Present value of cash inflows
10% $64,600
15% $58,200
20% $52,100
What is the internal rate of return (IRR) of the machine investment?
A Below 10%
B Between 10% and 15%
C Between 15% and 20%
D Over 20% (2 marks)
19.17 An investment project has a positive net present value (NPV) of $7,222 when its cash flows are
discounted at the cost of capital of 10% per annum. Net cash inflows from the project are expected to
be $18,000 per annum for five years. The cumulative discount (annuity) factor for five years at 10% is
3.791.
What is the investment at the start of the project?
A $61,016
B $68,238
C $75,460
D $82,778 (2 marks)
19.18 Which of the following accurately defines the internal rate of return (IRR)?
A The average annual profit from an investment expressed as a percentage of the investment sum
B The discount rate (%) at which the net present value of the cash flows from an investment is zero
C The net present value of the cash flows from an investment discounted at the required rate of
return
D The rate (%) at which discounted net profits from an investment are zero (2 marks)
19.19 An investment project has the following discounted cash flows ($'000):
Year Discount rate
0% 10% 20%
0 (90) (90) (90)
1 30 27.3 25.0
2 30 24.8 29.8
3 30 22.5 17.4
4 30 20.5 14.5
30 5.1 (12.3)
The required rate of return on investment is 10% per annum.
What is the discounted payback period of the investment project?
A Less than 3.0 years
B 3.0 years
C Between 3.0 years and 4.0 years
D More than 4.0 years (2 marks)
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QUESTIONS
81
19.20 What is the effective annual rate of interest of 2.1% compounded every three months?
A 6.43%
B 8.40%
C 8.67%
D 10.87% (2 marks)
19.21 If the interest rate is 8%, what would you pay for a perpetuity of $1,500 starting in one year’s time? (to
the nearest $)
A $1,620
B $17,130
C $18,750
D $20,370 (2 marks)
19.22 How much should be invested now (to the nearest $) to receive $24,000 per annum in perpetuity if the
annual rate of interest is 5%?
A $1,200
B $478,800
C $480,000
D $481,200 (2 marks)
19.23 The following question is taken from the June 2012 exam paper.
An investor has the choice between two investments. Investment Exe offers interest of 4% per year
compounded semi-annually for a period of three years. Investment Wye offers one interest payment of
20% at the end of its four-year life.
What is the annual effective interest rate offered by the two investments?
Investment Exe Investment Wye
A 4.00% 4.66%
B 4.00% 5.00%
C 4.04% 4.66%
D 4.04% 5.00%
(2 marks)
19.24 The following question is taken from the June 2013 exam paper.
A project has an initial outflow of $12,000 followed by six equal annual cash inflows, commencing in
one year’s time. The payback period is exactly four years. The cost of capital is 12% per year.
What is the project’s net present value (to the nearest $)?
A $333
B –$2,899
C –$3,778
D –$5,926
(2 marks)
(Total = 48 marks)
Important note
You have now reached the end of the multiple choice questions for Budgeting (Chapters 14 to 19). Make sure
that you practise the multi-task questions on Budgeting in Section 30. The real exam will contain three
10-mark multi-task questions on Budgeting, Standard costing and Performance measurement.
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QUESTIONS
83
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
If an organisation uses standard marginal costing instead of standard absorption costing, there will be no
........................................ variance and the ................. ....................../.....….… variances will be
valued at the standard contribution per unit (as opposed to standard profit per unit).
There are many possible reasons for variances arising including efficiencies and inefficiencies of
operations, errors in standard setting and changes in exchange rates.
Individual variances should not be looked at in isolation. They might be interdependent/ interrelated.
One may be .....….………… and one .....……… .
An ........................................ provides a reconciliation between budgeted and actual profit.
........................................ , ........................................ and ........................................ should be
considered before a decision about whether or not to investigate a variance is taken. One way of
deciding whether or not to investigate a variance is to investigate only those variances which exceed preset
tolerance limits.
A variance should only be investigated if the expected value of .....…..….… from investigation and any
control action exceed the .....……of investigation.
If the cause of a variance is controllable, action can be taken to bring the system back under control in
future. If the variance is uncontrollable, but not simply due to chance, it will be necessary to review
.....….… of expected results, and perhaps to revise the .....….… .
Possible pitfalls
Write down a list of mistakes you know you should avoid.
Do you know? – Standard costing
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FMA/F2 MANAGEMENT ACCOUNTING
84
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
If an organisation uses standard marginal costing instead of standard absorption costing, there will be no
fixed overhead volume variance and the sales volume/quantity variances will be valued at the standard
contribution per unit (as opposed to standard profit per unit).
There are many possible reasons for variances arising including efficiencies and inefficiencies of
operations, errors in standard setting and changes in exchange rates.
Individual variances should not be looked at in isolation. They might be interdependent/ interrelated.
One may be adverse and one favourable.
An operating statement provides a reconciliation between budgeted and actual profit.
Materiality, controllability and variance trend should be considered before a decision about whether or
not to investigate a variance is taken. One way of deciding whether or not to investigate a variance is to
investigate only those variances which exceed pre-set tolerance limits.
A variance should only be investigated if the expected value of benefits from investigation and any
control action exceed the costs of investigation.
If the cause of a variance is controllable, action can be taken to bring the system back under control in
future. If the variance is uncontrollable, but not simply due to chance, it will be necessary to review
forecasts of expected results, and perhaps to revise the budget.
Possible pitfalls
– Forgetting to state whether the variance is adverse or favourable.
– Not learning how to calculate each type of variance.
Did you know? – Standard costing
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QUESTIONS
85
20 Standard costing 17 mins
20.1 A company is in the process of setting standard unit costs for next period. Product J uses two types of
material, P and S. 7 kg of material P and 3 kg of material S are needed, at a standard price of $4 per kg
and $9 per kg respectively.
Direct labour will cost $7 per hour and each unit of J requires 5 hours of labour.
Production overheads are to be recovered at the rate of $6 per direct labour hour, and general overhead
is to be absorbed at a rate of ten per cent of production cost.
What is the standard prime cost for one unit of product J?
A $55
B $90
C $120
D $132 (2 marks)
20.2 What is an attainable standard?
A A standard which includes no allowance for losses, waste and inefficiencies. It represents the
level of performance which is attainable under perfect operating conditions
B A standard which includes some allowance for losses, waste and inefficiencies. It represents the
level of performance which is attainable under efficient operating conditions
C A standard which is based on currently attainable operating conditions
D A standard which is kept unchanged, to show the trend in costs (2 marks)
20.3 Which of the following statements is correct?
A The operating standards set for production should be the most ideal possible
B The operating standards set for production should be the minimal level
C The operating standards set for production should be the attainable level
D The operating standards set for production should be the maximum level (2 marks)
20.4 A company manufactures a carbonated drink, which is sold in 1 litre bottles. During the bottling process
there is a 20% loss of liquid input due to spillage and evaporation. What is the standard usage of liquid
per bottle?
A 0.80 litres
B 1.00 litres
C 1.20 litres
D 1.25 litres (2 marks)
20.5 Which of the following best describes management by exception?
A Using management reports to highlight exceptionally good performance, so that favourable results
can be built upon to improve future outcomes
B Sending management reports only to those managers who are able to act on the information
contained within the reports
C Focusing management reports on areas which require attention and ignoring those which appear
to be performing within acceptable limits
D Focusing management reports on areas which are performing just outside acceptable limits
(2 marks)
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20.6 Standard costing provides which of the following?
(i) Targets and measures of performance
(ii) Information for budgeting
(iii) Simplification of inventory control systems
(iv) Actual future costs
A (i), (ii) and (iii) only
B (ii), (iii) and (iv) only
C (i), (iii) and (iv) only
D (i), (ii) and (iv) only (2 marks)
20.7 A unit of product L requires 9 active labour hours for completion. The performance standard for product
L allows for ten per cent of total labour time to be idle, due to machine downtime. The standard wage
rate is $9 per hour. What is the standard labour cost per unit of product L?
A $72.90
B $81.00
C $89.10
D $90.00 (2 marks)
(Total = 14 marks)
21 Basic variance analysis 46 mins
21.1 A company manufactures a single product L, for which the standard material cost is as follows.
$ per unit
Material 14 kg $3 42
During July, 800 units of L were manufactured, 12,000 kg of material were purchased for $33,600, of
which 11,500 kg were issued to production.
SM Co values all inventory at standard cost.
What are the material price and usage variances for July?
Price Usage
A $2,300 (F) $900 (A)
B $2,300 (F) $300 (A)
C $2,400 (F) $900 (A)
D $2,400 (F) $840 (A) (2 marks)
The following information relates to questions 21.2 and 21.3.
A company expected to produce 200 units of its product, the Bone, in 20X3. In fact 260 units were produced.
The standard labour cost per unit was $70 (10 hours at a rate of $7 per hour). The actual labour cost was
$18,600 and the labour force worked 2,200 hours although they were paid for 2,300 hours.
21.2 What is the direct labour rate variance for the company in 20X3?
A $400 (A)
B $2,500 (F)
C $2,500 (A)
D $3,200 (A) (2 marks)
21.3 What is the direct labour efficiency variance for the company in 20X3?
A $400 (A)
B $2,100 (F)
C $2,800 (A)
D $2,800 (F) (2 marks)
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QUESTIONS
87
21.4 Extracts from a company's records from last period are as follows.
Budget Actual
Production 1,925 units 2,070 units
Variable production overhead cost $11,550 $14,904
Labour hours worked 5,775 8,280
What are the variable production overhead variances for last period?
Expenditure Efficiency
A $1,656 (F) $2,070 (A)
B $1,656 (F) $3,726 (A)
C $1,656 (F) $4,140 (A)
D $3,354 (A) $4,140 (A) (2 marks)
21.5 A company has budgeted to make and sell 4,200 units of product X during the period.
The standard fixed overhead cost per unit is $4.
During the period covered by the budget, the actual results were as follows.
Production and sales 5,000 units
Fixed overhead incurred $17,500
What are the fixed overhead variances for the period?
Fixed overhead Fixed overhead
expenditure variance volume variance
A $700 (F) $3,200 (F)
B $700 (F) $3,200 (A)
C $700 (A) $3,200 (F)
D $700 (A) $3,200 (A)
(2 marks)
21.6 A company manufactures a single product, and relevant data for December is as follows.
Budget/standard Actual
Production units 1,800 1,900
Labour hours 9,000 9,400
Fixed production overhead $36,000 $39,480
What are the fixed production overhead capacity and efficiency variances for December?
Capacity Efficiency
A $1,600 (F) $400 (F)
B $1,600 (A) $400 (A)
C $1,600 (A) $400 (F)
D $1,600 (F) $400 (A) (2 marks)
21.7 Which of the following would help to explain a favourable direct labour efficiency variance?
(i) Employees were of a lower skill level than specified in the standard
(ii) Better quality material was easier to process
(iii) Suggestions for improved working methods were implemented during the period
A (i), (ii) and (iii)
B (i) and (ii) only
C (ii) and (iii) only
D (i) and (iii) only (2 marks)
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21.8 Which of the following statements is correct?
A An adverse direct material cost variance will always be a combination of an adverse material
price variance and an adverse material usage variance
B An adverse direct material cost variance will always be a combination of an adverse material
price variance and a favourable material usage variance
C An adverse direct material cost variance can be a combination of a favourable material price
variance and a favourable material usage variance
D An adverse direct material cost variance can be a combination of a favourable material price
variance and an adverse material usage variance (2 marks)
The following information relates to Questions 21.9 and 21.10.
A company has a budgeted material cost of $125,000 for the production of 25,000 units per month. Each unit
is budgeted to use 2 kg of material. The standard cost of material is $2.50 per kg.
Actual materials in the month cost $136,000 for 27,000 units and 53,000 kg were purchased and used.
21.9 What was the adverse material price variance?
A $1,000
B $3,500
C $7,500
D $11,000 (2 marks)
21.10 What was the favourable material usage variance?
A $2,500
B $4,000
C $7,500
D $10,000 (2 marks)
21.11 The following information relates to labour costs for the past month:
Budget Labour rate $10 per hour
Production time 15,000 hours
Time per unit 3 hours
Production units 5,000 units
Actual Wages paid $176,000
Production 5,500 units
Total hours worked 14,000 hours
There was no idle time.
What were the labour rate and efficiency variances?
Rate variance Efficiency variance
A $26,000 Adverse $25,000 Favourable
B $26,000 Adverse $10,000 Favourable
C $36,000 Adverse $2,500 Favourable
D $36,000 Adverse $25,000 Favourable
(2 marks)
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QUESTIONS
89
21.12 A manufacturing company operates a standard absorption costing system. Last month 25,000
production hours were budgeted and the budgeted fixed production overhead cost was $125,000. Last
month the actual hours worked were 24,000 and the standard hours for actual production were
27,000.
What was the fixed production overhead capacity variance for last month?
A $5,000 Adverse
B $5,000 Favourable
C $10,000 Adverse
D $10,000 Favourable (2 marks)
The following information relates to questions 21.13 to 21.15.
Number of units produced 2,200 2,000
Budget Actual
$ $
Direct materials 110,000 110,000
Direct labour 286,000 280,000
Variable overhead 132,000 120,000
The actual number of units produced was 2,000.
21.13 What was the total direct materials variance?
A Nil
B $10,000 Adverse
C $10,000 Favourable
D $11,000 Adverse (2 marks)
21.14 What was the total direct labour variance?
A $6,000 Favourable
B $20,000 Adverse
C $22,000 Favourable
D Nil (2 marks)
21.15 What was the total direct variable overheads variance?
A Nil
B $12,000 Favourable
C $12,000 Adverse
D $11,000 Adverse (2 marks)
21.16 Which of the following statements are true?
(i) A favourable fixed overhead volume capacity variance occurs when actual hours of work are greater
than budgeted hours of work
(ii) A labour force that produces 5,000 standard hours of work in 5,500 actual hours will give a
favourable fixed overhead volume efficiency variance
A (i) is true and (ii) is false
B Both are true
C Both are false
D (i) is false and (ii) is true (2 marks)
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21.17 Which of the following statements are true?
(i) The fixed overhead volume capacity variance represents part of the over/under absorption of
overheads
(ii) A company works fewer hours than budgeted. This will result in an adverse fixed overhead
volume capacity variance
A (i) is true and (ii) is false
B Both are true
C Both are false
D (i) is false and (ii) is true (2 marks)
21.18 The costs below relate to the month of June.
Fixed budget Flexed budget Actual
2,200 units 2,000 units 2,000 units
Total direct materials $165,000 $150,000 $140,000
What was the total direct material variance?
A $10,000 Adverse
B $10,000 Favourable
C $25,000 Adverse
D $25,000 Favourable (2 marks)
21.19 The graph below shows the standard fixed overhead cost per unit, the total budgeted fixed overhead cost
and the actual fixed overhead cost for the month of December. The actual number of units produced in
June was 2,500 units.
Number of units
1000
2500
5000
7500
10000
12500
15000
17500
20000
2000 3000 4000 5000 6000 7000 8000 9000 x
Fixed
overhead
cost
$
Budgeted fixed
overhead cost
Actual fixed
overhead cost
Standard fixed overhead cost
What is the total fixed overhead variance?
A $2,500 Adverse
B $3,750 Favourable
C $5,000 Adverse
D $6,250 Favourable (2 marks)
(Total = 38 marks)
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QUESTIONS
91
22 Further variance analysis 53 mins
22.1 A company currently uses a standard absorption costing system. The fixed overhead variances extracted
from the operating statement for November are:
$
Fixed production overhead expenditure variance 5,800 adverse
Fixed production overhead capacity variance 4,200 favourable
Fixed production overhead efficiency variance 1,400 adverse
PQ Limited is considering using standard marginal costing as the basis for variance reporting in future.
What variance for fixed production overhead would be shown in a marginal costing operating statement
for November?
A No variance would be shown for fixed production overhead
B Expenditure variance: $5,800 adverse
C Volume variance: $2,800 favourable
D Total variance: $3,000 adverse (2 marks)
22.2 Which of the following situations is most likely to result in a favourable selling price variance?
A The sales director decided to change from the planned policy of market skimming pricing to one
of market penetration pricing
B Fewer customers than expected took advantage of the early payment discounts offered
C Competitors charged lower prices than expected, therefore selling prices had to be reduced in
order to compete effectively
D Demand for the product was higher than expected and prices could be raised without adverse
effects on sales volumes (2 marks)
The following information relates to questions 22.3 to 22.6.
A company manufactures a single product. An extract from a variance control report together with relevant
standard cost data is shown below.
Standard selling price per unit $70
Standard direct material cost (5 kg $2 per kg) $10 per unit
Budgeted total material cost of sales $2,300 per month
Budgeted profit margin $6,900 per month
Actual results for February
Sales revenue $15,200
Total direct material cost $2,400
Direct material price variance $800 adverse
Direct material usage variance $400 favourable
There was no change in inventory levels during the month.
22.3 What was the actual production in February?
A 200 units
B 217 units
C 240 units
D 280 units (2 marks)
22.4 What was the actual usage of direct material during February?
A 800 kg
B 1,000 kg
C 1,200 kg
D None of these (2 marks)
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22.5 What was the selling price variance for February?
A $120 (F)
B $900 (A)
C $1,200 (A)
D $1,200 (F) (2 marks)
22.6 What was the sales volume profit variance for February?
A $900 (F)
B $1,200 (F)
C $900 (A)
D $2,100 (A) (2 marks)
22.7 A company uses a standard absorption costing system. The following details have been extracted from
its budget for April.
Fixed production overhead cost $48,000
Production (units) 4,800
In April the fixed production overhead cost was under absorbed by $8,000 and the fixed production
overhead expenditure variance was $2,000 adverse.
What was the actual number of units produced?
A 3,800
B 4,200
C 4,800
D 5,800 (2 marks)
22.8 A company purchased 6,850 kgs of material at a total cost of $21,920. The material price variance was
$1,370 favourable. What was the standard price per kg?
A $0.20
B $3.00
C $3.20
D $3.40 (2 marks)
22.9 The following data relates to one of a company's products.
$ per unit $ per unit
Selling price 27.00
Variable costs 12.00
Fixed costs 9.00
21.00
Profit 6.00
Budgeted sales for control period 7 were 2,400 units, but actual sales were 2,550 units. The revenue
earned from these sales was $67,320.
Profit reconciliation statements are drawn up using marginal costing principles. What sales variances
would be included in such a statement for period 7?
Price Volume
A $1,530 (A) $900 (F)
B $1,530 (A) $2,250 (F)
C $1,530 (A) $2,250 (A)
D $1,530 (F) $2,250 (F) (2 marks)
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22.10 A company uses variance analysis to control costs and revenues.
Information concerning sales is as follows:
Budgeted selling price $15 per unit
Budgeted sales units 10,000 units
Budgeted profit per unit $5 per unit
Actual sales revenue $151,500
Actual units sold 9,800 units
What is the sales volume profit variance?
A $500 Favourable
B $1,000 Favourable
C $1,000 Adverse
D $3,000 Adverse (2 marks)
The following information relates to questions 22.11 and 22.12.
The standard direct material cost per unit for a product is calculated as follows:
10.5 litres at $2.50 per litre
Last month the actual price paid for 12,000 litres of material used was 4% above standard and the direct
material usage variance was $1,815 favourable. No stocks of material are held.
22.11 What was the adverse direct material price variance for last month?
A $1,000
B $1,200
C $1,212
D $1,260 (2 marks)
22.12 What was the actual production last month (in units)?
A 1,074
B 1,119
C 1,212
D 1,258 (2 marks)
22.13 Last month a company budgeted to sell 8,000 units at a price of $12.50 per unit. Actual sales last
month were 9,000 units giving a total sales revenue of $117,000.
What was the sales price variance for last month?
A $4,000 Favourable
B $4,000 Adverse
C $4,500 Favourable
D $4,500 Adverse (2 marks)
22.14 A company uses a standard absorption costing system. Last month budgeted production was 8,000
units and the standard fixed production overhead cost was $15 per unit. Actual production last month
was 8,500 units and the actual fixed production overhead cost was $17 per unit.
What was the total adverse fixed production overhead variance for last month?
A $7,500
B $16,000
C $17,000
D $24.500 (2 marks)
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22.15 A cost centre had an overhead absorption rate of $4.25 per machine hour, based on a budgeted activity
level of 12,400 machine hours.
In the period covered by the budget, actual machine hours worked were 2% more than the budgeted
hours and the actual overhead expenditure incurred in the cost centre was $56,389.
What was the total over or under absorption of overheads in the cost centre for the period?
A $1,054 over absorbed
B $2,635 under absorbed
C $3,689 over absorbed
D $3,689 under absorbed (2 marks)
22.16 A company uses standard marginal costing. Last month the standard contribution on actual sales was
$10,000 and the following variances arose:
$
Total variable costs variance 2,000 Adverse
Sales price variance 500 Favourable
Sales volume contribution variance 1,000 Adverse
What was the actual contribution for last month?
A $7,000
B $7,500
C $8,000
D $8,500 (2 marks)
22.17 AD Ltd manufactures and sells a single product, E, and uses a standard absorption costing system.
Standard cost and selling price details for product E are as follows.
$ per unit
Variable cost 8
Fixed cost 2
10
Standard profit 5
Standard selling price 15
The sales volume variance reported for last period was $9,000 adverse.
AD Ltd is considering using standard marginal costing as the basis for variance reporting in future. What
would be the correct sales volume variance to be shown in a marginal costing operating statement for
last period?
A $6,428 (A)
B $6,428 (F)
C $12,600 (F)
D $12,600 (A) (2 marks)
22.18 When comparing the profits reported under absorption costing and marginal costing during a period
when the level of inventory increased, which of the following is true?
A Absorption costing profits will be higher and closing inventory valuations lower than those under
marginal costing
B Absorption costing profits will be higher and closing inventory valuations higher than those under
marginal costing
C Marginal costing profits will be higher and closing inventory valuations lower than those under
absorption costing
D Marginal costing profits will be higher and closing inventory valuations higher than those under
absorption costing (2 marks)
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22.19 PH Ltd produces a single product and currently uses absorption costing for its internal management
accounting reports. The fixed production overhead absorption rate is $34 per unit. Opening inventories
for the year were 100 units and closing inventories were 180 units. The company's management
accountant is considering a switch to marginal costing as the inventory valuation basis.
If marginal costing were used, the marginal costing profit for the year, compared with the profit
calculated by absorption costing, would be which of the following?
A $2,720 lower
B $2,720 higher
C $3,400 lower
D $3,400 higher (2 marks)
22.20 The budgeted contribution for HMF Co for June was $290,000. The following variances occurred during
the month.
$
Fixed overhead expenditure variance 6,475 Favourable
Total direct labour variance 11,323 Favourable
Total variable overhead variance 21,665 Adverse
Selling price variance 21,875 Favourable
Fixed overhead volume variance 12,500 Adverse
Sales volume variance 36,250 Adverse
Total direct materials variance 6,335 Adverse
What was the actual contribution for the month?
A $252,923
B $258,948
C $321,052
D $327,077 (2 marks)
22.21 The following question is taken from the December 2011 exam paper.
A company calculates the following under a standard absorption costing system.
(i) The sales volume margin variance
(ii) The total fixed overhead variance
(iii) The total variable overhead variance
If a company changed to a standard marginal costing system, which variances could change in value?
A (i) only
B (ii) only
C (i) and (ii) only
D (i), (ii) and (iii) (2 marks)
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22.22 The following question is taken from the December 2012 exam paper.
A company uses a standard absorption costing system. The following figures are available for the last
accounting period in which actual profit was $108,000.
$
Sales volume profit variance 6,000 adverse
Sales price variance 5,000 favourable
Total variable cost variance 7,000 adverse
Fixed cost expenditure variance 3,000 favourable
Fixed cost volume variance 2,000 adverse
What was the standard profit for actual sales in the last accounting period?
A $101,000
B $107,000
C $109,000
D $115,000 (2 marks)
(Total = 44 marks)
Important note
You have now reached the end of the multiple choice questions for Standard costing (Chapters 20 to 22). Make
sure that you practise the multi-task questions on Standard costing in Section 31. The real exam will contain
three 10-mark multi-task questions on Budgeting, Standard costing and Performance measurement.
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Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
A .................. .................... is a formal statement of the business' aim. It can play an important point
in the ………….. process. Cascading downwards from this is a hierarchy of goals and …………….
These may be split into operational, tactical and strategic. Cascading downwards from this are the
critical success factors. A critical success factor is a performance requirement that is fundamental to
competitive success. ………. ………………. …………….. are quantifiable measurements which reflect
the critical success factors.
The 3 Es which are generally desirable features of organisational performance are ..................,
...................., and …………....
The formula for return on capital employed = (…………./………………) × 100%.
Capital employed = ………………….. + ………………. + ………..……. – ………………
The .....….……ratio is the standard test of liquidity and is the ratio of .....……… ………….. to
…………. …………….
Performance of non-profit-making organisations can be measured:
…………………….
…………………….
…………………….
The balanced scorecard measures performance in four perspectives: …………….. ……………,
…………… ……………, …………… ……………. and ………………..
.....….… ……………... is a planned and positive approach to reducing expenditure. Measures should be
planned programmes rather than crash programmes to cut spending levels.
Work study is a means of raising the ………………. of an operating unit by the …………. of work.
There are two main parts to work study: ………… …………. and ……….. …………….
Value analysis considers four aspects of value: …….. value, ………….. value, ………. value and
……… value.
Possible pitfalls
Write down a list of mistakes you know you should avoid.
Do you know? – Performance measurement
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
A mission statement is a formal statement of the business' aim. It can play an important point in the
planning process. Cascading downwards from this is a hierarchy of goals and objectives. These may be
split into operational, tactical and strategic. Cascading downwards from this are the critical success
factors. A critical success factor is a performance requirement that is fundamental to competitive
success. Key performance indicators are quantifiable measurements which reflect the critical success
factors.
The 3 Es which are generally desirable features of organisational performance are economy, efficiency
and effectiveness.
The formula for return on capital employed = (profit/capital employed) × 100%.
Capital employed = non-current assets + investments + current assets – current liabilities
The current ratio is the standard test of liquidity and is the ratio current assets to current liabilities.
Performance of non-profit-making organisations can be measured:
In terms of inputs and outputs
By judgement
By comparison
The balanced scorecard measures performance in four perspectives: customer satisfaction, financial
success, process efficiency and growth.
Cost reduction is a planned and positive approach to reducing expenditure. Measures should be planned
programmes rather than crash programmes to cut spending levels.
Work study is a means of raising the productivity of an operating unit by the reorganisation of work.
There are two main parts to work study: method study and work measurement.
Value analysis considers four aspects of value: cost value, exchange value, use value and esteem value.
Possible pitfalls
– Not realising that mission statements feed into objectives which feed into critical success factors
which are quantified by key performance indicators.
– Not knowing the performance measures which are appropriate for service industries.
– Not knowing the meaning of the efficiency, capacity and activity ratios.
– Not knowing the formulae for measuring profitability, liquidity and gearing.
Did you know? – Performance measurement
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23 Performance measurement 62 mins
23.1 All of the following, except one, are sound principles for devising objectives in order to enact the
corporate mission. Which is the exception?
A They should be observable or measurable
B They should be easily achievable
C They should relate to a specified time period
D They should be specific (2 marks)
23.2 Which one of the following performance indicators is a financial performance measure?
A Quality rating
B Number of customer complaints
C Cash flow
D System (machine) down time (2 marks)
23.3 A government body uses measures based upon the 'three Es' to the measure value for money generated
by a publicly funded hospital. It considers the most important performance measure to be 'cost per
successfully treated patient'.
Which of the three E's best describes the above measure?
A Economy
B Effectiveness
C Efficiency
D Externality (2 marks)
23.4 In order for a business's strength to have a real benefit, it has to be linked to critical success factors.
What are critical success factors?
A Factors contributing to reduced costs
B Factors necessary to match strengths to opportunities
C Factors necessary to build on strengths
D Factors fundamental to strategic success (2 marks)
23.5 The following summarised statement of financial position is available for L Co.
$'000 $'000
Non-current assets 31,250
Current assets
Inventory 35,000
Receivables 40,000
Cash 1,250
107,500
EQUITY AND LIABILITIES
Capital and reserves 47,500
Current liabilities (payables only) 60,000
107,500
What is the value of the acid test ratio?
A 0.6875
B 0.7093
C 1.2708
D 2.000 (2 marks)
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23.6 In general terms, which of the following elements should organisations include in their mission
statements?
(i) Policies and standards of behaviour
(ii) Values – a description of the culture, assumptions and beliefs regarded as important to those
managing the business
(iii) Profitability
(iv) Strategy – the commercial logic for the business, defining the nature of the business
A (i) and (ii) only
B (ii) and (iv) only
C (i), (ii) and (iv) only
D (iii) and (iv) only (2 marks)
23.7 Which of the following short-term objectives may involve the sacrifice of longer-term objectives?
(i) Reducing training costs
(ii) Increasing quality control
(iii) Increasing capital expenditure projects
A (i) only
B (i), (ii) and (iii)
C (ii) and (iii) only
D (i) and (ii) only (2 marks)
23.8 Which of the following statements are true?
(i) Non-financial performance indicators are less likely to be manipulated than financial ones
(ii) Non-financial performance indicators offer a means of counteracting short-termism
A (i) and (ii) are true
B (i) and (ii) are false
C (i) is true and (ii) is false
D (i) is false and (ii) is true (2 marks)
23.9 What is short-termism?
A It is when non-financial performance indicators are used for measurement
B It is when organisations sacrifice short term objectives
C It is when there is a bias towards short term rather than long term performance
D It is when managers' performance is measured on long term results (2 marks)
23.10 Which of the following performance measures is most likely to be recorded because of government
regulations?
A Sales growth
B Customer numbers
C CO2 emissions
D Return on investment (2 marks)
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23.11 Market conditions and economic conditions can impact on performance measurement. Which of the
following statements are true?
(i) The entry of a new competitor in the market will cause a business to examine sales performance
measures more closely
(ii) General economic conditions can raise or lower overall demand and supply
A (i) and (ii) are true
B (i) and (ii) are false
C (i) is true and (ii) is false
D (i) is false and (ii) is true (2 marks)
23.12 The following question is taken from the December 2011 exam paper.
A company has current assets of $1.8m, including inventory of $0.5m, and current liabilities of $1.0m.
What would be the effect on the value of the current and acid test ratios if the company bought more
raw material inventory on three months' credit?
Current ratio Acid test
A Increase Increase
B Decrease Increase
C Increase Decrease
D Decrease Decrease (2 marks)
23.13 The following question is taken from the June 2012 exam paper.
An investment centre earns a return on investment of 18% and a residual income of $300,000. The
cost of capital is 15%. A new project offers a return on capital employed of 17%.
If the new project were adopted, what would happen to the investment centre's return on investment
and residual income?
Return on investment Residual income
A Increase Decrease
B Increase Increase
C Decrease Decrease
D Decrease Increase (2 marks)
23.14 Which of the following BEST explains the relationship between mission statements and performance
measurement.
A Mission statements are a marketing tool and have no part to play in performance measurement
B To be of value, a performance measure must have an obvious link to the mission statement
C Performance measurement involves comparing actual performance against a target and the
mission statement represents the organisation's overall target
D Mission statements include detailed performance standards that actual performance can be
measured against (2 marks)
23.15 Which of the following describes the role of tactical objectives?
A 'Middle tier' objectives to facilitate the planning and control of individual functions within the
organisation
B Day-to-day performance targets related to the organisation's operations
C A clear vision of the organisation's reason for existing
D Long-term objectives for the organisation as a whole (2 marks)
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23.16 A company sells new, high quality motor vehicles in many countries around the world. Half way through
the company's current financial year, the global economy unexpectedly goes in to recession.
What impact would the unexpected recession have on performance measurement relating to sales and
revenue?
A The impact of a recession on the sales of new, high quality motor vehicles cannot be predicted
B Sales and revenue are likely to decrease in the second half of the year and performance should be
measured in that context
C No impact as a recession is unlikely to impact the sales and revenue of motor vehicles
D Sales and revenue are likely to increase in the second half of the year and performance should be
measured in that context (2 marks)
23.17 Which of the following is NOT a way in which governments influence performance measurement?
A Accurate records of financial performance are required for taxation purposes
B By requiring all private sector organisations to implement the Balanced Scorecard
C By encouraging measurement of environmental impact including CO2 emissions
D Requiring 'value for money' performance measures to be implemented in public sector
organisations (2 marks)
23.18 An extract from a company's financial results for 20X6 are shown below.
20X6
$'000
Sales 5,400
Less cost of sales: 1,950
3,450
Less expenses:
Wages 1,700
Repairs and maintenance 240
All other expenses 490
Net profit 1,020
What is the gross profit percentage for 20X6, to one decimal place?
A 18.9%
B 18.8%
C 63.9%
D 63.8% (2 marks)
23.19 Which of the following describes the role of strategic objectives?
A 'Middle tier' objectives to facilitate the planning and control of individual functions within the
organisation
B Day-to-day performance targets related to the organisation's operations
C A clear vision of the organisation's reason for existing
D Long-term objectives for the organisation as a whole (2 marks)
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23.20 A company's financial results for 20X4 are shown below.
20X4
$'000
Sales 7,200
Less cost of sales: 2,900
Gross profit 4,300
Less expenses:
Wages 1,600
Repairs and maintenance 360
Directors' salaries 150
Directors' bonuses 55
Other costs (including depreciation) 400
Net profit 1,735
What is the net profit percentage for 20X4, to one decimal place?
A 59.7%
B 24.0%
C 24.1%
D 59.8% (2 marks)
23.21 What is the main focus of the current ratio?
A Profitability
B Efficiency
C Liquidity
D Productivity (2 marks)
23.22 The following information has been extracted from the statement of financial position of X Company.
EQUITY AND LIABILITIES
Capital and reserves 585,000
Long term liabilities (long-term loan) 670,000
Current liabilities (payables only) 84,000
1,339,000
What is the capital gearing ratio, expressed as a percentage to one decimal place?
A 53.4%
B 128.9%
C 228.9%
D 69.6% (2 marks)
23.23 Which of the following BEST describes the advantage of a Balanced Scorecard approach?
A The Balanced Scorecard approach enables organisations that are struggling financially to
emphasise other areas
B The Balanced Scorecard approach enables organisations to consider all areas of performance
relevant to achieving their strategic goals
C The Balanced Scorecard approach enables organisations to more easily benchmark their
performance against others
D The Balanced Scorecard approach enables organisations to demonstrate their ethical credentials
(2 marks)
23.24 What is the main focus of the acid test ratio?
A Profitability
B Efficiency
C Liquidity
D Productivity (2 marks)
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23.25 Why would an organisation use non-financial performance measures?
A To appear socially responsible
B To prevent a narrow focus on short-term financial performance
C To prevent scrutiny of financial performance
D To encourage short termism (2 marks)
23.26 The Balanced Scorecard measures performance from four perspectives. What are they?
A Customer satisfaction, growth, financial stability and process efficiency
B Customer retention, growth, financial stability and process efficiency
C Customer satisfaction, growth, financial success and process effectiveness
D Customer satisfaction, growth, financial success and process efficiency
(2 marks)
(Total = 52 marks)
24 Applications of performance measurement 53 mins
24.1 The following information is available for company X.
20X7 20X8
$ $
Profit 7,500 9,000
Sales 500,000 450,000
Capital employed 37,500 60,000
Calculate the change in ROI from 20X7 to 20X8?
A Decrease from 20% to 15%
B Increase from 1.5% to 2%
C Increase from 7.5% to 13.3%
D Decrease from 100% to 90% (2 marks)
24.2 Using the figures in the question above, what is the asset turnover for 20X8?
A 0.075 times
B 0.13 times
C 7.5 times
D 13.3 times (2 marks)
24.3 The usefulness of profit as a single control measure has been criticised in recent years. Which of the
following is NOT a reason to support this criticism?
A Profit provides a narrow focus for performance measurement
B Profit measurement alone can lead to short-termism
C Profit is simple to understand
D Profit can be easily manipulated (2 marks)
24.4 In not for profit businesses and state-run entities, a value-for-money audit can be used to measure
performance. It covers three key areas: economy, efficiency and effectiveness. Which of the following
could be used to describe effectiveness in this context?
A Avoiding waste of inputs
B Achieving agreed targets
C Achieving a given level of profit
D Obtaining suitable quality inputs at the lowest price (2 marks)
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24.5 Balance Co is looking to introduce a balanced scorecard and is finalising the measures to use for the
'innovation and learning' perspective. Which one of the following is not really suitable for this
perspective?
A Number of ideas from staff
B Percentage of sales from new products
C Number of new products introduced
D Level of refunds given (2 marks)
24.6 Qual Co is keen to increase the use they make of non-financial performance measures in their overall
performance measurement activities. In particular, they are keen to improve customer retention and so
want to focus on the quality of service they provide to their customers. Which of the following measures
would be most appropriate as a measure of service quality?
(i) Number of customer complaints
(ii) Number of repeat orders as a proportion of total orders
(iii) Sales volume growth
A (i) and (ii)
B (i), (ii) and (iii)
C (i) and (iii)
D (ii) and (iii) (2 marks)
24.7 Which of the following are non-financial objectives?
(i) Growth of sales
(ii) Diversification
(iii) Contented workforce
(iv) Increase earnings per share
A (ii) and (iii)
B (i), (ii) and (iii)
C (ii), (iii) and (iv)
D (i), (iii) and (iv) (2 marks)
24.8 Which one of the following is not a measure of service quality?
A Number of complaints
B Proportion of repeat bookings
C Customer waiting times
D Staff turnover (2 marks)
24.9 Division A of Aigburth Co is considering a project which will increase annual net profit after tax by
$30,000 but will require average inventory levels to increase by $200,000. The current target rate of
return on investments is 13% and the imputed interest cost of capital is 12%.
Based on the ROI and/or RI criteria would the project be accepted?
A ROI – yes, RI – no
B ROI – yes RI – yes
C ROI – no, RI – yes
D ROI – no, RI – no (2 marks)
24.10 Which of the following statements are valid criticisms of return on investment (ROI) as a performance
measure?
(i) It is misleading if used to compare departments with different levels of risk
(ii) It is misleading if used to compare departments with assets of different ages
(iii) Its use may discourage investment in new or replacement assets
(iv) The figures needed are not easily available
A (ii) and (iii) only
B (ii) and (iv) only
C (i) and (iii) only
D (i), (ii) and (iii) (2 marks)
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24.11 Which of the following performance measures would be helpful for a service industry company?
(i) Net profit margins
(ii) Standard costs and variance analysis
(iii) Employee absentee rates
(iv) Number of defective units
A (ii) and (iii) only
B (ii) and (iv) only
C (i) and (iii) only
D (i), (ii) and (iii) (2 marks)
24.12 Which of the following would be suitable for measuring resource utilisation?
(i) Efficiency
(ii) Productivity
(iii) Relative market share
A (i) and (ii) only
B (ii) and (iii) only
C (i) and (iii) only
D (i), (ii) and (iii) (2 marks)
24.13 Which of the following would be suitable for measuring resource utilisation in a parcel delivery
company?
A Number of customer complaints
B Cost per consignment
C Depot profit league tables
D Client evaluation interview (2 marks)
24.14 A means of raising the production efficiency of an operating unit by the reorganisation of work is known
as which of the following?
A Work measurement
B Work study
C Method study
D Method measurement (2 marks)
24.15 Value analysis can achieve which of the following?
(i) Eliminate costs
(ii) Reduce costs
(iii) Increase quantity sold
(iv) Increase sales price
A (ii) and (iii) only
B (i) and (ii) only
C (iii) and (iv) only
D (i), (ii), (iii) and (iv) (2 marks)
24.16 The following statements relate to benchmarking.
(i) A danger of benchmarking is that inappropriate comparisons lead to incorrect conclusions
(ii) Benchmarking must involve competitors to be effective
(iii) The ultimate aim of benchmarking is to improve performance
(iv) Benchmarking is essentially a cost cutting exercise
Which statements are true?
A (i) and (iv) only
B (ii) and (iv) only
C (ii) and (iii) only
D (i) and (iii) only (2 marks)
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24.17 A financial services company benchmarks the performance of its IT department with that of a leading IT
outsource company.
What type of benchmarking is the company using?
A Strategic
B Competitive
C Functional
D Internal (2 marks)
24.18 Value analysis considers four aspects of value. What are they?
A Cost value, exchange value, use value and esteem value
B Cost value, trade value, use value and esteem value
C Cost value, exchange value, use value and retail value
D Competitive value, exchange value, use value and esteem value (2 marks)
24.19 Which one of the following would NOT improve the quality of a monthly report produced for senior
managers of a large organisation that operates across Europe?
A Ensuring all monetary values are presented in full, to the nearest whole Euro
B Summarising the key points in an executive summary at the start of the report
C Ensuring language used is clear and concise
D Ensuring points requiring action are clearly indicated (2 marks)
24.20 Company A manufactures mobile phones. Staff employed within the Research & Development function
at Company A have purchased a mobile phone manufactured by Company B for the purpose of reverse
engineering.
What type of benchmarking is Company A using?
A Strategic
B Competitive
C Functional
D Internal (2 marks)
24.21 Which of the following are suitable measures of performance at the strategic level?
(i) Machine idle time
(ii) Employee sick days
(iii) Return on capital employed
A (i) and (ii)
B (ii) only
C (ii) and (iii)
D (iii) only (2 marks)
24.22 What is 'short-termism'?
A A legitimate focus on short-term results
B A belief that senior management have a duty to maximise profit
C Prioritising short-term results above the organisation's long-term prospects
D A management philosophy linked to TQM (2 marks)
(Total = 44 marks)
Important note
You have now reached the end of the multiple choice questions for Performance measurement (Chapters 23 to
24). Make sure that you practise the multi-task questions on Performance measurement in Section 32. The real
exam will contain three 10-mark multi-task questions on Budgeting, Standard costing and Performance
measurement.
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25 Mixed Bank 1 48 mins
25.1 The following data relate to Product D.
Material cost per unit $20.00
Labour cost per unit $69.40
Production overhead cost per machine hour $12.58
Machine hours per unit 14
General overhead absorption rate 8% of total production cost
What is the total cost per unit of Product D, to the nearest $0.01?
A $176.12
B $265.52
C $286.76
D $300.12 (2 marks)
25.2 A product is made in two consecutive processes. Data for the latest period are as follows:
Process 1 Process 2
Input (kg) 47,000 42,000
Normal loss (% of input) 8 5
Output (kg) 42,000 38,915
No work in progress is held at any time in either process.
Was there an abnormal loss or abnormal gain arising in each process during the period?
Process 1 Process 2
A Abnormal loss Abnormal loss
B Abnormal loss Abnormal gain
C Abnormal gain Abnormal loss
D Abnormal gain Abnormal gain
(2 marks)
25.3 The following information is available for a company in the latest period.
Original budget Flexed budget Actual results
Sales and production (units) 11,200 9,500 9,500
$'000 $'000 $'000
Sales revenue 224.0 190.0 209.0
Direct material 56.0 47.5 57.0
Direct labour 66.0 57.5 56.1
Overhead 27.4 24.0 28.0
Profit 74.6 61.0 67.9
Which of the following statements is correct?
A Budgeted production volumes were achieved during the period
B Direct labour is a variable cost
C The actual selling price per unit exceeded the standard selling price per unit
D Direct material cost savings were achieved against the budget cost allowance (2 marks)
25.4 Variable costs are conventionally deemed to:
A Be constant per unit of output
B Vary per unit of output as production volume changes
C Be constant in total when production volume changes
D Vary, in total, from period to period when production is constant (2 marks)
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25.5 Which of the following criticisms of standard costing apply in all circumstances?
(i) Standard costing can only be used where all operations are repetitive and output is homogeneous
(ii) Standard costing systems cannot be used in environments which are prone to change. They
assume stable conditions
(iii) Standard costing systems assume that performance to standard is acceptable. They do not
encourage continuous improvement
A Criticism (i)
B Criticism (ii)
C Criticism (iii)
D None of them (2 marks)
25.6 Which of the following relates to capital expenditure?
A Cost of acquiring or enhancing non-current assets
B Expenditure on the manufacture of goods or the provision of services
C Recorded as an asset in the statement of profit or loss
D Recorded as a liability in the statement of financial position (2 marks)
25.7 Overheads in a factory are apportioned to four production cost centres (A, B, C and D). Direct labour
hours are used to absorb overheads in A and B and machine hours are used in C and D. The following
information is available:
Production cost centre
A B C D
Overhead expenditure ($) 18,757 29,025 46,340 42,293
Direct labour hours 3,080 6,750 3,760 2,420
Machine hours 580 1,310 3,380 2,640
Which cost centre has the highest hourly overhead absorption rate?
A Production Cost Centre A
B Production Cost Centre B
C Production Cost Centre C
D Production Cost Centre D (2 marks)
25.8 A company sold 56,000 units of its single product in a period for a total revenue of $700,000. Finished
inventory increased by 4,000 units in the period. Costs in the period were:
Variable production $3.60 per unit
Fixed production $258,000 (absorbed on the actual number of units produced)
Fixed non-production $144,000
Using absorption costing, what was the profit for the period?
A $82,000
B $96,400
C $113,600
D $123,200 (2 marks)
25.9 A company with a single product sells more units than it manufactures in a period.
Which of the following correctly describes the use of marginal costing in comparison with absorption
costing in the above situation?
A Both profit and inventory values will be higher
B Both profit and inventory values will be lower
C Profit will be higher; inventory values will be lower
D Profit will be lower; inventory values will be higher (2 marks)
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25.10 What is a by-product?
A A product produced at the same time as other products which has no value
B A product produced at the same time as other products which requires further processing to put
it in a saleable state
C A product produced at the same time as other products which has a relatively low volume
compared with the other products
D A product produced at the same time as other products which has a relatively low value
compared with the other products (2 marks)
25.11 CA Co manufactures a single product and has drawn up the following flexed budget for the year.
60% 70% 80%
$ $ $
Direct materials 120,000 140,000 160,000
Direct labour 90,000 105,000 120,000
Production overhead 54,000 58,000 62,000
Other overhead 40,000 40,000 40,000
Total cost 304,000 343,000 382,000
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 (2 marks)
25.12 An investment project has net present values as follows:
At a discount rate of 5% $69,700 positive
At a discount rate of 14% $16,000 positive
At a discount rate of 20% $10,500 negative
Using the above figures, what is the BEST approximation of the internal rate of return of the investment
project?
A 17.6%
B 17.9%
C 18.0%
D 22.7% (2 marks)
25.13 A company has decided to lease a machine. Six annual payments of $8,000 will be made with the first
payment on receipt of the machine. Below is an extract from an annuity table:
Year Annuity factor
10%
1 0.909
2 1.736
3 2.487
4 3.170
5 3.791
6 4.355
What is the present value of the lease payments at an interest rate of 10%?
A $30,328
B $34,840
C $38,328
D $48,000 (2 marks)
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25.14 Which of the following would be best described as a short term tactical plan?
A Reviewing cost variances and investigate as appropriate
B Comparing actual market share to budget
C Lowering the selling price by 15%
D Monitoring actual sales to budget (2 marks)
25.15 A company made 17,500 units at a total cost of $16 each. Three quarters of the costs were variable
and one quarter fixed. 15,000 units were sold at $25 each. There were no opening inventories.
By how much will the profit calculated using absorption costing principles differ from the profit if
marginal costing principles had been used?
A The absorption costing profit would be $10,000 less
B The absorption costing profit would be $10,000 greater
C The absorption costing profit would be $30,000 greater
D The absorption costing profit would be $40,000 greater (2 marks)
25.16 A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities.
The following information relates to the forthcoming period:
Order costs = $25 per order
Holding costs = 10% of purchase price = $4/unit
Annual demand = 20,000 units
Purchase price = $40 per unit
EOQ = 500 units
No safety inventory are held.
What are the total annual costs of inventory (ie the total purchase cost plus total order cost plus total
holding costs)?
A $22,000
B $33,500
C $802,000
D $803,000 (2 marks)
25.17 If X = 100, Y = 400, X2 = 2,040, Y2 = 32,278, XY = 8,104 and n = 5 which of the following
values for a and b are correct in the formula Y = a + bX?
a b
A 28 –2.6
B 28 +2.6
C –28 –2.6
D –28 +2.6 (2 marks)
25.18 A company is considering accepting a one-year contract which will require four skilled employees. The
four skilled employees could be recruited on a one-year contract at a cost of $40,000 per employee. The
employees would be supervised by an existing manager who earns $60,000 per annum. It is expected
that supervision of the contract would take 10% of the manager's time.
Instead of recruiting new employees the company could retrain some existing employees who currently
earn $30,000 per year. The training would cost $15,000 in total. If these employees were used they
would need to be replaced at a total cost of $100,000.
What is the relevant labour cost of the contract?
A $115,000
B $135,000
C $160,000
D $275,000 (2 marks)
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25.19 For a set of six data pairs for the variable x (profit) and y (sales) the following values have been found.
x = 2
y = 15
x2 = 30
y2 = 130
xy = 14
What is the correlation coefficient?
A 0.0006 (to 4 dp)
B 0.02 (to 2 dp)
C 0.17 ( to 2 dp)
D 1.9973 (to 4 dp) (2 marks)
25.20 A company wants to calculate the total cost of a job. The estimated cost for the job is as follows.
Direct materials 10 kg @ $10 per kg
Direct labour 20 hours @ $5 per hour
Variable production overheads are recovered at the rate of $2 per labour hour.
Fixed production overheads for the company are budgeted to be $100,000 each year and are recovered
on the basis of labour hours. There are 10,000 budgeted labour hours each year.
Other costs in relation to selling, distribution and administration are recovered at the rate of $50 per job.
What is the total production cost of the job?
A 200
B 400
C 440
D 490 (2 marks)
(Total = 40 marks)
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26 Mixed Bank 2 48 mins
26.1 A division of a service company is aware that its recent poor performance has been attributable to a low
standard of efficiency amongst the workforce, compared to rival firms. The company is adopting a
balanced scorecard approach to setting performance targets. As part of its objective of closing the skills
gap between itself and rival companies, the division's management has set a target of providing at least
40 hours of training each year for all its employees.
What does this performance target reflect?
A A customer perspective
B A learning and growth perspective
C An internal process perspective
D A finance perspective (2 marks)
26.2 Which of the following could be included in a time series based sales forecast?
(i) Trend
(ii) Seasonal variation
(iii) Cyclical variation
(iv) Random fluctuation
A (i) only
B (ii) only
C (i), (ii) and (iii) only
D (i), (ii), (iii) and (iv) (2 marks)
26.3 Which of the following is the best definition of return on capital employed?
A Profit before interest and tax ÷ Ordinary shareholders' funds × 100
B Profit before interest and tax ÷ (Ordinary shareholders' funds + Non-current liabilities) × 100
C Profit after interest and tax ÷ Ordinary shareholders' funds × 100
D Profit after interest and tax ÷ (Ordinary shareholders' funds + Non-current liabilities) × 100
(2 marks)
26.4 Good quality saves money but the cost of quality can be analysed into cost of conformance and cost of nonconformance.
Which one of the following costs is classed as a quality-related appraisal cost?
A Re-inspection cost
B Administration of customer complaints section
C Performance testing
D Training in quality control (2 marks)
26.5 Which of the following costs would be considered to be the responsibility of the manager of a profit
centre?
(i) Direct labour
(ii) Variable production overhead
(iii) Imputed interest on capital invested
(iv) Depreciation on machinery
A (i) and (ii) only
B (i), (ii) and (iii) only
C (i), (ii), (iii) and (iv)
D (iii) and (iv) only (2 marks)
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26.6 In a period 12,250 units were made and there was a favourable labour efficiency variance of $11,250.
If 41,000 labour hours were worked and the standard wage rate was $6 per hour, how many standard
hours (to two decimal places) were allowed per unit?
A 3.19
B 3.35
C 3.50
D 6.00 (2 marks)
26.7 In its first year of operations a company produced 100,000 units of a producttand sold 80,000 units at
$9 per unit. It earned a marginal costing profit of $200,000. It calculates that its fixed production
overhead per unit is $5.
What profit would it have earned under an absorption costing system?
A $100,000
B $200,000
C $300,000
D $320,000 (2 marks)
26.8 The table below contains details of an airline's expenditure on aviation fuel.
Year Total expenditure Total distance Fuel price
on aviation fuel flown index
$ million km million
20X8 600 4,200 120
20X9 1,440 4,620 240
The following statements relate to the changes between 20X8 and 20X9.
(i) The quantity of fuel consumed increased by 140%
(ii) The quantity of fuel consumed increased by 20%
(iii) The quantity of fuel consumed per km flown increased by 20%
(iv) The quantity of fuel consumed per km flown increased by 109%
Which statements are true?
A (i) only
B (ii) only
C (ii) and (iii) only
D (ii) and (iv) only
(2 marks)
26.9 The following statements relate to spreadsheets.
Which statement is false?
A They are an efficient method of storing text based files
B They facilitate 'what if' analysis
C They allow data to be displayed graphically
D They allow the font, size and colour of text to be changed (2 marks)
26.10 A company budgeted to sell 5,000 units of a product in November at a standard price of $30 per unit
and to earn a profit of $25,000. It actually sold 6,000 units at $28 per unit and earned a profit of
$32,000.
What was the favourable sales volume profit variance for November?
A $5,000
B $7,000
C $12,000
D $30,000 (2 marks)
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26.11 Which of the following are benefits of using activity based costing?
(i) It recognises that overhead costs are not always driven by the volume of production
(ii) It does not result in under or over absorption of foxed overheads
(iii) It avoids all arbitrary cost apportionments
(iv) It is particularly useful in single product businesses
A (i) only
B (i) and (ii) only
C (ii) and (iii) only
D (i) and (iv) only (2 marks)
26.12 An investment project has net present values as follows.
At a discount rate of 5% $69,700 positive
At a discount rate of 14% $16,000 positive
At a discount rate of 20% $10,500 negative
Using the above figures what is the best approximation of the internal rate of return of the investment
project?
A 17.6%
B 17.9%
C 18.0%
D 22.7% (2 marks)
26.13 A company uses production labour hours to absorb its fixed production overheads. A strike by its
workforce results in a loss of 30% of the period's budgeted production labour hours.
Which of the following variances will occur as a result of the loss in production labour hours?
A Adverse fixed overhead capacity variance
B Adverse fixed overhead efficiency variance
C Adverse direct labour efficiency variance
D Adverse direct labour rate variance (2 marks)
26.14 A firm with current assets of $40 million and current liabilities of $20 million buys $5 million of
inventory on credit which increases its inventory level to $10 million.
What will the effect be on its current ratio and quick (acid test) ratio?
Current ratio Liquidity ratio
A Increase by 25% Unchanged
B Reduce by 10% Unchanged
C Increase by 25% Reduce by 20%
D Reduce by 10% Reduce by 20%
(2 marks)
26.15 A publishing company is researching the reading habits of the United Kingdom's population. It randomly
selects a number of locations from around the UK and then interviews everyone who lives in these
locations.
What is this approach to sampling known as?
A Systematic sampling
B Stratified sampling
C Quota sampling
D Cluster sampling (2 marks)
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26.16 A company has a single product with a selling price of $12 per unit, which is calculated as variable cost
per unit, plus 20%. At an output level of 5,000 units it makes a loss of $8,000
What is the company's total fixed cost?
A $2,000
B $4,000
C $18,000
D $20,000 (2 marks)
The following information relates to questions 26.17 and 26.18.
The following data are available for product X
Period Period
budget actual
Sales units 5,000 5,200
$ $
Sales revenue 50,000 57,200
Manufacturing cost 30,000 31,200
Profit 20,000 26,000
26.17 What is the sales price variance?
A $5,200 Adverse
B $5,000 Favourable
C $5,200 Favourable
D $7,200 Favourable (2 marks)
26.18 What is the sales volume profit variance?
A $800 Favourable
B $1,000 Favourable
C $6,000 Favourable
D $7,200 Adverse (2 marks)
26.19 A firm has used linear regression analysis to establish the relationship between total cost and activity in
units.
What does the slope of the regression line represent?
A The variable cost per unit
B The fixed cost per unit
C The average cost per unit
D Total variable costs (2 marks)
26.20 A division has a capital employed of $2,000,000 and earns an operating profit of $600,000. It is
considering a project that will increase operating profit by $20,000 but would increase its capital
employed by $80,000. A rate of 15% is used to compute interest on capital employed.
What will be the effect on residual income and return on capital employed if the division accepts the
project?
Residual income Return on investment
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease Decrease
(2 marks)
(Total = 40 marks)
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27 Mixed Bank 3 48 mins
27.1 A company wishes to carry out a national survey of adults' reading habits. To reduce travelling costs, the
country was divided into constituencies. A sample of 50 constituencies was selected at random. With
each of these constituencies, 5 polling districts were selected, again using random techniques.
Interviewers will visit a random selection of 30 people on the electoral register of each district selected.
What sampling method is the company using?
A Stratified
B Systematic
C Multi-stage
D Simple random (2 marks)
27.2 When opening inventories were 8,500 litres and closing inventories were 7,100 litres, William Co had a
profit of $61,000 using marginal costing.
If the fixed overhead absorption rate was $4 per litre, what was the profit using absorption costing?
A $61,000
B $55,400
C $56,500
D $51,100 (2 marks)
27.3 A firm rents a photocopier with the following charges. A fixed rental amount is payable up to a certain
number of copies each period. If the number of copies exceeds this amount, a constant charge per copy
is made for all subsequent copies during that period.
Which one of the following graphs depicts the total photocopier rental costs described?
A
Level of activity
Total
cost
$
B
Level of activity
Total
cost
$
C
Level of activity
Total
cost
$
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D
Level of activity
Total
cost
$
(2 marks)
27.4 The following data relate to the overhead expenditure of an organisation at two activity levels.
Square metres 12,750 15,100
Overheads $73,950 $83,585
What is the estimated overhead expenditure if 16,200 square metres are to be cleaned?
A $25,626
B $44,745
C $88,095
D $192,645 (2 marks)
27.5 A management consultancy recovers overheads on the basis of chargeable consulting hours. Budgeted
overheads were $615,000 and actual consulting hours were 32,150. Overheads were under-recovered
by $35,000.
If actual overheads were $694,075, what was the budgeted overhead absorption rate per hour?
A $19.13
B $20.50
C $21.59
D $22.68 (2 marks)
27.6 A pet food company incurred the following costs last year for each of its three different markets.
$
Dog food 1,345,000
Cat food 2,300,000
Food supplements 985,000
If a pie chart were used to represent the proportion of costs incurred by each area, what would be the
angle of the section representing cat food?
A 179 degrees
B 77 degrees
C 120 degrees
D 106 degrees (2 marks)
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27.7 The following extract from a spreadsheet represents monthly regional sales figures for product A in the
first quarter of the year.
A B C D E
1 Sales figures for Product A
2 January February March Total
3 South 135,000 141,000 174,000 450,000
4 North 78,000 45,000 191,000 314,000
5 East 45,000 57,000 87,000 189,000
6 West 23,000 19,000 15,000 57,000
7 Total 281,000 262,000 467,000 1,010,000
Which formula would be used to calculate total sales in the West?
A =SUM(B6:D6)
B =(B6:D6)
C SUM(B6:D6)
D =TOTAL(B6:D6) (2 marks)
27.8 The following statements relate to activity-based costing.
(i) Activity-based costs can be used to identify relevant costs for decision making
(ii) Activity-based costing cannot be used to cost services
(iii) Activity-based costing is a form of absorption costing
(iv) Activity-based costing is an alternative to traditional volume-based costing models
Which statements are true?
A (i) only
B (ii) only
C (ii) and (iii) only
D (iii) and (iv) only (2 marks)
27.9 Which of the following is a disadvantage of the payback method of investment appraisal?
A It may lead to excessive investment in short-term projects
B Its use will hinder liquidity
C It is a fairly complex technique and not easily understood
D It tends to maximise financial and business risk (2 marks)
27.10 Which four of the following are aspects of value analysis?
(i) Esteem value
(ii) Exchange value
(iii) Net realisable value
(iv) Use value
(v) Cost value
A (i), (ii), (iii), (iv)
B (ii), (iii), (iv), (v)
C (i), (iii), (iv), (v)
D (i), (ii), (iv), (v) (2 marks)
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27.11 The direct materials involved in the manufacture of a Whoopie cost $2 per unit and the direct labour
cost is $2.50 per unit. There are also direct expenses of $0.50 per Whoopie. Fixed costs apportioned to
a Whoopie amount to $3.15.
What is the prime cost of a Whoopie?
A $3.65
B $4.50
C $5.00
D $8.15 (2 marks)
27.12 Absorption costing will result in the same profit as marginal costing in which three of the following
situations?
(i) When inventory levels are constant
(ii) When opening and closing inventory volumes are the same
(iii) When no inventory is held as opening inventory and no inventory is held as closing inventory
(iv) When opening inventory is greater than closing inventory
(v) When closing inventory is greater than opening inventory
A (i), (ii), (iii)
B (ii), (iii), (iv)
C (i), (ii), (v)
D (i), (iii), (v) (2 marks)
27.13 In process costing, what is an equivalent unit?
A A unit of output in relation to which costs may be ascertained
B The quantity of work achievable in one hour at standard levels of performance
C Notional whole units which represent incomplete work
D A unit of output which is identical to others previously manufactured in the same process
(2 marks)
27.14 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, what is the total cost equation?
A Total cost = $65,000 + ($3 × units produced)
B Total cost = $71,000 + ($3 × units produced)
C Total cost = $61,250 + ($1.25 × units produced)
D Total cost = $70,250 + ($1.25 × units produced)
(2 marks)
27.15 Which of the following statements is/are correct?
(i) Strategic planning is carried out by line managers.
(ii) Non-financial information is relevant to management accounting.
A (i) is true and (ii) is false
B (ii) is true and (i) is false
C Both are true
D Both are false (2 marks)
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27.16 Which of the following sampling methods require a sampling frame?
(i) Random
(ii) Stratified
(iii) Quota
(iv) Systematic
A (i) and (ii) only
B (i), (ii) and (iii) only
C (i), (ii) and (iv) only
D (iii) only (2 marks)
The following information is to be used for questions 27.17 and 27.18.
In a time series analysis, the multiplicative model is used to forecast sales and the following seasonal variations
apply:
Quarter 1 2 3 4
Seasonal variation 1.2 1.3 0.4 ?
The actual sales values for the first two quarters of 2006 were:
Quarter 1: $125,000
Quarter 2: $130,000
27.17 What is the seasonal variation for the fourth quarter?
A –2.9
B 0.9
C 1.0
D 1.1 (2 marks)
27.18 Which one of the following is true?
A The trend line for sales decreased between quarter 1 and quarter 2.
B The trend line for sales increased between quarter 1 and quarter 2.
C The trend line for sales remained constant between quarter 1 and quarter 2.
D The trend line for sales cannot be determined from the information given. (2 marks)
27.19 A firm has used linear regression analysis to establish the relationship between total cost and activity in
units.
What does the intercept of the regression line represent?
A The variable cost per unit
B The fixed cost per unit
C The average cost per unit
D Total fixed costs (2 marks)
27.20 Which of the following statements are true?
(i) Flexible budgets help managers to deal with uncertainty
(ii) Flexed budgets allow a more meaningful comparison to the made with actual results
A (i) is true and (ii) is false
B (ii) is true and (i) is false
C (i) and (ii) are true
D (i) and (ii) are false (2 marks)
(Total = 40 marks)
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28 Mixed Bank 4 36 mins
28.1 Most businesses assess the performance of management.
Which one of the following is most likely to lead to short-termism?
A Linking managers' rewards to share price
B Setting quality based as well as financial targets for managers
C Setting cost cutting targets
D Making short-term targets realistic (2 marks)
28.2 Which of the following best describes TQM?
A Identifying the factors which cause the costs of an organisation's major activities
B Applying a zero defect philosophy to the management of all resources and relationships within an
organisation
C Tracking and accumulating costs and revenues attributable to each product over its life
D Estimating product costs by subtracting a desired profit margin from a selling price
(2 marks)
28.3 Jay Co makes a product which passes through a single refining process. The following information is
available for June.
Materials 15,000kg at $1.50 per kg
Labour $2,100
Normal loss 10% of input
Scrap value of loss 56c per kg
The output for the period was 13,000 kg from the process. There was no opening or closing inventory
during June.
What is the value credited to the process account for the normal loss and the abnormal loss for the
period?
Normal loss Abnormal loss
A $840 $880
B $840 $911
C $Nil $280
D $840 $Nil (2 marks)
28.4 Gold Co makes and sells two products called the A and the U. The following information is available for
May.
Production Sales
Product A 4,500 units 4,300 units
Product U 3,100 units 2,600 units
Product
A U
$ $
Unit selling price 85 60
Unit variable costs
Direct materials 20 10
Direct labour ($3/hr) 15 18
Variable production overheads 15 20
Fixed costs were $75,000 for May and are recovered on the basis of direct labour hours. There was no
opening inventory for either product.
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QUESTIONS
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What is profit reported for May using marginal costing principles?
A $72,700
B $106,700
C $153,700
D $181,700 (2 marks)
28.5 Last month Zed Co purchased 750 kg of raw materials for $13,500. The material price variance was
$1,125 favourable.
What was the standard price per kg of the raw materials?
A $15.00
B $16.50
C $17.00
D $19.50 (2 marks)
28.6 Under which sampling method is the population divided into categories?
A Systematic
B Quota
C Random
D Stratified (2 marks)
28.7 The price index for a commodity in the current year is 125 (base year = 100). The current price for the
commodity is $31.50 per kg.
What was the price per kg in the base year?
A $23.63
B $25.20
C $31.50
D $39.38 (2 marks)
28.8 Two statements follow about data and information.
(i) Data is a scientific term for facts and figures.
(ii) Information is data which has been processed.
Which one of the following is correct with regard to the above two statements?
A Both statements are false
B Both statements are true
C Statement (i) is true but statement (ii) is false
D Statement (i) is false but statement (ii) is true (2 marks)
28.9 D Co forecasts costs using the model y = a + bx. The intercept is $20. When y = $270 then x = 50.
What is the value of the gradient?
A –5
B 5
C 14.6
D –14.6 (2 marks)
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The following information relates to questions 28.10 and 28.11
A company produces and sells one type of product. The details for last year were as follows:
Production and Sales
Budget Actual
Production (units) 26,000 26,000
Sales (units) 28,000 25,000
There was no inventory at the start of the year.
Selling price and costs
Budget Actual
$ $
Selling price per unit 80 80
Variable costs per unit 60 60
Fixed production overhead 143,000 113,000
Fixed selling costs 69,000 69,000
28.10 What would be the actual profit for the year using marginal costing?
A $312,500
B $318,000
C $323,500
D $682,000 (2 marks)
28.11 What would be the actual profit for the year using absorption costing?
A $312,500
B $318,000
C $323,500
D $682,000 (2 marks)
28.12 The costs of the factory maintenance department for Freer Co appear to have a variable element
dependent upon the number of units produced. The fixed element of the costs steps up by $30,000
when 32,000 or more units are produced. The variable cost per unit is constant.
Volume of production
Units $
28,000 160,000
34,000 208,000
What would be the total cost for 29,000 units and the total cost for 35,000 units?
29,000 units 35,000 units
A $163,000 $181,000
B $163,000 $211,000
C $296,000 $344,000
D $296,000 $181,000 (2 marks)
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The following information relates to questions 28.13 and 28.14.
A company operating a standard costing system has the following direct labour standards per unit for one of its
products:
4 hours at $12.50 per hour.
Last month when 2,195 units of the product were manufactured, the actual direct labour cost for the 9,200
hours worked was $110,750.
28.13 What was the direct labour rate variance for last month?
A $4,250 Favourable
B $4,250 Adverse
C $5,250 Favourable
D $5,250 Adverse (2 marks)
28.14 What was the direct labour efficiency variance for last month?
A $4,250 Favourable
B $4,250 Adverse
C $5,250 Favourable
D $5,250 Adverse (2 marks)
28.15 The purchase price of an item of inventory is $110 per unit. In each six month period the usage of the
item is 50,000 units. The annual holding costs associated with one unit equate to 3% of its purchase
price. The cost of placing an order for the item is $15.
What is the Economic Order Quantity (EOQ) for the inventory item to the nearest whole unit?
A 674
B 953
C 1,651
D 10,000 (2 marks)
(Total = 30 marks)
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29 Mixed Bank 5 24 mins
29.1 The costs of the factory maintenance department for C Co appear to have a variable element dependent
upon the number of units produced. The fixed element of the costs steps up when 20,000 or more units
are produced. At an activity level of 22,000 units, the fixed element of the cost is $25,000. The
variable cost per unit is constant.
Volume of production
Units $
18,000 200,000
22,000 245,000
What would be the total cost for 19,000 units and the total cost for 21,000 units?
19,000 units 21,000 units
A $210,000 $235,000
B $215,000 $235,000
C $210,000 $230,000
D $231,660 $258,940 (2 marks)
29.2 A company has a capital employed of $300,000. It has a cost of capital of 10% per year. Its residual
income is $30,000.
What is the company's return on investment?
A 1%
B 10%
C 18%
D 20% (2 marks)
29.3 Are the following statements, which refer to documents used in the material procurement procedures of
a company, true or false?
(i) All purchase requisitions are prepared in the purchasing department and are then sent out to
suppliers
(ii) All goods received notes are prepared in the goods inwards department
Statement (i) Statement (ii)
A False False
B True True
C True False
D False True (2 marks)
29.4 A company uses standard marginal costing. Last month the standard contribution on actual sales was
$40,000 and the following variances arose:
Sales price variance $1,000 Favourable
Sales volume contribution variance $3,500 Adverse
Fixed overhead expenditure variance $2,000 Adverse
There were no variable cost variances last month
What was the actual contribution for last month?
A $35,500
B $37,500
C $39,000
D $41,000 (2 marks)
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29.5 A company uses flexed budgets. The fixed budget for last month was based on 100% activity and
showed direct costs of $100,000. Last month's actual direct costs were compared with the flexed
budget to show the following:
Actual Variance
Direct costs $93,600 $2,400 Adverse
What was the actual activity as a % of the fixed budget last month?
A 91.2%
B 93.6%
C 96.0%
D 97.5% (2 marks)
29.6 A process operates with a normal loss of 5% of input. All losses have a realisable value of $38 per litre.
Last month 10,000 litres were input to the process and good production was 9,200 litres. Process costs
arising last month were $456,000. There was no work-in-progress.
What was the credit entry in the process account for abnormal loss last month?
A 11,400
B 13,440
C 13,800
D 14,400 (2 marks)
29.7 The price index for a commodity in the current year is 175 (base year = 100). The current price for the
commodity is $92.70 per unit.
What was the price per unit in the base year?
A $92.70
B $25.20
C $52.97
D $188.78 (2 marks)
29.8 Dee Co uses a pie chart to show its sales for its various products. One of the segments on the pie chart
is 120 degrees and this represents $200,000 worth of sales of the product D.
What is the total sales value for Dee Co?
A $250,000
B $500,000
C $600,000
D $900,000 (2 marks)
29.9 D Co forecasts costs using the model y = a + bx. The gradient is $40. When y = $1,100 then x = 20.
What is the value of the intercept?
A 300
B 1,100
C 1,500
D 1,900 (2 marks)
29.10 A company has under-absorbed fixed production overheads for the period by $9,000. The fixed
production overhead absorption rate was $7 per unit and is based on the normal level of activity of
5,000 units. Actual production was 5,500 units.
What was the actual fixed production overheads incurred for the period?
A $26,000
B $29,500
C $44,000
D $47,500 (2 marks)
(Total = 20 marks)
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30 Budgeting 96 mins
30.1 J Co makes a component M which uses 3 kg of raw material X. The opening inventory at the start of
next year is expected to be as follows.
Opening inventory of raw material X 5,000 kg @ $4
Opening inventory of component M 2,000 units
Sales of component M for the year are budgeted at 48,000 units. Production and sales are budgeted to
occur evenly throughout the year.
Closing inventory at the end of the year is budgeted as follows.
Closing inventory of raw material X One month's worth of production
Closing inventory of component M Two months' worth of sales
(a) How many units of component M are to be produced in the year? (2 marks)
(b) How many kg of material X are required for production in the year? (1 mark)
(c) What is the material X purchases budget for the year in kg? (2 marks)
(d) What is the material X purchases budget for the year in $? (1 mark)
(e) Briefly explain THREE reasons why net profit and net cash flow may be different.
(4 marks)
(Total = 10 marks)
30.2 (a) Given below is the forecast statement of profit or loss for a business for the three months ending
31 December together with forecast statements of financial position at that date and also at the
previous 30 September.
FORECAST STATEMENT OF PROFIT OR LOSS
FOR THE THREE MONTHS ENDING 31 DECEMBER
$'000
Revenue 860
Cost of sales (600)
Gross profit 260
Depreciation (20)
Overheads (100)
Profit from operations 140
FORECAST STATEMENTS OF FINANCIAL POSITION
31 December 30 September
$'000 $'000 $'000 $'000
Non-current assets 1,050 760
Current assets:
Inventory 100 100
Receivables 85 45
Cash 10 10
195 155
Payables 100 75
Accruals of overheads 45 40
145 115
Net current assets 50 40
1,100 800
Equity share capital 600 600
Retained earnings 500 200
1,100 800
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Calculate the actual cash receipts and cash payments for the quarter to 31 December.
$'000
Sales receipts
Purchase payments
Overhead payments
Note. The total marks will be split evenly across the three figures (6 marks)
(b) The business currently sells its product for $30 but it is anticipated that there will be a price
increase of 4% from 1 February. The sales quantities are expected to be as follows:
January 21,000 units
February 22,000 units
March 22,800 units
All sales are on credit and 40% of cash is received in the month following the sale and the
remainder two months after the sale.
What are the receipts from January and February sales that are received in March?
$
Receipts in March relating to January sales
Receipts in March relating to February sales
Note. 1 mark each for January and February figures (2 marks)
(c) Which of the following statements applied to a flexible budget?
A It is continuously updated by adding another accounting period when the earliest
accounting period has come to an end
B It is amended in response to changes in costs
C It is produced before the control period and not subsequently changed in response to
changes in activity, costs or revenues
D It is amended in response to changes in the level of activity (2 marks)
(Total = 10 marks)
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30.3 HM Co commenced business on 1 October 20X2, to provide specialist contract cleaning services to
industrial customers. All sales are on credit.
More favourable credit terms are offered to larger customers (class A) than to smaller customers (class
B). All sales are invoiced at the end of the month in which the sale occurs. Class A customers will be
given credit terms requiring payment within 60 days of invoicing, while class B customers will be
required to pay within 30 days of invoicing.
Since it is recognised, however, that not all customers comply with the credit terms they are allowed,
receipts from customers have prudently been estimated as follows:
Customer type Within 30 days 31 to 60 days 61 to 90 days 91 to 120 days Bad debts
Class A 50% 30% 15% 5%
Class B 60% 25% 10% 5%
The above table shows that customers are expected either to pay within 60 days of the end of the credit
period, or not at all. Bad debts will therefore be written off 60 days after the end of the credit period.
Budgeted credit sales for each class of customer in the first 4 months of trading are as follows:
Customer type October November December January
$'000 $'000 $'000 $'000
Class A 100 150 200 300
Class B 60 80 40 50
Assume all months are of 30 days.
Required
(a) Prepare a statement showing the budgeted cash to be received by HM Co from customers in each
of the three months of November 20X2, December 20X2 and January 20X3, based upon the
prudently estimated receipts from customers.
Note. The following mark allocation is provided as guidance for this requirement:
1 mark each for cash received from Class A customers in Nov, Dec and Jan
1 mark each for cash received from Class B customers in Nov, Dec and Jan
(6 marks)
(b) Budgets can be flexed using the high-low method.
State two advantages and two disadvantages of the high-low method. (4 marks)
(Total = 10 marks)
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30.4 (a) Briefly explain the purpose of index numbers. (2 marks)
(b) Product M uses four different types of materials. The materials used and their prices, in 20X6
and 20X7, are as follows.
20X6 20X7
Kg $ per kg Kg $ per kg
Material A 200 0.98 300 1.40
Material B 500 0.95 400 1.10
Material C 300 1.20 500 0.92
Material D 400 1.10 100 1.14
Required
Calculate the Laspeyre quantity index for 20X7 (with 20X6 as the base year) to two decimal
places. (4 marks)
(c) The following spreadsheet can be used to investigate the inter-relationship between advertising
expenditure and sales.
A B C D E
1 Monthly advertising
2 Expenditure Sales
3 X Y X2 Y2 XY
4 1.2 132.5 1.44 17556.25 159
5 0.9 98.5 0.81 9702.25 88.65
6 1.6 154.3 2.56 23808.49 246.88
7 2.1 201.4 4.41 40561.96 422.94
8 1.6 161.0 2.56 25921.00 257.6
9 7.4 747.7 11.78 117549.95 1175.07
The cell E9 shows the total of the XY values. Which of the following would be a correct entry for
this cell?
A =A9*B9
B =SUM(E4:E8)
C =SUM(A9:D9)
D =C9*D9 (2 marks)
(d) For which of the following tasks would a spreadsheet be used?
Tick box
Cash flow forecasting
Monthly sales analysis by market
Writing a memo
Calculation of depreciation
(2 marks)
(Total = 10 marks)
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QUESTIONS
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30.5 A company, which manufactures a range of products, has decided to introduce a product costing
system. As a first step it wishes to analyse the behaviour of its costs.
The following data is available for the previous four periods.
A B C D E
1 Period 1 Period 2 Period 3 Period 4
2 Total costs ($) 214,559 239,970 243,183 259,541
3 Total output (units) 64,200 76,350 77,880 85,620
(a) Using the high-low method, which ONE of the following formulae will correctly calculate the cost
of the variable element per unit?
A =E2-B2/E3-B3
B =(D2-B2)/(D3-B3)
C =(E2-B2)/(E3-B3)
D =D2-B2/D3-B3 (2 marks)
(b) Using the high-low method, establish a linear function of the form:
y = a + bx
to represent total costs. (4 marks)
(c) Using the linear function established in (b) above, estimate costs in the following period (Period
5) when output is expected to be 87,500 units. (2 marks)
(d) Briefly explain ONE limitation of the method used in part (c). (2 marks)
(Total = 10 marks)
30.6 Great Southern Ltd manufactures hairdryers for the hotel industry, which it sells for $12 each. Variable
costs of production are currently $6 per unit, and fixed costs $1 per unit. New production technology is
now available which would cost $250,000, but which could be used to make the hairdryers for a
variable cost of only $4.50 per unit.
Fixed costs are expected to increase by $20,000 per annum, 75% of which will be directly as a result of
installing the new technology. Great Southern charges depreciation at 20% and seeks a return on its
investments of at least 10%.
The new technology would have an expected life of 5 years and a resale value after that time of
$50,000. Sales of hairdryers are estimated to be 50,000 units per annum.
The management accountant has started preparing a spreadsheet to calculate the NPV of the project,
and an extract is shown below:
A B C D E F
1 Year Cash invested Cost savings Resale PV factor NPV
2 0 (250,000) – – 1.000 (250,000)
3 1 – –
(a) Which figure should be shown in cell C3?
A $75,000
B $60,000
C $125,000
D $10,000 (1 mark)
(b) Should Great Southern invest in the new technology? (3 marks)
(c) What is the IRR of the project? (3 marks)
(d) Give two advantages of the IRR method of investment appraisal (2 marks)
(e) What is the effect on a company's accounts if capital expenditure is treated as revenue
expenditure? (1 mark)
(Total = 10 marks)
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30.7 Fit Co owns and runs two local sports club. Last year the largest club made sales of $500,000 but as
member numbers are declining they are thinking about refurbishing the gym and upgrading the
equipment.
The expected costs and benefits of the refurbishment are as follows:
(i) New fitness equipment would cost $450,000 to buy and install. This includes a refurbishment of
the gym space.
(ii) Sales are expected to rise to $550,000 in Year 1 if the changes are made, thereafter increasing
by 5% per annum. If the changes are not made sales are expected to fall by $40,000 per
annum.
(iii) Depreciation would be provided at $90,000 per annum.
(iv) The manager of the gym has been to a conference to research the new equipment and receive
training on the safe use of the equipment. The cost of the conference was $3,000. A further
$20,000 would be spent on training the rest of the gym staff if the equipment was purchased.
(v) It is anticipated that electricity costs would rise by 5% of the total sales as a result of extra
running costs of the new machines.
(vi) The manager of the other fitness centre would be required to cover the running of the gym when
the new equipment is first introduced, while the current manager trains the remaining gym staff.
It is anticipated he would stay for one month. He is paid an annual salary of $48,000. He would
not be replaced at the other fitness centre during this month.
(vii) A 5 year maintenance contract would be entered into at a cost of $10,000 per annum.
(viii) Interest on money borrowed to finance the refurbishment would be $6,000 per annum.
(ix) Fit Co's cost of capital is 10% per annum.
Required
(a) State whether each of the following items are relevant or irrelevant cashflows for a net present
value (NPV) evaluation of whether to refurbish the gym.
(i) Investment of $450,000 in the new equipment
(ii) Depreciation of $90,000 over each of the five years
(iii) Staff training costs of $20,000
(iv) Temporary manager's salary of $4,000
(v) Conference and staff training costs of $3,000
(vi) Interest costs of $6,000 per annum
(6 marks)
(b) Calculate the following values if the gym is refurbished:
(i) Incremental sales in Year 1 (1 mark)
(ii) Present value of the maintenance costs over the life of the contract (2 marks)
(iii) Additional electricity costs in Year 1 (1 marks)
(Total = 10 marks)
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QUESTIONS
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30.8 The bookkeeper of House Co (a furniture retailer) has prepared a list of items of expenditure from last
month, but cannot decide if they are capital or revenue as has asked for your help.
(a) Identify which of the following items are capital or revenue expenditure:
Expenditure Capital Revenue
Purchase of new delivery van
Road tax for new delivery van
Repairs to customer toilets
Extension of customer car
park
(4 marks)
(b) House Co also manufactures furniture. It anticipates that they will sell 200 of their best selling
beds in June 20X6. It is anticipated that sales will rise by 25% in July because of a planned
sales promotion.
Inventory levels at the end of May are 15 units, and because of the sales promotion the sales
manager has requested that inventory at the end of June is equal to 20% of July's forecast sales.
What number of beds should be manufactured in June to ensure that inventory levels are as
required at the beginning of July?
A 200
B 215
C 235
D 250 (2 marks)
(c) House Co also plans to manufacture 90 sofas in June. Below are some extracts from the cost
card for a sofa:
$
Materials – 10m2 of fabric @$50 per m2 500
Assembly labour - 8 hours @$15 per hour 120
(i) How many metres of fabric should be purchased if 10% of material is wasted during the
production process?
(ii) How much should be budgeted for labour for sofa production in June?
(4 marks)
(Total = 10 marks)
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31 Standard costing 96 mins
31.1 CT Co uses a standard absorption costing system and manufactures and sells a single product called the
DG. The standards cost and selling price details for the DG are as follows.
$ per unit
Variable cost 12
Fixed cost 4
16
Standard profit 6
Standard selling price 22
The sales volume variance reported in June was $12,000 adverse.
CT Co is considering using standard marginal costing as the basis for variance reporting in the future.
(a) Calculate the sales volume variance that would be shown in a marginal costing operating
statement for June. (2 marks)
(b) Briefly explain the term standard costing. (2 marks)
(c) Identify one advantage of using ideal standards. (2 marks)
(d) Identify one disadvantage of using ideal standards. (2 marks)
(e) A company has a budgeted material cost of $125,000 for the production of 25,000 units per
month. Each unit is budgeted to use 2 kg of material. The standard cost of material is $2.50 per
kg. Actual materials in the month cost $136,000 for 27,000 units and 53,000 kg were
purchased and used.
What was the adverse material price variance?
A $1,000
B $3,500
C $7,500
D $11,000 (2 marks)
(Total = 10 marks)
31.2 (a) Identify and briefly explain TWO main reasons for using standards. (4 marks)
(b) Last month a company's budgeted sales were 5,000 units. The standard selling price was $6 per
unit with a standard contribution to sales ratio of 60%. Actual sales were 4,650 units with a
total revenue $30,225.
What were the favourable sales price and adverse sales volume contribution variance?
Sales price Sales volume contribution
$ $
A 2,325 1,260
B 2,500 1,260
C 2,325 2,100
D 2,500 2,100 (2 marks)
(c) Briefly explain why individual variances should not be considered in isolation. (2 marks)
(d) Briefly explain what is meant by the interdependence of variances. (2 marks)
(Total = 10 marks)
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QUESTIONS
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31.3 An extract of the standard cost card for product X100 is given below:
$ per unit
Direct labour 6 hours at $20 per hour 120
In the most recent period 5,000 units were produced. Direct labour was paid for 33,000 hours and cost
$693,000.
Required
(a) Calculate the direct labour efficiency variance for product X100 for the most recent period.
(2 marks)
(b) Briefly explain TWO reasons why an adverse labour efficiency variance may arise.
(4 marks)
(c) Briefly explain TWO differences in the way variances are used to reconcile profit in a marginal
costing system and in an absorption costing system. (4 marks)
(Total = 10 marks)
31.4 Kubrick uses a standard absorption costing system to control the cost of its only product. The flexed
budget for production overhead for the company shows a budgeted total overhead cost of $200,000 per
period when 5,000 tonnes are produced and $264,000 per period when 9,000 tonnes are produced.
In Period 9, when the actual output was 6,500 tonnes, total actual overhead cost was $245,000
($125,000 fixed and $120,000 variable). The standard fixed overhead absorption rate is $24 per
tonne.
Required:
(a) Using the high-low technique, calculate the following:
(i) The budgeted variable overhead per tonne. (2 marks)
(ii) The budgeted fixed overhead per period. (2 marks)
(b) Calculate the following:
(i) The fixed overhead expenditure variance. (2 marks)
(ii) The fixed overhead volume variance. (2 marks)
(c) Explain one possible operational causes of each of the following:
(i) An adverse fixed overhead expenditure variance.
(ii) A favourable fixed overhead volume variance. (2 marks)
(Total = 10 marks)
31.5 Mortensen manufactures wooden toys. It uses a standard costing system to control costs. The cutting
department cuts the shapes which are sold as toy animals.
$
Hardwood 16.00
Direct labour 30 minutes at $9 per hour 4.50
Fixed overhead 30 minutes at $4 per direct labour hour 2.00
22.50
Fixed overhead absorption rates are based upon monthly fixed overheads of $26,000 and a budgeted
monthly output of 13,000 sets of animals.
In the most recent month 14,000 sets of animals were made. 8,000 direct labour hours were worked
and paid at $9.25 per hour. Actual fixed overheads were $23,000 for the month.
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Required
(a) Calculate the following variances from standard cost for the most recent month.
(i) Fixed overhead expenditure
(ii) Fixed overhead efficiency
(iii) Fixed overhead capacity
(iv) Fixed overhead volume (8 marks)
(b) Briefly explain the significance of Mortensen's fixed overhead efficiency and fixed overhead
capacity variances. (2 marks)
(Total = 10 marks)
31.6 (a) CC Ltd makes garden chairs, which have a standard direct material cost as follows.
6 kilograms of Material W at $15 per kilogram = $90 per chair
During October 20X5, 2,500 chairs were manufactured, using 12,000 kilograms of Material W
which cost $175,000.
Calculate the following variances.
(i) The direct material total variance (2 marks)
(ii) The direct material price variance (2 marks)
(iii) The direct material usage variance (2 marks)
(b) A company uses standard marginal costing. Its budgeted contribution for the last month was
$30,000. The actual contribution for the month was $20,000, and the following variances have
been calculated:
Sales volume contribution variance $5,000 adverse
Sales price variance $10,000 favourable
Fixed overhead expenditure variance $3,000 favourable
What was the total variable cost variance?
A $18,000 adverse
B $18,000 favourable
C $15,000 adverse
D $15,000 favourable (2 marks)
(c) Describe the purpose of an operating statement (2 marks)
(Total = 10 marks)
31.7 (a) Explain each of the following fixed overhead variances:
(i) Fixed overhead total variance
(ii) Fixed overhead expenditure variance
(iii) Fixed overhead volume variance
(iv) Fixed overhead volume efficiency variance
(v) Fixed overhead volume capacity variance (5 marks)
(b) Busy Ltd uses direct labour hours as its basis for absorption of fixed overheads. At the beginning
of the year it budgeted to work 10,000 direct labour hours, and its budgeted fixed production
overhead was $50,000.
During the year, however, actual overhead was $55,000 and actual direct labour hours were
8,000. How much overhead was under/over absorbed?
A $5,000 under absorbed
B $15,000 over absorbed
C $5,000 over absorbed
D $15,000 under absorbed (2 marks)
(c) Give three factors that need to be taken into account when deciding whether to investigate a
variance. (3 marks)
(Total = 10 marks)
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QUESTIONS
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31.8 (a) Swindle Ltd makes widgets. Two types of labour are involved in the production of a widget,
skilled and unskilled. Skilled labour is paid $15 per hour and unskilled $3 per hour. Twice as
many unskilled labour hours as skilled labour hours are needed to produce a widget, six unskilled
labour hours being needed.
A widget is made up of two different direct materials. Five kilograms of Material X and two
metres of Material Z are needed. Material X costs $2 per kilogram and Material Z $5 per metre.
Variable production overheads are incurred at Swindle at the rate of $3.00 per direct skilled labour
hour.
The basis of fixed cost absorption is direct skilled labour hours. For the coming year, budgeted
fixed production overheads are $100,000 and budgeted production of widgets is 10,000 units.
Administration, selling and distribution overheads are added to products at the rate of $20 per
widget, and a mark-up of 15% is made on each.
Required
(i) Prepare the standard cost card for a widget (6 marks)
(ii) Calculate the standard sales price. (2 marks)
(b) How is a selling price variance calculated?
A The difference between actual units sold and the budgeted quantity, valued at the
standard selling price
B The difference between the actual units sold and the budgeted quantity, valued at the
standard profit per unit
C The difference between budgeted and actual sales revenue
D The difference between what the sales revenue should have been for the quantity sold,
and what it was (2 marks)
(Total = 10 marks)
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32 Performance measurement 96 mins
32.1 Rediphone employs more than 500 people in administrative roles across three departments; the sales
department, the accounts department and the credit control department.
The new head office, opened only 12 months ago, is already full. A solution has been proposed,
whereby at least half of the staff would be encouraged to work from home, thus reducing the pressure
on office accommodation. Most of the tasks performed by sales and accounts staff are routine. Workers
could link to Rediphone systems over a secure Internet link from their home.
Rediphone has sought your help in setting up a performance measurement system to suit the new
working arrangements.
Required
(a) Identify TWO financial measures by which management might seek to monitor the credit control
department. (2 marks)
(b) Identify TWO non-financial measures by which management might seek to monitor the credit
control department. (2 marks)
(c) Briefly explain how the output of remote workers could be monitored. (2 marks)
(d) State FOUR examples of information that could be produced by a management accounting
system to assist in monitoring the efficiency and effectiveness of remote workers.
(4 marks)
(Total = 10 marks)
32.2 Perry is a large conglomerate company structured on a divisional basis. It seeks to maximise investor
wealth. Head office avoids day to day involvement in divisional affairs and only intervenes if performance
is considered unsatisfactory. Divisional performance is measured by residual income.
One of Perry's larger divisions operates a chain of high class hotels in one particular country. The
division's mission statement is 'To be the hotel of first choice for business users and tourists'. Although
the chain has generally been popular with tourists it is not proving quite so popular with business users
and conference organisers.
Over the last two years the division has invested a large amount of money in modernising its hotels.
Head office is concerned that the performance of the hotel chain appears to have declined over the last
few years despite this expenditure.
The following figures are available.
20X2 20X3
$m $m
Capital employed 70 90
Operating profit 16 17
The cost of capital applicable to the hotel division is 20% per annum.
Required
(a) Calculate the residual income for the hotel chain for each of the two years. (2 marks)
(b) For each of the following headings, identify one critical success factor suitable for the hotel chain.
(i) Financial success (1 mark)
(ii) Customer satisfaction (1 mark)
(iii) Process efficiency (1 mark)
(iv) Organisational learning and growth (1 mark)
(c) For each critical success factor identified in part (b), state one suitable key performance indicator.
(4 marks)
(Total = 10 marks)
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32.3 Supervans is a freight delivery company. Its mission statement is 'to provide the quickest and most
reliable delivery service to our customers and satisfactory returns to our shareholders'. The company
currently has a total of 230 vans operating from eight depots making urgent deliveries of packages to
small shops (mainly pharmacies) and businesses across the UK. Recently the company has started
making deliveries of parcels to private households in the UK. The company is highly geared and cash
flow as well as profitability is vital to its survival. Competition in its marketplace is fierce and customers
expect a high standard of service. The depot managers are responsible for all the operations within their
depot, a key role being route planning, as efficient routing of vehicles and drivers' schedules is a major
cost driver. A typical depot includes the following operations: a depot manager; an administration and
accounting department; vehicle maintenance; deliveries; and a sales and marketing team responsible for
increasing business.
To date the company has judged the success of its depot managers on the basis of return on investment.
Required
(a) Briefly explain the role of mission statements in performance measurement. (2 marks)
(b) Briefly explain the balanced scorecard approach to performance measurement. (2 marks)
(c) For THREE of the following categories state ONE critical success factor and ONE accompanying
key performance indicator that could be useful in measuring the performance of a depot.
(i) Financial success
(ii) Customer satisfaction
(iii) Process efficiency
(iv) Innovation (6 marks)
(Total = 10 marks)
32.4 (a) State TWO advantages of residual income as a divisional performance measure.
(2 marks)
(b) State TWO disadvantages of residual income as a divisional performance measure.
(2 marks)
(c) A company has a current ratio of 1.5:1. It decides to use surplus cash balances to settle 30% of
its total current liabilities.
The current ratio will:
A Decrease by more than 30%
B Decrease by less than 30%
C Increase by more than 30%
D Increase by less than 30% (2 marks)
(d) Briefly explain the purpose of benchmarking. (2 marks)
(e) State TWO limitations of benchmarking. (2 marks)
(Total = 10 marks)
32.5 WH is a member of a trade association which operates an inter-company comparison scheme. The
scheme is designed to help its member companies to monitor their own performance against that of
other companies in the same industry.
Your manager has given you the following extract, which shows the average profitability and asset
turnover ratios for the latest year (Year 4). For comparison purposes, WH's accounts analyst has added
the ratios for your company.
Trade association average WH
Return On Capital Employed 20.5% 18.4%
Asset Turnover 3.8 times 2.7 times
Gross Margin 14.2% 12.9%
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Required
(a) State the purpose of the ROCE ratio. (2 marks)
(b) State the purpose of the Asset Turnover ratio. (2 marks)
(c) State the purpose of the Gross Margin ratio. (2 marks)
(d) Briefly explain the significance of WH's ROCE compared with the trade association average.
(2 marks)
(e) Briefly explain the significance of WH's Asset Turnover compared with the trade association
average. (2 marks)
(Total = 10 marks)
32.6 JB Co manufactures and sells car radios. Below is a summary of the financial statements for the
business for 20X6:
20X6
$'000
Sales 2,540
Cost of sales 1,425
Expenses 600
Interest 11
Share capital and reserves 2400
Long term loan 250
Non-current assets 1650
Receivables 347
Inventory 180
Payables 318
Bank balance 36
(a) Complete the table below to calculate the performance measures for 20X6. Give your answer to
two decimal places.
20X6
(i) Gross profit margin
(ii) Return on capital employed
(iii) Asset turnover
(iv) Current ratio
(v) Quick ratio
(vi) Inventory holding period in days
(vii) Payables payment period in days
(viii) Receivables period in days
(8 marks)
(b) Product quality is associated with which perspective of performance in a Balanced Scorecard?
A Customer perspective
B Financial perspective
C Innovation and learning
D Internal business processes (2 marks)
(Total = 10 marks)
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32.7 Wychwood is a region with a population of 200,000 people. With the help of an endowment from a
prominent local citizen several years ago, a charity operates a regional library service that aims to
'provide cost-effective, reliable and comprehensive library facilities for all citizens of Wychwood.'
The following statement of profit or loss for the year ended 31 March 20X5 has been provided by the
library.
WYCHWOOD LIBRARY SERVICE
SUMMARISED STATEMENT OF PROFIT OR LOSS
YEAR ENDING 31 MARCH 20X5
$'000 $'000
Venue hire income 100
Fees for services 25
Library staff wages 50
Other operating expenses 25
Depreciation 18
(93)
Surplus 32
SUMMARISED STATEMENT OF FINANCIAL POSITION AT 31 MARCH 20X5
$'000 $'000
Assets
Non-current assets 200
Current assets
Inventory 45
Cash 3
48
48
248
Reserves and liabilities
Endowment 200
Reserves 19
219
Current liabilities 29
248
OPERATING STATISTICS FOR THE YEAR ENDED 31 MARCH 20X5
Total library visitors 48,000 visitors
Total number of loans 864,000 loans
Library services average ratios
Year ended 31 March 20X5
Return on capital employed 10%
Average cost per loan 25c
Required
(a) Calculate the following ratios for the Wychwood Library Service.
(i) Return on capital employed
(ii) Average cost to the charity of each loan that is made (2 marks)
(b) Explain the meaning of each ratio . (2 marks)
(c) A member of the charity's board has suggested that the performance of the library service should
be assessed on the basis of 'economy', 'effectiveness' and 'efficiency'.
Explain the meaning of these terms and suggest a measure of each one for the library service
(6 marks)
(Total = 10 marks)
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32.8 (a) Cycle Ltd, a mail order company operating in a very competitive market, has undergone a
strategic review and has identified the retention of existing customers as one if its critical success
factors. To achieve this, it wants to install a new call centre to enable customers to place orders
over the phone. It has been estimated that the sales value of orders that will be placed using the
new system will average $1,000 per hour.
The system that Cycle has chosen will require a regular annual software update, during which
time customers will not be able to call, and orders will be lost. The system may be updated at
one of three levels: X, Y or Z. The costs of the updates, and the estimates of hours lost, are as
follows.
Level Update cost Hours lost
$
X 8,000 21
Y 9,750 19
Z 7,500 27
Recommend which level of maintenance should be chosen. (3 marks)
(b) Determine whether each of the following measures represents a CSF or a KPI:
Measure CSF KPI
95% customer complaint resolution
Successful relationships with key suppliers
Negotiation of favourable terms for new project finance
Gain in market share by 2% each month
Lower the cost of capital by 1.5%
(5 marks)
(c) Which of the following is a definition of a 'critical success factor' for an organisation?
A A statement of what the organisation intends to achieve over a period of time
B A measurable indicator of organisational performance
C A performance requirement that is fundamental to competitive success
D A basic belief of the people who work in the organisation
(2 marks)
(Total = 10 marks)
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Answers
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ANSWERS
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1 Accounting for management
1.1 C Complete accuracy is not necessarily an essential quality of good information. It needs to be
sufficiently accurate for its purpose, and often there is no need to go into unnecessary detail for
pointless accuracy.
1.2 B Tactical planning is used by middle management to decide how the resources of the business
should be employed to achieve specific objectives in the most efficient and effective way.
1.3 D Management accounts often incorporate non-monetary measures. Therefore statement (i) is
incorrect.
There is no legal requirement to prepare management accounts. Therefore statement (ii) is
incorrect.
Management accounts do serve as a future planning tool, but they are also useful as an historical
record of performance. Therefore statement (iii) is incorrect.
1.4 D Statement (i) is a description of a management information system, not a management control
system.
Statement (ii) is the 'wrong way round'. The strategy is the course of action that a business might
pursue in order to achieve its objectives.
Statement (iii) is correct. Data is the 'raw material' which is processed into useful information.
1.5 B Good information is not necessarily extensive. Too much information may tend to obscure the
important points.
1.6 A Monthly variance reports are an example of tactical management information.
1.7 C Statement (i) is true and this is why cost accounting is, in general, unsuitable for decisionmaking.
Statement (ii) is true. However, the way the data is analysed is different.
1.8 D Establishing objectives. The planning stage involves establishing objectives and selecting
appropriate strategies to achieve those objectives.
1.9 B Financial accounting systems provide information for legal requirements, shareholders and tax
authorities. Management accounting systems provide information specifically for the use of
decision-makers (managers) within the organisation.
1.10 B The other three items have been processed in some way to provide meaningful information
whereas total sales value per product is the basic data for further processing.
2 Sources of data
2.1 D Data collected by survey for a particular project are a primary data source.
Historical records of transport costs were not collected specifically for the preparation of
forecasts, therefore these are secondary data.
The Annual Abstract of Statistics is a source of secondary external data.
2.2 D It is primary data that is collected for a specific purpose so (i) is false. Continuous data can take
on any value so (ii) is false. Both (iii) and (iv) are true.
2.3 C A sampling frame is a numbered list of all items in a population (not a sample).
Cluster sampling involves selecting one definable subsection of the population which therefore
makes the potential for bias considerable.
2.4 B Population data. Foreign exchange rates and interest rates are likely to be obtained from financial
newspapers. Details of industry costs are more likely to be found in trade journals.
2.5 D In quota sampling, investigators are told to interview all of the people they meet up to a certain
quota.
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3 Cost classification
3.1 B The royalty cost can be traced in full to the product, ie it has been incurred as a direct
consequence of making the product. It is therefore a direct expense. Options A, C and D are all
overheads or indirect costs which cannot be traced directly and in full to the product.
3.2 B The wages paid to the stores assistant cannot be traced in full to a product or service, therefore
this is an indirect labour cost.
3.3 B Overtime premium is always classed as factory overheads unless it is:
Worked at the specific request of a customer to get the order completed.
Worked regularly by a production department in the normal course of operations, in which
case it is usually incorporated into the direct labour hourly rate.
3.4 D The salary of the sales director is a selling overhead.
3.5 D The manager of a profit centre usually has control over how revenue is raised, ie selling prices
(item (i)) and over the controllable costs incurred in the centre (item (ii)).
Apportioned head office costs (item (iii)) are uncontrollable from the point of view of the profit
centre manager. A responsibility centre manager does not have control over the capital
investment in the centre (item (iv)) unless the centre is designated an investment centre.
3.6 C Controllable costs are items of expenditure which can be directly influenced by a given manager
within a given time span.
3.7 D It would be appropriate to use the cost per customer account and the cost per cheque received
and processed for control purposes. Therefore items (ii) and (iii) are suitable cost units.
Stationery costs, item (i), is an expense of the department, therefore it is not a suitable cost unit.
3.8 A A period cost is charged against the sales for the period. It is not carried forward in inventory to a
future period.
3.9 C The supervisors are engaged in the production activity, therefore option D can be eliminated.
They supervise the production of all products, therefore their salaries are indirect costs because
they cannot be specifically identified with a cost unit. This eliminates options A and B. The
salaries are indirect production overhead costs, therefore option C is correct.
3.10 A Remember you are only looking for costs that are directly related to getting the finished goods
from the production line to your customers. Before they can be distributed, finished goods may
have to be temporarily stored in a warehouse therefore the rental of the warehouse will be
regarded as a distribution cost. In addition, you will need delivery vehicles for distribution
purposes – any costs related to these vehicles will be classed as distribution costs. Hence both
(i) and (ii) are distribution costs (option A). Commission paid to sales staff is a selling cost.
3.11 B A function or location for which costs are ascertained. A cost centre acts as a 'collecting place' for
costs before they are analysed further.
3.12 A For (10) machining department use of (410) indirect materials the code is 10410.
Option B has an incorrect expense type.
Options C and D have the incorrect cost centre code. The code indicates the cost centre incurring
the cost, ie receiving the materials.
3.13 C Wider issues are more suited to communication through a 'free text' description rather than the
use of codes.
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ANSWERS
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4 Cost behaviour
4.1 B Within the relevant range, fixed costs are not affected by the level of activity, therefore option B is
correct.
4.2 B Variable overhead =
97,850 - 84,865 12,985
=
15,950 - 13,500 2,450
= $5.30 per square metre
Fixed overhead = $84, 865 – ($5.30 × 13,500)
= $84,865 – $71,550 = $13,315
Overheads on 18,300 square metres = $13,315 + ($5.30 18,300)
= $13,315 + $96,990
= $110, 305
4.3 B Graph 2 shows that costs increase in line with activity levels.
4.4 A Graph 1 shows that fixed costs remain the same whatever the level of activity.
4.5 A Graph 1 shows that cost per unit remains the same at different levels of activity.
4.6 C Graph 4 shows that semi-variable costs have a fixed element and a variable element.
4.7 A Graph 3 shows that the step fixed costs go up in 'steps' as the level of activity increases.
4.8 C
Units $
High output 1,100 18,300
Low output 700 13,500
Variable cost of 400 4,800
Variable cost per unit $4,800/400 = $12 per unit
Fixed costs = $18,300 – ($12 × 1,100) = $5,100
Therefore the correct answer is C.
4.9 D The salary is part fixed ($650 per month) and part variable (5 cents per unit). Therefore it is a
semi-variable cost and answer D is correct.
4.10 D The cost described will increase in steps, remaining fixed at each step until another supervisor is
required. Such a cost is known as a step cost.
4.11 A Independent variable x = advertising expenditure
Dependent variable y = sales revenue
Highest x = month 6 = $6,500
Highest y = month 6 = $225,000
Lowest x = month 2 = $2,500
Lowest y = month 2 = $125,000
Using the high-low method:
Advertising expenditure Sales revenue
$ $
Highest 6,500 225,000
Lowest 2,500 125,000
4,000 100,000
Sales revenue generated for every $1 spent on advertising =
$100,000
$4,000
= $25 per $1 spent.
If $6,500 is spent on advertising, expected sales revenue = $6,500 × $25 = $162,500
Sales revenue expected without any expenditure on advertising = $225,000 – $162,500 =
$62,500
Sales revenue = 62,500 = (25 × advertising expenditure)
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4.12 D The cost described is a stepped fixed cost. A stepped fixed cost is fixed in nature but only within
certain levels of activity.
4.13 B
Activity level Cost
Units $
Highest 10,000 400,000
Lowest 5,000 250,000
5,000 150,000
Variable cost per unit =
$150,000
5,000 units
= $30
4.14 A The diagram shown depicts annual factory power cost where the electricity supplier sets a tariff
based on a fixed charge plus a constant unit cost for consumption but subject to maximising
arrival charge.
4.15 C Using the high-low method:
Units Cost
$
20,000 40,000
4,000 20,000
16,000 20,000
Variable cost per unit =
$20,000
16,000 units
= $1.25
4.16 A Graph A shows that up to 30,000 units, each unit costs a constant price per unit. After 30,000
units, the gradient of the new variable cost line is more gentle which indicates that the cost per
unit is lower than the cost when 0 – 30,000 units are purchased.
4.17 C
Production Total cost
Units $
Level 2 5,000 9,250
Level 1 3,000 6,750
2,000 2,500
Variable cost per unit =
$2,500
2,000 units
= $1.25 per unit
Fixed overhead = $9,250 – ($1.25 × 5,000) = $3,000
4.18 A
ACCA examining team comments
This question relates to study guide reference A3(h).
The high-low technique estimates variable cost per unit by looking at the change in costs
between the highest and lowest levels of output. The correct answer is A. This can be calculated
by finding the change in cost between the highest and lowest output levels not explained by the
step in fixed costs ($9,500 – $4,000 – $500 = $5,000) , and dividing by the change in output
between the highest and lowest output levels. ($5,000 / (4,000 units – 1,000 units) = $1.67
per unit.
Many candidates incorrectly based their calculations on the change in costs between the highest
and lowest levels of cost, and hence selected option D (($10,000 – $4,000)/ (3,000 units –
1,000 units) or C (($10,000 – $4,000 – $500)/ (3,000 units – 1,000 units). This mistake
suggests some confusion between the independent variable, output, and the dependent variable,
cost.
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5 Presenting information
5.1 C Material Cost $ Percentage % Degrees
W 2,250 25 90
X 3,000 33.3 120
Y 3,600 40 144
Z 150 1.7 6
9,000 100 360
3,600/9,000 × 360o = 144o
5.2 B Multiple bar chart.
5.3 C In June, the gap between the sales of strawberry and the sales of chocolate reduced.
5.4 C A line graph would be most suitable here. A percentage component bar chart would not show
how the total sales values have fluctuated. A scatter diagram would show fluctuations but it
would not be as clear as a line graph. A pie chart would not show the fluctuations.
6 Accounting for materials
6.1 A Among other things, the GRN is used to update the inventory records and to check that the
quantity invoiced by the supplier was actually received. The GRN does not usually contain price
information. Therefore the correct answer is A.
6.2 A Free inventory balance = units in inventory + units on order from suppliers – units
outstanding on customers' orders
13,000 = units in inventory + 27,500 – 16,250
Units in inventory = 13,000 – 27,500 + 16,250 = 1,750
6.3 C Reorder level = maximum usage × maximum lead time
= 95 × 18
= 1,710 units
6.4 C Maximum level = reorder level + reorder quantity – (minimum usage × minimum lead time)
= 1,710 + 1,750 – (50 × 12) = 2,860 units
6.5 C EOQ =
h
2CoD
C
=
2 $80 2,500
$15
= 163
6.6 D Stock-outs arise when too little inventory is held (i); safety inventories are the level of units
maintained in case there is unexpected demand (ii); and a reorder level can be established by
looking at the maximum usage and the maximum lead-time (iii). Therefore, they are all correct
statements with regards to inventories.
6.7 C The economic batch quantity is used to establish the optimal order quantity.
6.8 D EOQ =
H
2CoD
C
Where Co = 20
D = 12,500 × 4 = 50,000
CH = 10% × $15 = 1.50
EOQ =
2 20 50,000
1.50
= 1,333,333
= 1,155 units
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6.9 D If there is a decrease in the cost of ordering a batch of raw material, then the EOQ will also be
lower (as the numerator in the EOQ equation will be lower). If the EOQ is lower, than average
inventory held (EOQ/2) with also be lower and therefore the total annual holding costs will also
be lower.
6.10 C Reorder level = maximum usage × maximum lead time
= 520 × 15
= 7,800 units
6.11 C Statement (i) is not correct. A debit to stores with a corresponding credit to work in progress
(WIP) indicates that direct materials returned from production were $18,000.
Statement (ii) is correct. Direct costs of production are 'collected' in the WIP account.
Statement (iii) is correct. Indirect costs of production or overhead are 'collected' in the overhead
control account.
Statement (iv) is correct. The purchases of materials on credit are credited to the creditors
account and debited to the material stores control account.
Therefore the correct answer is C.
6.12 C Annual holding cost
= [buffer (safety) inventory + reorder level/2)] × holding cost per unit
= [500 + (2,000/2)] × $2
= $3,000
6.13 D The economic order quantity is 300 units.
The formula for the economic order quantity (EOQ) is
EOQ =
2C D
o
C
h
With CO = $10
D = 5,400 12 = 450 per month
Ch = $0.10
EOQ =
2 $10 450
$0.10
= 90,000
= 300 units
6.14 A The level of safety inventory is 400 units (to the nearest whole unit).
Let x = safety inventory
Average inventory = safety inventory (x) +
reorder quantity
2
3,400 = x +
6,000
2
3,400 = x + 3,000
x = 3,400 – 3,000
x = 400 units
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6.15 A The economic order quantity is 175 units (to the nearest whole unit).
EOQ =
2CoD
Ch
=
2 $100 1,225
$8
= 30,625
= 175 units
6.16 B The maximum inventory level was 6,180 units
Reorder level = maximum usage maximum lead time
= 130 26 = 3,380 units
Maximum level = reorder level + reorder quantity – (minimum usage minimum lead time)
= 3,380 + 4,000 – (60 20)
= 6,180 units
6.17 C EBQ =
0
h
2C D
C (1 D /R)
Q
0.0025(1 5,000 / 10,000)
2 125 5,000
=
1,250,000
0.00125
= 31,623 units
6.18 C The EOQ is found where the holding costs equal the ordering costs. You need to read the value of
units on the x axis of the graph at point C.
6.19 B The company could order the EOQ amount of 160 or it could order 300 units and take a
discount of 2%. We need to work out which is the cheapest option.
$
Purchases (no discount) 1,800 × $25 45,000
Holding costs (W1) 360
Ordering costs (W2) 360
Total annual costs 45,720
Workings
(1) Holding costs = average inventory × holding cost for one unit of inventory for one year
Average inventory = order quantity ÷ 2
= 160 ÷ 2 = 80 units
Holding cost for one unit of inventory for one year = $4.50
holding costs = 80 units × $4.50 = $360
(2) Ordering costs = number of orders × ordering costs per order ($32)
Number of orders = Annual demand ÷ order quantity
= 1,800 ÷ 160
= 11.25 orders
ordering cost = 11.25 orders × $32
= $360
With a discount of 2% and an order quantity of 300 units, unit costs are as follows.
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$
Purchases $45,000 × 98% 44,100.00
Holding costs (W1) 661.50
Ordering costs (W2) 192.00
Total annual costs 44,953.50
Workings
(1) Holding costs = average inventory × holding cost for one unit of inventory for one year
Average inventory = order quantity ÷ 2
= 300 ÷ 2 = 150 units
Holding cost for one unit of inventory for one year = $4.50 × 98% = $4.41
holding costs = 150 units × $4.41 = $661.50
(2) Ordering costs = number of orders × ordering costs per order ($32)
Number of orders = Annual demand ÷ order quantity
= 1,800 ÷ 300
= 6 orders
ordering cost = 6 orders × $32
= $192
The cheapest option is to order 300 at a time and accept the discount.
Workings for both questions 6.20 and 6.21.
FIFO LIFO
Value Value
Units $/unit $ Units $/unit $
Purchase 1/1 4,000 2.50 10,000 4,000 2.50 10,000
31/1 1,000 2.00 2,000 1,000 2.00 2,000
5,000 12,000 5,000 12,000
Sales 15/2 (3,000) 2.50 (7,500) (1,000) 2.00 (2,000)
(2,000) 2.50 (5,000)
2,000 4,500 2,000 5,000
Purchase 28/2 1,500 2.50 3,750 1,500 2.50 3,750
3,500 8,250 3,500 8,750
Sales 14/3 (500) 2.50 (1,250) (500) 2.50 (1,250)
3,000 7,000 3,000 7,500
6.20 C See workings above. If you selected the wrong option then check your workings carefully against
the above table.
6.21 C See workings above. If you selected the wrong option then check your workings carefully against
the above table.
6.22 B $4,492
Units $
Opening inventory 300 $25 300 7,500
Issue on 2 Jan 256 $25 (250) (6,250)
50 1,250
Receipt on 12 Jan 400 10,300
450 11,550
Issues on 21 Jan and 29 Jan
(11,550/450) (200 + 75) (275) (7,058)
175 4,492
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157
7 Accounting for labour
7.1 D Budgeted hours = 3,000 + 8,000 + 7,000 + 9,000 = 27,000
Capacity ratio =
actual hours worked
budgeted hours
=
29,000
27,000
100% = 107.4%
7.2 A
Product Units Standard hours
W 12,000 ( 0.2) 2,400
X 25,000 ( 0.4) 10,000
Y 16,000 ( 0.5) 8,000
Z 5,000 ( 1.5) 7,500
27,900
Efficiency ratio =
Standard hours produced
Actual hours worked
=
27,900
29,000
100% = 96.2%
7.3 A The graph shows a constant wage up to a certain level of output, which is payable even at zero
output. This is the minimum guaranteed wage. Above a certain output the wage cost rises at a
constant rate. This is the piece rate payable in addition to the minimum wage.
Graphs for the other options would look like this:
Option B Option C Option D
7.4 B Hours
Standard time for 180 units (× 4/60) 12
Actual time taken 7
Time saved 5
$
Basic pay 7 hours × $5 35
Bonus: 60% × 5 hours saved × $5 per hour 15
50
7.5 A Number of units qualifying for payment = 210 – 17
= 193
Piecework payment to be made:
$
First 100 units @ $0.20 20.00
Last 93 units @ $0.30 27.90
47.90
7.6 C The overtime premium paid at the specific request of a customer would be treated as a direct
cost because it can be traced to a specific cost unit.
The four hours of machine breakdown is idle time. It cannot be traced to a specific cost unit
therefore it is an indirect cost.
The direct wages cost is as follows.
$
Basic pay for active hours (38 hours $3.60) 136.80
Overtime premium re: customer request (2 hours $1.80) 3.60
140.40
$ $ $
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7.7 C Group bonus schemes are useful to reward performance when production is integrated so that all
members of the group must work harder to increase output, for example in production line
manufacture. Statement (i) is therefore true.
Group bonus schemes are not effective in linking the reward to a particular individual's
performance. Even if one individual makes a supreme effort, this can be negated by poor
performance from other members of the group. Therefore statement (ii) is not true.
Non-production employees can be included in a group incentive scheme, for example when all
employees in a management accounting department must work harder to produce prompt
budgetary control reports. Statement (iii) is therefore true, and the correct option is C.
7.8 B The overtime was not worked for any specific job and is therefore an indirect wages cost to be
'collected' in the overhead control account. Similarly, the holiday pay is an indirect cost, therefore
the total debit to the overhead control account is $2,500. The direct wages of $70,800 is
debited to the work in progress account and the total wages cost is credited to the wages
control account.
7.9 B Reduction in number of employees = 30 – 20 = 10
Number of employees leaving = 15
Number of employees replaced = 15 – 10 = 5
Labour turnover rate =
replacements
100%
average no. of employees in period
=
5
100%
(30 20) 2
= 20%
7.10 A Hours
Standard time for 80 units (× 9/60) 12
Actual time taken 8
Time saved 4
Group bonus : 70% × 4 hours saved × $6 per hour = $16.80
Jane's share of bonus = 50% × ($16.80 × 60%)
= $5.04
7.11 C DR Overhead control CR Wages control
Indirect wages are 'collected' in the overhead control account, for subsequent absorption into
work in progress.
7.12 A Labour turnover rate =
Replacements
Average number of employees in period
× 100%
=
10
×100
(4,000+3,800)÷2
= 0.26%
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ANS
ANSWERS
159
8 Accounting for overheads
8.1 D Number of employees in packing department = 2 direct + 1 indirect = 3
Number of employees in all production departments = 15 direct + 6 indirect = 21
Packing department overhead
Canteen cost apportioned to packing department =
$8,400
21
× 3
= $1,200
Original overhead allocated and apportioned = $8,960
Total overhead after apportionment of canteen costs = $10,160
8.2 D Department 1 appears to undertake primarily machine-based work, therefore a machine-hour rate
would be most appropriate.
$27,000
45,000
= $0.60 per machine hour
Therefore the correct answer is D.
8.3 C Department 2 appears to be labour-intensive therefore a direct labour-hour rate would be most
appropriate.
$18,000
25,000
= $0.72 per direct labour hour
8.4 A Statement (i) is correct because a constant unit absorption rate is used throughout the period.
Statement (ii) 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 (iii) is incorrect because under/over absorption of overheads is caused by the use of
predetermined overhead absorption rates.
8.5 A Description B could lead to under-absorbed overheads if actual overheads far exceeded both
budgeted overheads and the overhead absorbed. Description C could lead to under-absorbed
overheads if overhead absorbed does not increase in line with actual overhead incurred.
8.6 B Budgeted absorption rate for fixed overhead = $360,000/8,000
= $45 per unit
Fixed overhead absorbed = 9,000 units × $45
= $405,000
8.7 A
Actual fixed overhead incurred $432,000
Fixed overhead absorbed $405,000 (from question 6)
Fixed overhead under absorbed $27,000
8.8 C The insurance cost is likely to be linked to the cost of replacing the machines, therefore the most
appropriate basis for apportionment is the value of machinery.
8.9 A All of the overhead absorption methods are suitable, depending on the circumstances.
Method 1, direct labour hours, is suitable in a labour-intensive environment.
Method 2, machine hours, is suitable in a machine-intensive environment.
Method 3, a percentage of prime costs, can be used if it is difficult to obtain the necessary
information to use a time-based method. Method 4, a rate per unit, is suitable if all cost units are
identical.
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8.10 C Statement (i) is correct. The cost of indirect material issued is 'collected' in the overhead control
account pending absorption into work in progress.
Statement (ii) is incorrect. The overhead cost incurred was $210,000. The overhead absorbed
into work in progress during the period was $404,800.
Statement (iii) is incorrect. The $8,400 is debited to the statement of profit or loss, indicating
an extra charge to compensate for the overhead under absorbed.
Statement (iv) is correct. The indirect wage cost is 'collected' in the overhead control account
pending absorption into work in progress.
Therefore the correct answer is C.
8.11 A Only production related costs should be considered when considering the allocation,
apportionment and reapportionment of overhead in an absorption costing situation.
8.12 A
$
Actual fixed production overheads X
Absorbed fixed production overheads (4,500 × $8) 36,000
Over-absorbed fixed production overheads 6,000
Actual fixed production overheads = $36,000 – $6,000
= $30,000
8.13 D
Production cost centre
Primary Finishing
Allocated and apportioned $96,000 $82,500
Total direct labour hours 9,600 hours 6,875 hours
Fixed overhead absorption rate $10 per hour $12 per hour
Workings
(1) Total direct labour hours – Primary = (6,000 × 36/60) hours + (7,500 × 48/60) hours
= (3,600 + 6,000) hours
= 9,600 hours
(2) Total direct labour hours – Finishing = (6,000 × 25/60) hours + (7,500 × 35/60) hours
= (2,500 + 4,375) hours
= 6,875 hours
Budgeted fixed overhead cost per unit for Product Y
Primary = 48 minutes/60 minutes × $10 per hour
= $8 per unit
Finishing = 35 minutes/60 minutes × $12 per hour
= $7 per unit
Total = $8 + $7
= $15 per unit of Product Y
8.14 A
$
Absorbed overhead (30,000 hours × $3.50) 105,000
Actual overhead 108,875
Under-absorbed overhead 3,875
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161
8.15 D Using simultaneous equations:
Let P = overheads for department P after reapportionment
X = overheads for department X after reapportionment
Y = overheads for department Y after reapportionment
P = 95,000 + 0.4X + 0.3Y
X = 46,000 + 0.1Y
Y = 30,000 + 0.2X
X = 46,000 + 0.1 (30,000 + 0.2X)
X = 46,000 + 3,000 + 0.02X
X = 49,000 + 0.02X
X – 0.02X = 49,000
0.98X = 49,000
X = 49,000/0.98
= 50,000
If X = 50,000
Y = 30,000 + (0.2 × 50,000)
Y = 30,000 + 10,000
Y = 40,000
X = 50,000 and Y = 40,000
P = 95,000 + 0.4X + 0.3Y
= 95,000 + (0.4 × 50,000 + (0.3 × 40,000)
= 95,000 + 20,000 + 12,000
= 127,000
8.16 D Production overhead absorption rate = $150,000/60,000
= $2.50 per machine hour
Production overhead absorbed = $2.50 55,000 hours
= $137,500
Production overhead incurred = $150,000
Production overhead under absorbed = $ 12,500
8.17 A The number of machine hours (to the nearest hour) budgeted to be worked were 14,850
hours.
Budgeted hours =
Budgeted overheads
Budgeted overheadabsorptionrate
=
$475,200
$32
= 14,850
8.18 B The machine hour absorption rate is (to the nearest $) $45 per machine hour.
Machine hour absorption rate =
Budgeted overheads
Budgeted machine hours
=
$690,480
15,344
= $45 per machine hour
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8.19 C The budgeted overhead absorption rate was $25 per machine hour (to the nearest $).
$
Actual overheads incurred 496,500
Over-absorbed overhead 64,375
Actual overheads absorbed 560,875
Actual overheads absorbed
Actualmachine hours
= Amount absorbed per machine hour
$560,875
22,435
= $25 per machine hour
8.20 D Fixed production overhead was under absorbed by $25,000
$
Overhead absorbed (110,000 std hours $2.50) 275,000
Overhead incurred 300,000
Overhead under absorbed 25,000
The overhead is under absorbed because the overhead absorbed was less than the overhead
incurred.
8.21 D The direct method results in costs being re-apportioned between production centres (not between
service centres) so statement (i) is false. When using the direct method, it doesn't matter in
which order the service overheads are re-apportioned so statement (ii) is true. Statement (iii) is
true but statement (iv) is false because the order does matter when using the step-down
approach.
8.22 D $354,888
Direct method
Production departments Service centres
Mixing Stirring Stores Canteen
Overheads 216,400 78,800 181,600 47,200
Reapportion stores (50:30) (5/8) 113,500 (3/8) 68,100 (181,600) –
Reapportion canteen (45:40) 24,988 22,212 – (47,200)
354,888 169,112
8.23 C $351,416
Step down method
Production departments Service centres
Mixing Stirring Stores Canteen
Overheads 216,400 78,800 181,600 47,200
Reapportion stores (50:30:20) 90,800 54,480 (181,600) 36,320
– 83,520
Reapportion canteen (45:40) 44,216 39,304 (83,520)
351,416 172,584 –
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ANSWERS
163
8.24 A
ACCA examining team comments
The question relates to study guide reference B2d. The correct answer is A. Standard
absorption costing will include $96,000 of the period's overhead (2,000 units × 4 labour
hours × $12 per hour) in the valuation of closing inventory. Under standard marginal
costing the $96,000 would be charged against the period's profit resulting in a profit
$96,000 lower than $464,000. This type of question is included in virtually every costing
textbook and it is disappointing that only a minority of candidates selected the correct
alternative. The most common answer was B, ($464,000 – 2000 units × $12 per labour
hour) suggesting some misunderstanding of overhead absorption rates or careless reading of
the question. C was also a popular answer ($464,000 – 2,000 units ÷ 20,000 units ×
100,000 hours × $12 per labour hour) indicating that many candidates believed that
inventories should be valued on the basis of actual labour hours in a standard absorption
costing system. On the bright side, only a small proportion of candidates selected alternative
D, which indicates that most candidates understand that in periods of rising finished goods
inventories, absorption costing will show higher profits than marginal costing.
9 Absorption and marginal costing
9.1 D We know that the profit using marginal costing would be higher than the absorption costing
profit, because inventories are decreasing. However, we cannot calculate the value of the
difference without the fixed overhead absorption rate per unit.
Difference in profit = 2,000 units inventory
reduction
fixed overhead absorption
rate per unit
9.2 B Difference in profit = change in inventory level fixed overhead per unit
= (2,400 – 2,700) ($4 3)
= $3,600
The absorption profit will be higher because inventories have increased, and fixed overheads have
been carried forward in inventories.
9.3 A Difference in profit = change in inventory level fixed overhead per unit
= (15,000 – 20,000) $8
= $40,000
The inventory level increased during the period therefore the absorption costing profit is higher
than the marginal costing profit.
Marginal costing profit = $130,000 – $40,000 = $90,000
9.4 A Contribution per unit = $30 – $(6.00 + 7.50 + 2.50)
= $14
Contribution for month = $14 × 5,200 units
= $72,800
Less fixed costs incurred = $27,400
Marginal costing profit = $45,400
9.5 D
$ $
Sales (5,200 at $30) 156,000
Materials (5,200 at $6) 31,200
Labour (5,200 at $7.50) 39,000
Variable overhead (5,200 at $2.50) 13,000
Total variable cost (83,200)
Fixed overhead ($5 5,200) (26,000)
Over-absorbed overhead (W) 1,600
Absorption costing profit 48,400
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Working $
Overhead absorbed (5,800 $5) 29,000
Overhead incurred 27,400
Over-absorbed overhead 1,600
9.6 B Inventory levels increased by 3,000 units and absorption costing profit is $105,000 higher
($955,500 – $850,500).
Fixed production cost included in inventory increase:
=
$105,000
3,000
= $35 per unit of inventory
Budgeted fixed cos ts
Fixed cos t per unit
=
$1,837,500
$35
= 52,500 units
9.7 D Decrease in inventory levels = 48,500 – 45,500 = 3,000 units
Difference in profits = $315,250 – $288,250 = $27,000
Fixed overhead per unit =
$27,000
3,000
= $9 per unit
If you selected one of the other options you attempted various divisions of all the data available in
the question!
9.8 C All of the methods are acceptable bases for absorbing production overheads. However, the
percentage of prime cost has serious limitations and the rate per unit can only be used if all cost
units are identical.
9.9 D Under absorption costing all associated costs are included in the total cost of a product.
9.10 C If inventory levels increase in a period, absorption costing will show a higher profit than marginal
costing.
Difference in profit = change in inventory levels × overhead absorption rate per unit
= (750 units – 300 units) × $5 per unit
= 450 units × $5
= $2,250
$
Marginal costing profit 72,300
Increase in profit 2,250
Absorption costing profit 74,550
9.11 B Contribution per unit = selling price – variable cost
= $10 – $6
= $4 per unit
Total contribution = 250,000 units × $4 per unit = $1,000,000
Total fixed costs = 200,000 units × $2 per unit
= $400,000
Marginal costing profit = total contribution – total fixed costs
= $1,000,000 – $400,000
= $600,000
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ANSWERS
165
9.12 C If inventory levels increase in a period, absorption costing will show a higher profit than marginal
costing.
Difference in profit = change in inventory levels × overhead absorption rate per unit
= (350 – 100) units × $4 per unit
= 250 units × $4
= $1,000
$
Marginal costing profit 37,500
Increase in profit 1,000
Absorption costing profit 38,500
9.13 B
Fixed production overhead absorption rate =
$48,000
12,000 units
= $4 per unit
Increase in inventory levels = (12,000 – 11,720) units
= 280 units
Difference in profit = 280 units × $4 per unit
= $1,120
Marginal costing profits are lower than absorption costing profits when inventory levels increase
in a period, therefore marginal costing profit will be $1,120 lower than absorption costing profits
for the same period.
9.14 C If budgeted fixed overhead expenditure = 100%
Actual fixed overhead expenditure = 110%
Variance = 10%
If variance = $36,000 = 10% × budgeted fixed overhead expenditure
Budgeted fixed overhead expenditure = $36,000/0.1
= $360,000
Actual fixed overhead expenditure = 110% × $360,000
= $396,000
9.15 B Increase in inventory = (18,000 – 16,500) units
= 1,500 units
Difference in profit = 1,500 units × $10
= $15,000
Profits under marginal costing will be $15,000 less than profits under absorption costing ie
$40,000 – $15,000 = $25,000.
9.16 D Any difference between marginal and absorption costing profit is due to changes in inventory.
$
Absorption costing profit 2,000
Marginal costing loss (3,000)
Difference 5,000
Change in inventory = Difference in profit/fixed product cost per unit
= $5,000/$2 = 2,500 units
Marginal costing loss is lower than absorption costing profit therefore inventory has gone up –
that is, production was greater than sales by 2,500 units.
Production = 10,000 units (sales) + 2,500 units = 12,500 units
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9.17 D
Units
Opening inv 900
Closing inv 300
Decrease 600 $500,000
2,500
= 120,000 lower
9.18 C
ACCA examining team comments
The correct answer is C. This can be calculated by multiplying the increase in finished goods
inventory of 1,000 units (2,000 units produced less 1,000 units sold) by the fixed
production cost per unit that will be included in absorption costing closing inventory
valuation.
The distracters were all based around the $4,000 over-absorption of fixed production cost.
Distracter A suggests that the difference in profits will be equal to the over- absorption of
fixed production cost, whereas B and D suggest that it is due to a difference in inventory
valuation and over-absorption of fixed production cost. Incorrect answers were roughly
evenly spread around the 3 distracters, suggesting a misunderstanding of under- or overabsorption
(or possibly a high level of guessing).
Under- or over-absorption adjustments to profit do not cause a difference between marginal
and absorption costing profits. They simply ensure that absorption costing charges the same
amount of fixed overhead as marginal costing.
If we look in more detail at the situation it is apparent that the over-absorption of $4,000
was caused by the production of 400 units more than budgeted ($4,000 ÷ $10 per unit).
Budgeted production would therefore be 1,600 units (2,000 units actually produced less
the 400 units above).
It follows that budgeted fixed production cost was therefore 1,600 units × $10 per unit =
$16,000. As actual fixed production cost was equal to budgeted, marginal cost fixed
production costing would have recorded an actual fixed production cost of $16,000.
Absorption costing would have charged $20,000 of fixed production cost to product (2,000
units produced × $10 per unit), however the adjustment for over-absorption would have
corrected this overcharge and reduced this cost by $4,000, resulting in the same fixed
production cost as marginal costing.
The important point is that it is not under- or over-absorption that causes the difference
between profits under absorption and marginal costing principles. The difference in profits
is caused by the difference in finished goods inventory valuations.
10 Job, batch and service costing
10.1 D Process costing is a costing method used where it is not possible to identify separate units of
production, or jobs, usually because of the continuous nature of the production process. The
manufacture of liquid soap is a continuous production process.
10.2 B $
Selling price of job 1,690
Less profit margin (30/130) 390
Total cost of job 1,300
Less overhead 694
Prime cost 606
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10.3 A $
Direct materials (5 $20) 100
Direct labour (14 $8) 112
Variable overhead (14 $3) 42
Fixed overhead (14 $5*) 70
Other overhead 80
Total cost of job 173 404
*Fixed production overhead absorption rate =
$200,000
40,000
= $5 per direct labour hour
10.4 C The most logical basis for absorbing the overhead job costs is to use a percentage of direct labour
cost.
Overhead =
$24,600
$(14,500+ 3,500+24,600)
$126,000
=
$24,600
$42,600
$126,000
= $72,761
10.5 C Job number WIP
$
AA10 (26,800 + 17,275 + 14,500) + ( 14,500
42,600
126,000)
101,462
CC20 (18,500 + 24,600 + 72,761) 115,861
217,323
10.6 C The actual material and labour costs for a batch (i and iv) can be determined from the material
and labour recording system. Actual manufacturing overheads cannot be determined for a specific
batch because of the need for allocation and apportionment of each item of overhead
expenditure, and the subsequent calculation of a predetermined overhead absorption rate.
Therefore item (ii) is incorrect and item (iii) is correct.
10.7 B The vehicle cost per passenger-kilometre (i) is appropriate for cost control purposes because it
combines the distance travelled and the number of passengers carried, both of which affect cost.
The fuel cost for each vehicle per kilometre (ii) can be useful for control purposes because it
focuses on a particular aspect of the cost of operating each vehicle.
The fixed cost per kilometre (iii) is not particularly useful for control purposes because it varies
with the number of kilometres travelled.
10.8 B Number of occupied room-nights = 40 rooms 30 nights 65%
= 780
Room servicing cost per occupied room-night =
$3,900
780
= $5
10.9 D Weeks during year = 52 – 4 = 48
Hours worked per year = 48 35 hours
= 1,680 hours
Hours chargeable to clients = 1,680 90% = 1,512
Hourly charge rate =
$3,000+$18,000
1,512
=
$21,000
1,512
= $13.89 per hour
Price for 3-hour 'colour and cut' = $13.89 3 = $41.67
10.10 A For most services it is difficult to identify many attributable direct costs. A high level of indirect costs
must be shared over several cost units, therefore option A is not a characteristic of service costing.
10.11 B A college and a hotel are likely to use service costing. A plumber works on separately identifiable
jobs and is therefore more likely to use job costing.
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10.12 C An airline company, a railway company and a firm of accountants are all considered to be service
industries.
10.13 C Assignment 789
$
Senior consultant – 54 hours × $40 2,160
Junior consultant – 110 hours × $25 2,750
Overhead absorption – 164 hours × $20 3,280
Total cost 8,190
40% × total cost = 40% × $8,190 3,276
Final fee 11,466
10.14 A Total cost – job number 1012
$
Direct materials 45
Direct labour 30
Prime cost 75
Production overheads (30/7.5 × $12.50) 50
Total production cost 125
Non-production overheads (0.6 × $75) 45
Total cost – job number 1012 170
10.15 A $0.002 per kg-km
First we calculate the total number of kg-km.
Kg × km taken = 250,000 kg × 7,500 km
= 1,875,000,000 kg-km
cost per kg-km = $3,750,000/1,875,000,000 = $0.002 per kg-km
10.16 B
ACCA examining team comments
The question relates to study guide reference B3c(ii).
The correct answer is B. The cost per kilogram/kilometre of sand delivered is the cost of
carrying one kilogram of sand for one kilometre. Kilogram kilometres can be calculated by
multiplying the weight of goods delivered to each customer by the distance covered. (500 kg
× 200km + 180 kg × 1200km = 316,000 kilogram kilometres.) If truck costs are divided
by this figure a cost of $0.010 is obtained. Alternative C represents the cost per kilometre
travelled (($3,060 / 1,400 km). Alternative A can be obtained by dividing truck cost by
680 kg × 1,400 kilometres = 952,000. This is a meaningless figure as it does not allow
for different weights travelling different distances. Finally alternative D represents the
average cost per kilogram delivered ($3,060 / 680 kg = $4.50).
11 Process costing
11.1 A Good production = input – normal loss – abnormal loss
= (2,500 – (2,500 × 10%) – 75)kg
= 2,500 – 250 – 75
= 2,175 kg
11.2 C Work in progress = 300 litres input – 250 litres to finished goods
= 50 litres
Equivalent litres for each cost element are as follows.
Material Conversion costs
% Equiv. litres % Equiv. litres
50 litres in progress 100 50 50 25
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11.3 A There is no scrap value available for any losses therefore the normal loss would have a zero
value. The normal loss does not carry any of the process costs therefore options B, C and D are
all incorrect.
11.4 D Expected output = 2,000 units less normal loss (5%) 100 units = 1,900 units
In situation (i) there is an abnormal loss of 1,900 – 1,800 = 100 units
In situation (ii) there is an abnormal gain of 1,950 – 1,900 = 50 units
In situation (iii) there is an abnormal gain of 2,000 – 1,900 = 100 units
Therefore the correct answer is D.
11.5 B Abnormal losses are valued at the same unit rate as good production, so that their occurrence
does not affect the cost of good production.
11.6 D The total loss was 15% of the material input. The 340 litres of good output therefore represents
85% of the total material input.
Therefore, material input =
340
0.85
= 400 litres
11.7 C Step 1. Determine output and losses
Equivalent units
Input Output Total Materials Labour and overhead
Units Units Units % Units %
Finished units (balance) 400 400 100 400 100
500 Closing inventory 100 100 100 80 80
500 500 500 480
Step 2. Calculate the cost per equivalent unit
Equivalent production Cost per
Input Cost in units unit
$ $
Materials 9,000 500 18
Labour and overhead 11,520 480 24
42
Step 3. Calculate total cost of output
Cost of completed units = $42 × 400 units = $16,800
11.8 B Using the data from answer 7 above, extend step 3 to calculate the value of the work in
progress.
Cost Number of Cost per
element equivalent units equivalent unit Total
$ $
Work in progress: Materials 100 18 1,800
Labour & overhead 80 24 1,920
3,720
11.9 C STATEMENT OF EQUIVALENT UNITS
Equivalent units
Total Materials Labour Overheads
Units
Output to process 2* 600 600 600 600
Closing WIP 100 (100%) 100 (50%) 50 (30%) 30
700 700 650 630
*500 units input + opening WIP 200 units – closing WIP 100 units.
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11.10 B STATEMENT OF COSTS PER EQUIVALENT UNIT
Materials Labour Overheads Total
$ $ $
Opening stock 2,400 1,200 400
Added during period 6,000 3,350 1,490
Total cost 8,400 4,550 1,890
Equivalent units 700 650 630
Cost per equivalent unit $12 $7 $3 $22
Value of units transferred to process 2 = 600 units $22 = $13,200
11.11 D
Equivalent units
Total Materials Conversion costs
Units Units Units
Output to finished goods 9,850 9,850 9,850
Closing inventory 450 (100%) 450 (30%) 135
10,300 10,300 9,985
11.12 B Input costs = 2,000 units × $4.50 = $9,000
Conversation costs = $13,340
Normal loss = 5% × 2,000 units × $3 = $300
Expected output = 2,000 units – 100 units = 1,900 units
Cost per unit of output =
Input costs
Expected output
=
$9,000 + $13,340 - $300
1,900 units
=
$22,040
1,900 units
= $11.6 (to one decimal
point)
11.13 D
$
Material 9,000
Conversion costs 11,970
Less scrap value of normal loss (300 $1.50) (450)
Cost of process 20,520
Expected output = 3,000 – (10% 3,000)
= 3,000 – 300 = 2,700 units
Costs per unit =
Input costs – scrap value of normal loss
Expected output
=
$20,520
2,700
= $7.60
Value of output = 2,900 $7.60 = $22,040
11.14 B Abnormal gain = 276 units – 112 units = 164 units
Cost per unit of good production = $29,744/5,408 = $5.50
Value of abnormal gain = 164 units $5.50 = $902
The value of the input can be found as the balancing figure in the value columns of the process
account.
Polishing process account
$ $
Input (balancing figure) 29,532 Output 29,744
Abnormal gain 902 Normal loss (276 $2.50) 690
30,434 30,434
11.15 D Statement (i) is incorrect. Units of normal loss are valued at their scrap value (which may be nil).
Statement (ii) is incorrect. Units of abnormal loss are valued at the same rate as good units.
Therefore the correct answer is D, statements (i) and (ii) both being incorrect.
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12 Process costing, joint products and by-products
12.1 C Total production inventory
$
Opening inventory 1,000
Direct materials added 10,000
Conversion costs 12,000
23,000
Less closing inventory 3,000
Total production cost 20,000
Apportioned
Production Sales value cost
Units $ $
P 4,000 ( $5) 20,000 ($20,000 20/80) 5,000
R 6,000 ( $10) 60,000 ($20,000 60/80) 15,000
80,000 20,000
Product R cost per unit = $15,000/6,000 = $2.50 per unit.
12.2 A From the previous answer, total production cost to be apportioned = $20,000.
Production Apportioned cost
Units $
P 4,000 ($20,000 4/10) 8,000
R 6,000 ($20,000 6/10) 12,000
10,000 20,000
12.3 D Statement (i) is incorrect because the value of the product described could be relatively high even
though the output volume is relatively low. This product would then be classified as a joint
product.
Statement (ii) is incorrect. Since a by-product is not important as a saleable item, it is not
separately costed and does not absorb any process costs.
Statement (iii) is correct. These common or joint costs are allocated or apportioned to the joint
products.
12.4 B Net process costs
$
Raw material input 216,000
Conversion costs 72,000
Less by-product revenue (4,000)
Net process cost 284,000
Apportioned
Production Sales value cost
Units $
E 21,000 ( $15) 315,000 ($284,000 315/495) 180,727
Q 18,000 ( $10) 180,000 ($284,000 180/495) 103,273
495,000 284,000
12.5 C No costs are apportioned to the by-product. The by-product revenue is credited to the sales
account, and so does not affect the process costs.
Apportioned
Units Sales value cost
$ $
L 3,000 ( $32) 96,000 ($230,000 96/332) 66,506
M 2,000 ( $42) 84,000 ($230,000 84/332) 58,193
N 4,000 ( $38) 152,000 ($230,000 152/332) 105,301
332,000 230,000
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12.6 A Total production units = 412,000 + 228,000
= 640,000 units
Joint costs apportioned to Product H =
228,000
640,000
× $384,000= $136,800
Further processing costs = $159,600
Total product cost of Product H = $(136,800 + 159,600) = $296,400
Closing inventory value of Product H =
28,000
228,000
× $296,400= $36,400
12.7 D Sales value of production
W (12,000 units × $10) $120,000
X (10,000 units × $12) $120,000
Joint production costs will be apportioned equally between the two products as the sales value of
production is the same for each product.
Joint production costs allocated to X = $776,160/2 = $388,080
Value of closing inventory =
2,000
10,000
× $388,080 = $77,616
13 Alternative costing principles
13.1 C ABC is an alternative to traditional volume based methods where production overhead is
absorbed on the basis of the volume of direct labour hours or machine hours worked. However, it
is still a form of absorption costing because production overheads are absorbed into product
costs. ABC identifies costs with support activities and the overhead costs of a product or service
could reflect the long-run variable cost of that product or service. ABC can be used for costing
services as well as products.
13.2 B Maturity. During this period, prices tend to fall but profits remain high due to good sales volume.
13.3 C Growth. During the growth phase the product begins to make a profit. This is due to economies
of scale being received as increased demand for the product occurs.
13.4 B Target cost means a product cost estimate derived by subtracting a desired profit margin from a
competitive market price.
13.5 A Growth. The product life cycle stages can be summarised as follows:
Introduction: Basic quality, few competitors, high promotion costs
Growth: As stated in question
Maturity: Most competitive stage, product extension strategies, for example, new markets
Decline: Exit strategy needs to be identified.
13.6 C Statement 1 is true. More accurate feedback can be obtained since the costs of research and
development are also taken into account. Statement 2 is false. Individual profitability for products
is more accurate.
13.7 A This is a cost arising from inadequate quality discovered after the transfer of ownership, an
external failure cost.
13.8 C Target costing involves setting a target cost by subtracting a desired profit margin from a
competitive market price.
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14 Forecasting
14.1 C From the data given, it is clear that the correlation is positive and strong. The correlation
coefficient describing a positive strong relationship is 0.98.
14.2 A Y = 20 – 0.25X
X = 12
Y = 20 – 0.25(12) = 17%
14.3 D (i) A correlation coefficient close to +1 or –1 indicates a strong linear relationship between X
and Y. The regression equation is therefore more reliable for forecasting.
(ii) Working to a high number of decimal places gives spurious accuracy unless both the data
itself is accurate to the same degree and the methods used lend themselves to such
precision.
(iii) Forecasting for values of X outside the range of the original data leads to unreliable
estimates, because there is no evidence that the same regression relationships hold for
such values.
(iv) The regression equation is worthless unless a sufficiently large sample was used to
calculate it. In practice, samples of about ten or more are acceptable.
(i) and (iv) increase the reliability of forecasting.
14.4 A The formula for the correlation coefficient is provided in your exam. There are no excuses for
getting this question wrong.
Correlation coefficient, r =
2 2 2 2
n XY X Y
[n X ( X) ][n Y ( Y) ]
=
2 2
(4 157) (12 42)
[4 46 12 ] [4 542 42 ]
=
628 504
(184 144) (2,168 1,764)
=
124
40 404
=
124
127.12
= 0.98 (to 2 decimal places)
14.5 C (i) High levels of correlation do not prove that there is cause and effect.
(ii) A correlation coefficient of 0.73 would generally be regarded as indicating a strong linear
relationship between the variables.
(iii) The coefficient of determination provides this information and is given by squaring the
correlation coefficient, resulting in 53% in this case.
(iv) The coefficient of determination provides this information and not the correlation
coefficient. Remember that you must square the correlation coefficient in order to obtain
the coefficient of determination.
Statements (ii) and (iii) are relevant and the correct answer is therefore C.
14.6 D When X = 20, we don't know anything about the relationship between X and Y since the sample
data only goes up to X = 10. (i) is therefore true.
Since a correlation coefficient of 0.8 would be regarded as strong (it is a high value) the estimate
would be reliable. (ii) is therefore not true.
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With such a small sample and the extrapolation required, the estimate is unlikely to be reliable.
(iii) is therefore not true.
The sample of only six pairs of values is very small and is therefore likely to reduce the reliability
of the estimate. (iv) is therefore true.
The correct answer is therefore D.
14.7 C The independent variable is denoted by X and the dependent one by Y.
14.8 A a = y
n
– b x
n
where b = 17.14
x = 5.75
y = 200
n = 4
a =
200
4
– 17.14 ×
5.75
4
= 50 – (17.14 × 1.4375)
= 50 – 24.64
= 25.36 (to 2 decimal places)
14.9 C a =
y x
b
n n
=
330 x440
b
11 11
b =
2 2
n xy x y
n x ( x)
= 2
(11 13,467) (440 330)
(11 17,986) 440
=
148,137 145,200
197,846 193,600
=
2,937
4,246
= 0.6917
a =
330
11
– (0.6917 ×
440
11
= 30 – 27.668
= 2.332
= 2.33 (to 2 decimal places)
14.10 C The correlation coefficient can take on any value from –1 to +1.
14.11 B y = 7.112 + 3.949x
If x = 19, trend in sales for month 19 = 7.112 + (3.949 19) = 82.143
Seasonally-adjusted trend value = 82.143 1.12 = 92
If you failed to select the correct option, rework the calculation carefully. You shouldn't have too
much trouble with this question since it is just a matter of plugging in a value for x into the
equation given in the question.
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14.12 A If x = 16, y = 345.12 – (1.35 16) = 323.52
Forecast = trend + seasonal component = 323.52 – 23.62 = 299.9 = 300 (to nearest unit)
14.13 D
4,700
0.92
= 5,109 (to the nearest whole number)
14.14 C y = 9.82 + (4.372 × 24)
y = 114.748
forecast = 114.748 + 8.5
= 123.248
= 123
14.15 B (i) Forecasts are made on the assumption that everything continues as in the past.
(ii) If the model being used is inappropriate, for example, if an additive model is used when
the trend is changing sharply, forecasts will not be very reliable.
(iii) Provided a multiplicative model is used, the fact that the trend is increasing need not have
any adverse effect on the reliability of forecasts.
(iv) Provided the seasonal variation remains the same in the future as in the past, it will not
make forecasts unreliable.
(i) and (ii) are therefore necessary and hence the correct answer is B.
14.16 B Seasonally adjusting the values in a time series removes the seasonal element from the data
thereby giving an instant estimate of the trend.
14.17 B X = 38 and Y = 40
X + 36 + Y = 38
3
36 + Y + 41 = 39
3
Y = (3 × 39) – 36 – 41 = 40
X + 36 + 40 = 38
3
X = (38 × 3) – 36 – 40 = 38
14.18 D If t = 1 in the first quarter of 20X5
t = 8 in the fourth quarter of 20X6
Trend (Y) = 65 + (7 8)
= 121
Forecast = trend + seasonal component
= 121 + (–30)
= 121 – 30
= 91
14.19 C In the first month of 20X9, t = 13
Y = $1,500 – $(3 13)
= $1,461
Forecast = trend seasonal component
= $1,461 0.92
= $1,344
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14.20 C (i) Provided the multiplicative model is used, it does not matter if the trend is increasing or
decreasing.
(ii) Forecasts are made on the assumption that the previous trend will continue.
(iii) In general, extrapolation does not produce reliable estimates but in forecasting the future
using time series analysis we have no option but to extrapolate.
(iv) Forecasts are made on the assumption that previous seasonal variations will continue.
(ii) and (iv) are therefore necessary. The correct answer is C.
14.21 B When the trend is increasing or decreasing, additive seasonal components change in their
importance relative to the trend whereas multiplicative components remain in the same
proportion to the trend. Option B is therefore a circumstance in which the multiplicative model
would be preferred to the additive model.
14.22 B In 20X9, t = 9
y = 20t – 10
y = (20 9) – 10
y = 180 – 10 = 170
Forecast profits for 20X9 = 170 – 30 = 140
= $140,000
14.23 B The additive model
Y = T + S
where Y = actual series
T = trend
S = seasonal
The seasonally-adjusted value is an estimate of the trend.
Y = T + S
T = Y – S
T = 567,800 – (+90,100)
T = 477,700
14.24 C A Paasche index requires quantities to be ascertained each year and so constructing a Paasche
index may therefore be costly. A Laspeyre index only requires them for the base year so (i) is true.
The denominator of a Laspeyre index is fixed and therefore the Laspeyre index numbers for
several different years can be directly compared. (ii) is therefore false.
14.25 C Fisher's ideal index = (Laspeyre index Paasche index)
= (150.00 138.24)
= 20,736
= 144
14.26 C
106
91
× $0.80 = $0.93
14.27 C $14.33 ($5 × 430 ÷ 150)
14.28 C $10 × 510 ÷ 130 = $39.23
14.29 A Spreadsheets are commonly used by management accountants to produce management
accounts, not financial accounts.
14.30 C A spreadsheet is unlikely to be used for writing a memo.
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177
14.31 B
ACCA examining team comments
The question relates to study guide references A3h and C2n.
The correct answer is B. This is calculated by firstly adjusting the overhead cost from 2
years ago to current price levels by multiplying by 155/121, to obtain a cost of $4,740.
This figure is then used in a high low calculation (change in cost divided by change in
activity) to obtain the variable cost per unit (($13,000 - $4,740) / (3,000 units – 1,000
units) = $4.13).
The most popular choice was alternative C, which was selected by majority of candidates.
This indicates that although competent in the high low technique they failed to adjust costs
to current price levels. In analysing cost data it is important that inflation is allowed for.
Those who chose option D indicated that either they guessed badly, or that they could
competently perform the high low calculation and that they realised a need to adjust the
figures for inflation but failed to do so correctly and multiplied by 121/155). Finally a
minority chose alternative A, again possibly suggesting a bad guess or alternatively that they
indexed costs to price levels from two years ago.
14.32 D
ACCA examining team comments
The question relates to study guide reference C2k.
The correct answer is D. This is calculated by firstly computing the trend for fourth quarter of
2015 (Y = 4,000 + 6 × 8 = 4,048) and then adding a seasonal adjustment of 5, to give
forecast sales of 4,053.
The most popular choice was alternative C. This indicates that many candidates were able
to calculate the trend but failed to apply the seasonal adjustment. Distracters (the incorrect
answers to objective test questions) are often based upon partially complete calculations.
Candidates are advised not to stop thinking as soon as they generate a number that
corresponds with one of the options offered. A good way of avoiding this trap is not to look
at the answers until you are satisfied that you have fully completed your calculation.
Answer A used a value of 4 for period 4 of 2015 and generated the wrong trend figure, but
then correctly processed the seasonal adjustment.
Finally a minority of candidates selected answer B, indicating that they could correctly
calculate trend but subtracted rather than added the seasonal adjustment.
15 Budgeting
15.1 B Coordination (i) is an objective of budgeting. Budgets help to ensure that the activities of all
parts of the organisation are coordinated towards a single plan.
Communication (ii) is an objective of budgeting. The budgetary planning process communicates
targets to the managers responsible for achieving them, and it should also provide a mechanism
for junior managers to communicate to more senior staff their estimates of what may be
achievable in their part of the business.
Expansion (iii) is not in itself an objective of budgeting. Although a budget may be set within a
framework of expansion plans, it is perfectly possible for an organisation to plan for a reduction
in activity.
Resource allocation (iv) is an objective of budgeting. Most organisations face a situation of
limited resources and an objective of the budgeting process is to ensure that these resources are
allocated among budget centres in the most efficient way.
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15.2 C The principal budget factor is the factor which limits the activities of an organisation.
Although cash and profit are affected by the level of sales (options A and B), sales is not the only
factor which determines the level of cash and profit.
15.3 D The total production cost allowance in a budget flexed at the 83% level of activity would be
$8,688 (to the nearest $)
Direct material cost per 1% = $30
Labour and production overhead:
$
At 90% activity 6,240
At 80% activity 6,180
Change 10% 60
Variable cost per 1% activity = $60/10% = $6
Substituting in 80% activity:
Fixed cost of labour and production overhead = $6,180 – (80 $6)
= $5,700
Flexed budget cost allowance:
$
Direct material $30 83 2,490
Labour and production overhead:
variable $6 83 498
fixed 5,700
8,688
15.4 B Spreadsheets are not useful for word processing
15.5 B C4
15.6 C =D4-D5
15.7 A =G6/G2*100
15.8 D Budgeted production = budgeted sales + closing inventory – opening inventory. In March, 10%
of March's sales (found in cell F3) will still be inventory at the beginning of the month and 10%
of April's sales (cell F4) will be in inventory at the end of the month. Production for March will
therefore be
March's sales (F3) + 10% of April's sales (F4) – 10% of March's sales (F3)
Or
=[(0.9*F3) + (0.1*F4)]
15.9 A The volume variance for last month was $4,755 Adverse
The volume variance is the increase in cost resulting from a change in the volume of activity, ie
the difference between the original budget and the flexed budget.
Volume variance = $126,100 – $130,855
= $4,755 (A)
15.10 D The expenditure variance for last month was $2,725 Adverse
The expenditure variance is the difference between the flexed budget and the actual results.
Expenditure variance = $130,855 – $133,580
= $2,725 (A)
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179
16 The budgetary process
16.1 B The master budget is the summary budget into which all subsidiary budgets are consolidated. It
usually comprises the budgeted statement of profit or loss, budgeted statement of financial
position and budgeted cash flow statement.
The master budget is used in conjunction with the supporting subsidiary budgets, to plan and
control activities. The subsidiary budgets are not in themselves a part of the master budget.
Therefore option D is not correct.
16.2 D A functional budget is a budget prepared for a particular function or department. A cash budget is
the cash result of the planning decisions included in all the functional budgets. It is not a
functional budget itself. Therefore the correct answer is D.
16.3 B Since there are no production resource limitations, sales would be the principal budget factor and
the sales budget (ii) would be prepared first. Budgeted inventory changes included in the finished
goods inventory budget (iv) would then indicate the required production for the production budget
(v). This would lead to the calculation of the material usage (i) which would then be adjusted for
the budgeted change in material inventory (vi) to determine the required level of budgeted
material purchases (iii).Therefore the correct answer is B.
16.4 C Since there are no production resource limitations, sales would be the principal budget factor
therefore the sales budget must be prepared before the production budget (i). The budgeted
change in finished goods inventory (iii) would then indicate the required volume for the
production budget. Therefore the correct answer is C.
Item (ii), the material purchases, would be information derived from the production budget after
adjusting for material inventory changes, and item (iv), the standard direct labour cost per unit,
would be required for the production cost budget, but not for the production budget, which is
expressed in volume terms.
16.5 B Any opening inventory available at the beginning of a period will reduce the additional quantity
required from production in order to satisfy a given sales volume. Any closing inventory required
at the end of a period will increase the quantity required from production in order to satisfy sales
and leave a sufficient volume in inventory. Therefore we need to deduct the opening inventory
and add the required closing inventory.
16.6 C 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, and the correct answer is C.
16.7 C Units
Required for sales 24,000
Required to increase inventory (2,000 × 0.25) 500
24,500
16.8 B Units
Required increase in finished goods inventory 1,000
Budgeted sales of Alpha 60,000
Required production 61,000
kg
Raw materials usage budget (× 3 kg) 183,000
Budgeted decrease in raw materials inventory (8,000)
Raw materials purchase budget 175,000
16.9 D 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
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16.10 D Hours
Active hours required for production = 200 × 6 hours = 1,200
Allowance for idle time (20% of total time = 25% of active time) 300
Total hours to be paid for 1,500
× $7 per hour
Direct labour cost budget $10,500
16.11 D Units
Planned increase in inventories of finished goods 4,600
Budgeted sales 36,800
Budgeted production (to pass quality control check) 41,400
This is 92% of total production, allowing for an 8% rejection rate.
Budgeted production =
100
92
× 41,400 = 45,000 units
Budgeted direct labour hours = (× 5 hours per unit) 225,000 hours
16.12 D Before you can work out the total cost, you have to determine how many labour hours are
required. You can calculate the number of hours required for the units quite easily: 4,800 × 5 =
24,000 hours. However 20% of labour time is idle, which means that 24,000 hours is only 80%
of the total hours required to produce 4,800 units. Total hours = 24,000 × (100/80) = 30,000
hours.
Total cost = 30,000 hours × $10 per hour = $300,000 (which is option D)
16.13 D Statement (i) is true because certain factors are often out of the manager's control. The level of
sales (or production) will be out of the manager's control and a flexed budget will account for this.
Statement (ii) is true. The major purpose of a fixed budget is at the planning stage when it seeks
to define the broad objectives of the organisation. Statement (iii) is true because forecast volumes
are very unlikely to be equal to actual volumes and so the variances will contain large volume
differences.
16.14 B Depreciation is not a cash item and would be excluded from the cash budget.
All of the other options are cash items which would be included in the cash budget.
16.15 B Received in September
$
August sales $60,000 60% 98%* 35,280
July sales $40,000 25% 10,000
June sales $35,000 12% 4,200
49,480
*This reduction allows for the 2% settlement discount.
If you selected option A you misinterpreted 'month after sale' to be the month the sale was made.
The invoices are issued on the last day of each month, therefore cash receipts in respect of each
month's sales will begin in the following month.
Option C makes no allowance for the settlement discount and option D includes the receipt of
bad debts; those amounts will never be received cash.
16.16 A
$
40% of May sales for cash (40% $55,000) 22,000
70% of April credit sales less 2% discount (70% 60% $70,000 98%) 28,812
27% of March credit sales (27% 60% $60,000) 9,720
60,532
If you selected option B you forgot to allow for the two per cent discount. Option C works on the
assumption that receipts from cash sales occur in the month after sale; by definition, cash sales
receipts occur as soon as the sale is made. If you selected option D you calculated the credit
receipts on the basis that all sales were made on credit; only 60 per cent of sales were on a
credit basis.
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16.17 C 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
× $2 per kg = payment for purchases in June $50,200
Option A is the figure for the quantity of material to be paid for, not its value. Option B is the
value of June purchases, which will be paid for in July. If you selected option D your adjustments
for opening and closing material inventories were the wrong way round.
16.18 B $
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 option A you calculated the payment the wrong way round as 25% of May wages
cost and 75% of April wages cost. If you selected option C you calculated the payment as 75%
to be paid in the month and 25% in advance for the following month. Option D is the labour cost
for May, which makes no allowance for the timing of cash payments.
16.19 A
$
Cash sales in December ($402,000 10%) 40,200
Receipts from November credit sales ($390,000 90% 30% 99%) 104,247
Receipts from October credit sales ($224,000 90% 70%) 141,120
Total sales receipts in December 285,567
16.20 C
$
Variable production overhead payment:
for August production (12,600 $5 30%) 18,900
for September production (5,500 $5 70%) 19,250
Total variable production overhead payment 38,150
Fixed overhead cash payment ($9,440 – $2,280) 7,160
Total cash payment 45,310
16.21 D
Units $
High activity 3,000 12,900
Low activity 2,000 11,100
Increase 1,000 1,800
Variable cost per unit =
1,000
$1,800
= $1.80 per unit
Fixed cost, substituting in high activity = $12,900 (3,000 $1.80)
= $7,500
Budget cost allowance for 4,000 units: $
Variable cost (4,000 $1.80) 7,200
Fixed cost 7,500
14,700
Option A is the variable cost allowance only and option B is the fixed cost allowance only. If you
selected option C your variable cost per unit calculation was upside down ($1,000/1,800 instead
of $1,800/1,000).
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16.22 C The amount budgeted to be paid to suppliers in September is $289,000
Workings
Paid in Month
July August September October November
Purchases $ $ $ $ $
July $250,000 59,375(1) 175,000(2) 12,500(3)
August $300,000 71,250(4) 210,000(5) 15,000(6)
September $280,000 66,500(7) 196,000(8) 14,000(9)
289,000
1 $250,000 25% 0.95 = $59,375
2 $250,000 70% = $175,000
3 $250,000 5% = $12,500
4 $300,000 25% 0.95 = $71,250
5 $300,000 70% = $210,000
6 $300,000 5% = $15,000
7 $280,000 25% 0.95 = $66,500
8 $280,000 70% = $196,000
9 $280,000 5% = $14,000
16.23 B An adverse labour efficiency variance means that employees are taking too long to produce the
products. Employing more highly skilled labour should help to speed up the process so statement
(i) is applicable. Supervision of employees may help to improve efficiency standards by ensuring
less time is wasted by employees. So statement (ii) is applicable. Asking employees to work paid
overtime will not help to improve the efficiency because it is unlikely to reduce the number of
hours worked. Employees may even slow down further and become more inefficient if they think
that they can work overtime and be paid extra wages. So statement (iii) is not applicable.
16.24 D The direct material price variance is too small to be material and is therefore not worth
investigating.
The labour rate variance can be explained by the company wide increase of 2% and so it is not
worthy of investigation.
The sales volume variance is large and should be investigated, even though it is favourable.
Managers need to plan for the future and need to know whether the increase in sales is a one off
or likely to continue into the next quarter.
16.25 B A flexible budget facilitates control by establishing a budget relevant to actual activity levels.
16.26 B Statement (iii) is false. If output levels are stable, a fixed budget is appropriate as the additional
time and effort required to produce a flexible budget would not be justified.
17 Making budgets work
17.1 B Staff suggestions may be ignored leading to de-motivation. Psuedo-participation occurs when
managers pretend to involve staff but actually ignore their input. This may lead to a less realistic
budget and will certainly be de-motivating if the staff involved find out what is going on.
17.2 C It is generally agreed that the existence of some form of target or expected outcome is a greater
motivation than no target at all. Therefore (i) is true. The establishment of a target, however,
raises the question of the degree of difficulty or challenge of the target. Therefore (ii) is true. If the
performance standard is set too high or too low sub-optimal performance could be the result.
The degree of budget difficulty is not easy to establish. It is influenced by the nature of the task,
the organisational culture and personality factors. Some people respond positively to a difficult
target. Others, if challenged, tend to withdraw their commitment. So (iii) is not true.
17.3 C A budget which is set without permitting the ultimate budget holder to participate in the
budgeting process.
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183
17.4 D Imposed budgets are effective in very small businesses and in times of crisis or economic
hardship. They are not appropriate in organisations that encourage participative management and
employee empowerment.
17.5 A Participative budgeting should be used in all three circumstances.
17.6 D A cost which can be influenced by its budget holder.
18 Capital expenditure budgeting
18.1 D An opportunity cost is the value of the benefit sacrificed when one course of action is chosen, in
preference to another.
18.2 C A decision is about the future, therefore relevant costs are future costs (i). If a cost is unavoidable
then any decision taken about the future will not affect the cost, therefore unavoidable costs are
not relevant costs (ii). Incremental costs are extra costs which will be incurred in the future
therefore relevant costs are incremental costs (iii). Differential costs are the difference in total
costs between alternatives and they are therefore affected by a decision taken now and they are
associated with relevant costs (iv).
18.3 D
$
Opportunity cost (net realisable value) 1,200
Cost of disposal in one year's time 800
Total relevant cost of machine 2,000
18.4 C Purchases of raw materials would be classed as revenue expenditure, not capital expenditure.
The others are capital expenditure.
19 Methods of project appraisal
19.1 B Current rate is 6% pa payable monthly
Effective rate is 6/12% = ½% compound every month
In the six months from January to June, interest earned =
($1,000 [1.005]6) – $1,000 = $30.38
Option A is incorrect since it is simply 6% $1,000 = $60 in one year, then divided by 2 to
give $30 in six months.
Option C represents the annual interest payable (6% $1,000 = $60 pa).
Option D is also wrong since this has been calculated (incorrectly) as follows.
0.05 $1,000 = $50 per month
Over six months = $50 6
= $300 in six months
19.2 B $2,070 = 115% of the original investment
Original investment =
100
115
$2,070
= $1,800
Interest = $2,070 – $1,800
= $270
Option D is calculated (incorrectly) as follows.
x
$2,070
= 15%
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x = 0.15 $2,070
= $310.50
Make sure that you always tackle this type of question by establishing what the original
investment was first.
19.3 C We need to calculate the effective rate of interest.
8% per annum (nominal) is 2% per quarter. The effective annual rate of interest is [1.024 – 1] =
0.08243 = 8.243%.
Now we can use S = X(1 + r)n
S = 12,000 (1.08243)3
S = $15,218.81
The principal will have grown to approximately $15,219.
19.4 D $
PV of $1,200 in one year = $1,200 0.926 = 1,111.20
PV of $1,400 in two years = $1,400 0.857 = 1,199.80
PV of $1,600 in three years = $1,600 0.794 = 1,270.40
PV of $1,800 in four years = $1,800 0.735 = 1,323.00
19.5 D Effective quarterly rate = 1% (4% 4)
Effective annual rate = [(1.01)4 – 1]
= 0.0406 = 4.06% pa
You should have been able to eliminate options A and B immediately. 1% is simply 4% 4 =
1%. 4% is the nominal rate and is therefore not the effective annual rate of interest.
19.6 B The formula to calculate the IRR is a% +
A
(b – a) %
A B
where a = one interest rate
b = other interest rate
A = NPV at rate a
B = NPV at rate b
IRR = 9% +
22
1 %
22 4
= 9 + 0.85 = 9.85%
19.7 B The discount factor for 10 years at 7% is 0.508.
Original amount invested = $2,000 0.508
= $1,016
But $1,016 × 1.0710 is just under $2,000 so $1,017 is the correct answer.
19.8 B If house prices rise at 2% per calendar month, this is equivalent to (1.02)12 = 1.268 or 26.8%
per annum.
19.9 D Annuity = $700
Annuity factor = 1 + 6.247 (cumulative factor for 9 years, first payment is now)
= 7.247
Annuity =
PV of annuity
Annuity factor
$700 =
PV of annuity
7.247
$700 7.247 = PV of annuity
PV of annuity = $5,073 (to the nearest $)
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185
19.10 C 9%
Annuity =
Present value of annuity
Annuity factor
Annuity factor =
86,400
19,260
= 4.486
From tables, this annuity factor corresponds to an interest rate of 9% over six years.
19.11 D The present value of a perpetuity is:
PV =
a
r
where a = annuity = $24,000
r = cost of capital as a proportion = 5% = 0.05
PV =
24,000
0.05
= $480,000
19.12 D The internal rate of return (IRR) of the investment can be calculated using the following formula.
IRR = a% +
A
(b a) %
A B
where a = first interest rate = 12%
b = second interest rate = 20%
A = first NPV = $24,000
B = second NPV = $(8,000)
IRR = 12% +
24,000
(20 12) %
24,000 8,000
= 12% + 6%
= 18%
19.13 D The non-discounted payback period of Project Beta =
2 years and 6 months.
Workings
Project Beta
Year Cash inflow Cumulative cash inflow
$ $
1 250,000 250,000
2 350,000 600,000
3 400,000 1,000,000
4 200,000 1,200,000
5 150,000 1,350,000
6 150,000 1,500,000
Project Beta has a payback period of between 2 and 3 years.
Payback period = 2 years +
$200,000
12months
$400,000
= 2 years + 6 months
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19.14 B The discounted payback period of Project Alpha is between 3 and 4 years.
Workings
Project Alpha
Year Cash flow Discount factor PV Cum. PV
$ 10% $ $
0 (800,000) 1.000 (800,000) (800,000)
1 250,000 0.909 227,250 (572,750)
2 250,000 0.826 206,500 (366,250)
3 400,000 0.751 300,400 (65,850)
4 300,000 0.683 204,900 139,050
5 200,000 0.621 124,200 263,250
6 50,000 0.564 28,200 291,450
The discounted payback period is therefore between three and four years.
19.15 B The payback period is the time that is required for the total of the cash inflows of a capital
investment project to equal the total of the cash outflows, ie initial investment ÷ annual net cash
inflow.
19.16 B
$
Investment (60,000)
PV of cash inflow 64,600
NPV @ 10% 4,600
$
Investment (60,000)
PV of cash inflow 58,200
NPV @ 15% (1,800)
The IRR of the machine investment is therefore between 10% and 15% because the NPV falls
from $4,600 at 10% to –$1,800 at 15%. Therefore at some point between 10% and 15% the
NPV = 0. When the NPV = 0, the internal rate of return is reached.
19.17 A Let x = investment at start of project.
Year Cash flow Discount factor Present value
$ 10% $
0 x 1.000 (x)
1 – 5 18,000 3.791 68,238
7,222
–x + $68,238 = $7,222
x = $68,238 – $7,222
x = $61,016
19.18 B IRR is the discount rate at which the net present value of the cash flows from an investment is
zero.
19.19 C At the end of year 3, $74,600 has been 'paid back'. The remaining $15,400 for payback will be
received during year 4.
19.20 C (1.021)4 – 1 = 0.0867 = 8.67%
19.21 C 1,500/0.08 = 18,750
19.22 C The present value of a perpetuity is:
PV =
a
r
where a = annuity = $24,000
r = cost of capital as a proportion = 5% = 0.05
PV =
24,000
0.05
= $480,000
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ANSWERS
187
19.23 C
ACCA examining team comments
The question relates to study guide reference C5d The correct answer is C. The answer can
be arrived at by calculation (Investment Exe annual effective return = 1.022
– 1 = 0.0404
or 4.04% and investment Wye annual effective return = 1.200.25
– 1 = 0.0466 or 4.66%).
Alternatively the answer can be 'reasoned' out: investment Exe's semi annual compounding
must result in a higher effective annual rate than 4% (2 × 2%) and a 20% return over a 4
year period must have an effective annual rate of less than 5% (20% ÷ 4 years) when the
compounding effect is allowed for. Just over 32% of candidates incorrectly selected option
D. This suggests that although most candidates can convert a sub annual interest rate into
an effective annual rate, many find it difficult to convert a multi year rate into an effective
annual rate.
19.24 A
ACCA examining team comments
The question relates to study guide reference C5j.
The correct answer is A.
A four year payback period implies an (equal) annual cash flow of $12,000 ÷ 4 years =
$3,000 per year. As these cash flows run for 6 years the NPV is equal to $333 ( –$12,000
+ annuity factor for 6 years @ 12% × $3,000 = –$12,000 + 4.111 × $3,000 = $333).
Alternative C is based upon an incorrect calculation of annual cash flow ($12,000 ÷ 6
years = $2,000 per year), suggesting a misunderstanding of the payback method.
In alternative B the NPV was based on a project life of 4 years rather than 6 suggesting a
failure to read the question carefully.
Finally alternative D's NPV was based upon a combination of the other two distracters, that
is, an annual cash flow of $2,000 for 4 years.
20 Standard costing
20.1 B
$ per unit $ per unit
Material P 7 kg $4 28
Material S 3 kg $9 27
55
Direct labour 5hr $7 35
Standard prime cost of product J 90
20.2 B An attainable standard assumes efficient levels of operation, but includes allowances for normal
loss, waste and machine downtime.
20.3 C It is generally accepted that the use of attainable standards has the optimum motivational
impact on employees. Some allowance is made for unavoidable wastage and inefficiencies, but
the attainable level can be reached if production is carried out efficiently.
20.4 D Required liquid input = 1 litre
100
80
= 1.25 litres
20.5 C When management by exception is operated within a standard costing system, only the variances
which exceed acceptable tolerance limits need to be investigated by management with a view to
control action. Adverse and favourable variances alike may be subject to investigation, therefore
option A is incorrect.
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Any efficient information system would ensure that only managers who are able to act on the
information receive management reports, even if they are not prepared on the basis of
management by exception. Therefore option B is incorrect.
20.6 A Standard costing provides targets for achievement, and yardsticks against which actual
performance can be monitored (item (i)). It also provides the unit cost information for evaluating
the volume figures contained in a budget (item (ii)). Inventory control systems are simplified with
standard costing. Once the variances have been eliminated, all inventory units are valued at
standard price (item (ii)).
Item (iv) is incorrect because standard costs are an estimate of what will happen in the future,
and a unit cost target that the organisation is aiming to achieve.
20.7 D Standard labour cost per unit = 9 hours
100
90
$9 = $90
21 Basic variance analysis
21.1 C Since inventories are valued at standard cost, the material price variance is based on the
materials purchased.
$
12,000 kg material purchased should cost ($3) 36,000
but did cost 33,600
Material price variance 2,400 (F)
800 units manufactured should use ( 14 kg) 11,200 kg
but did use 11,500 kg
Usage variance in kg 300 kg (A)
standard price per kg $3
Usage variance in $ $900 (A)
21.2 C $
2,300 hours should have cost ( $7) 16,100
but did cost 18,600
Rate variance 2,500 (A)
21.3 D
260 units should have taken ( 10 hrs) 2,600 hrs
but took (active hours) 2,200 hrs
Efficiency variance in hours 400 hrs (F)
standard rate per hour $7
Efficiency variance in $ $2,800 (F)
21.4 C Standard variable production overhead cost per hour = $11,550 5,775 = $2
$
8,280 hours of variable production overhead should cost ( $2) 16,560
but did cost 14,904
Variable production overhead expenditure variance 1,656 (F)
Standard time allowed for one unit = 5,775 hours 1,925 units = 3 hours
2,070 units should take ( 3 hours) 6,210 hours
but did take 8,280 hours
Efficiency variance in hours 2,070 hours (A)
standard variable production overhead cost per hour $2
Variable production overhead efficiency variance $4,140 (A)
21.5 C Fixed overhead expenditure variance
$
Budgeted fixed overhead expenditure (4,200 units $4 per unit) 16,800
Actual fixed overhead expenditure 17,500
Fixed overhead expenditure variance 700 (A)
The variance is adverse because the actual expenditure was higher than the amount budgeted.
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ANSWERS
189
Fixed overhead volume variance
$
Actual production at standard rate (5,000 $4 per unit) 20,000
Budgeted production at standard rate (4,200 $4 per unit) 16,800
Fixed overhead volume variance 3,200 (F)
The variance is favourable because the actual volume of output was greater than the budgeted
volume of output.
If you selected an incorrect option you misinterpreted the direction of one or both of the
variances.
21.6 A
Capacity variance
Budgeted hours of work 9,000 hours
Actual hours of work 9,400 hours
Capacity variance in hours 400 hours (F)
standard fixed overhead absorption rate per hour * × $4
Fixed production overhead capacity variance $1,600 (F)
* $36,000/9,000 = $4 per hour
Efficiency variance
1,900 units of product should take ( 9,000/1,800 hrs) 9,500 hours
but did take 9,400 hours
Efficiency variance in hours 100 hours (F)
standard fixed overhead absorption rate per hour * × $4
Fixed production overhead efficiency variance in $ $400 (F)
* $36,000/9,000 = $4 per hour
21.7 C Statement (i) is not consistent with a favourable labour efficiency variance. Employees of a lower
skill level are likely to work less efficiently, resulting in an adverse efficiency variance.
Statement (ii) is consistent with a favourable labour efficiency variance. Time would be saved in
processing if the material was easier to process.
Statement (iii) is consistent with a favourable labour efficiency variance. Time would be saved in
processing if working methods were improved.
Therefore the correct answer is C.
21.8 D Direct material cost variance = material price variance + material usage variance
The adverse material usage variance could be larger than the favourable material price variance.
The total of the two variances would therefore represent a net result of an adverse total direct
material cost variance.
21.9 B
$
53,000 kg should cost (× $2.50) 132,500
but did cost 136,000
Material price variance 3,500 (A)
21.10 A
$
27,000 units should use (× 2 kg) 54,000 kg
but did use 53,000 kg
1,000 kg (F)
standard cost per kg 2.5
Material usage variance 2,500 (F)
21.11 D Labour rate variance
$
14,000 hours should have cost (× $10 per hour) 140,000
but did cost 176,000
Labour rate variance 36,000 (A)
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Labour efficiency variance
$
5,500 units should have taken (× 3 hours per unit) 16,500 hrs
but did take 14,000 hrs
Labour efficiency variance (in hours) 2,500 hrs (F)
standard rate per unit × $10
$25,000 (F)
21.12 A Standard fixed overhead absorption rate per hour = $125,000/25,000 = $5 per hour
Fixed overhead volume capacity variance
Budgeted hours of work 25,000 hrs
Actual hours of work 24,000 hrs
Fixed overhead volume capacity variance 1,000 hrs (A)
standard fixed overhead absorption rate per hour $5
Fixed overhead volume capacity variance in $ $5,000 (A)
21.13 B The total direct materials variance can be found by comparing the flexed budget figures with the
actual figures.
Budgeted material cost per unit = $110,000/2,200
= $50
Flexed for 2,000 units = $50 × 2,000
= $100,000
Total direct materials variance
$
Flexed direct material cost 100,000
but did cost 110,000
Total direct materials variance 10,000 (A)
21.14 B The total direct labour variance can be found by comparing the flexed budget figures with the
actual figures.
Budgeted labour cost per unit = $286,000/2,200
= $130
Flexed for 2,000 units = $130 × 2,000
= $260,000
Total direct labour variance
$
Flexed direct labour cost 260,000
but did cost 280,000
Total direct labour variance 20,000 (A)
21.15 A The total direct variable overhead variances can be found by comparing the flexed budget figures
with the actual figures.
Budgeted variable overhead cost per unit = $132,000/2,200
= $60
Flexed for 2,000 units = $60 × 2,000
= $120,000
Total direct variable overhead variance
$
Flexed direct variable overhead cost 120,000
but did cost 120,000
Total direct variable overhead variance nil
21.16 A Statement (i) is true. Statement (ii) is false. Producing 5,000 standard hours of work in 5,500
hours would give rise to an adverse fixed overhead volume efficiency variance.
21.17 B Both statements are true.
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ANSWERS
191
21.18 B $10,000 Favourable.
The total direct materials variance can be found by comparing the flexed budget figures with the
actual figures.
$
Total materials cost should have been 150,000
But was 140,000
Variance 10,000 (F)
21.19 A $2,500 Adverse
Number of units
1000
2500
5000
7500
10000
12500
15000
17500
20000
2000 3000 4000 5000 6000 7000 8000 9000 x
Total
variance
Volume
variance
Budgeted fixed
overhead cost
Fixed overhead
expenditure variance
Fixed
ocerhead
cost
$
Actual fixed
overhead cost
Total fixed overhead variance = $12,500 – $10,000 = $2,500 Adverse.
22 Further variance analysis
22.1 B The only fixed overhead variance in a marginal costing statement is the fixed overhead
expenditure variance. This is the difference between budgeted and actual overhead expenditure,
calculated in the same way as for an absorption costing system.
There is no volume variance with marginal costing, because under or over absorption due to
volume changes cannot arise.
22.2 D Raising prices in response to higher demand would result in a favourable selling price variance.
22.3 A
$
Total actual direct material cost 2,400
Add back variances: direct material price (800)
direct material usage 400
Standard direct material cost of production 2,000
Standard material cost per unit $10
Number of units produced (2,000 $10) 200
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22.4 A Since there was no change in inventories, the usage variance can be used to calculate the
material usage.
Saving in material used compared with standard =
$400(F)
$2 per kg
= 200 kg
Standard material usage for actual production (200 units 5kg) 1,000 kg
Usage variance in kg 200 kg (F)
Actual usage of material 800 kg
22.5 D
$
200 units should sell for ( $70) 14,000
but did sell for 15,200
Selling price variance 1,200 (F)
22.6 C Budgeted sales volume per month =
Budgeted material cos t of sales
Standard material cos t per unit
=
$2,300
$10
= 230 units
Budgeted profit margin per unit =
Budgeted monthly profit marg in
Budgeted monthly sales volume
=
$6,900
230
= $30 per unit
Budgeted sales volume 230 units
Actual sales volume 200 units
Sales volume variance in units 30 units (A)
Standard profit per unit × $30
Sales volume variance in $ $900 (A)
22.7 B Actual expenditure = $(48,000 + 2,000) = $50,000
Overhead absorbed = $(50,000 – 8,000) = $42,000
Overhead absorption rate per unit = $48,000 4,800 = $10
Number of units produced = $42,000 $10 = 4,200
22.8 D Total standard cost of material purchased – actual cost of material purchased = Price variance
Total standard cost = $21,920 + $1,370
= $23,290
Standard price per kg = $23,290/6,850
= $3.40
22.9 B
Actual sales 2,550 units
Budgeted sales 2,400 units
Variance in units 150 units (F)
× standard contribution per unit ($(27 – 12)) × $15
Sales volume variance in $ $2,250 (F)
$
Revenue from 2,550 units should have been ( $27) 68,850
but was 67,320
Selling price variance 1,530 (A)
22.10 C
$
Budgeted sales volume 10,000 units
Actual sales volume 9,800 units
Sales volume variance (units) 200 units (A)
× standard profit per unit × $5
Sales volume profit variance (in $) $1,000 (A)
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ANSWERS
193
22.11 B Direct material price variance
$
12,000 litres should have cost (× $2.50) 30,000
But did cost (12,000 × $2.50 × 1.04) 31,200
Direct material price variance 1,200 (A)
22.12 C Standard cost per unit = 10.5 litres × $2.50 per litre
= $26.25 per unit
Standard cost of actual production = standard cost + variance
= $(12,000 litres × $2.50) + 1,815
= $(30,000 + 1,815)
= $31,815
Actual production = standard cost of actual production/standard cost per unit
= 31,815/$26.25
= 1,212 units
22.13 C
$
Sales revenue for 9,000 units should have been (× $12.50) 112,500
but was 117,000
Sales price variance 4,500 (F)
22.14 C
$
8,500 units should have cost (× $15) 127,500
but did cost (8,500 × $17) 144,500
17,000 (A)
22.15 B
$
Absorbed overhead (12,400 × 1.02 × $4.25) 53,754
Actual overhead 56,389
Under-absorbed overhead 2,635
22.16 D
$
Standard contribution 10,000
Sales price variance 500
Variable cost variance (2,000)
8,500
22.17 D The sales volume variance in a marginal costing system is valued at standard contribution per
unit, rather than standard profit per unit.
Contribution per unit of E = $15 $8 = $7
Sales volume variance in terms of contribution =
$9,000(A)
$5
× $7 = $12,600 (A)
22.18 B Closing inventory valuation under absorption costing will always be higher than under marginal
costing because of the absorption of fixed overheads into closing inventory values.
The profit under absorption costing will be greater because the fixed overhead being carried forward
in closing inventory is greater than the fixed overhead being written off in opening inventory.
22.19 A If marginal costing is used to value inventory instead of absorption costing, the difference in
profits will be equal to the change in inventory volume multiplied by the fixed production
overhead absorption rate = 80 units $34 = $2,720
Since closing inventory are higher than opening inventories, the marginal costing profit will be
lower that the absorption costing profit (so option B is incorrect). This is because the marginal
costing profit does not 'benefit' from the increase in the amount of fixed production overhead
taken to inventory (rather than to the statement of profit or loss).
If you selected options C or D you based the difference on 100 units of opening inventory.
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22.20 B Standard marginal costing reconciliation
$
Original budgeted contribution 290,000
Sales volume variance (36,250)
Standard contribution from actual sales 253,750
Selling price variance 21,875
275,625
Variable cost variances
Total direct material variance (6,335)
Total direct labour variance 11,323
Total variable overhead variance (21,665)
Actual contribution 258,948
22.21 C
ACCA examining team comments
This question relates to study guide heading D1(b).
The correct answer is C. In a standard absorption costing system the sales volume margin
variance is based upon profit per unit, whereas under a marginal costing system it is based upon
contribution per unit. In a standard absorption costing system the total fixed overhead variance
includes expenditure and volume variances. Under marginal costing only the expenditure variance
is included. Variable cost variances are the same under both systems. Only 15% of candidates
selected the correct alternative. The most frequent answers were A (37% of candidates), and B
(30% of candidates). This is essentially a knowledge based question, and the poor results
suggest that candidates need to do more work in this area.
22.22 C
ACCA examining team comments
The question relates to study guide reference D3a.
The correct answer is C, but was chosen by only a handful of candidates. The correct answer can
be obtained by working backwards by adding appropriate adverse variances and subtracting
appropriate favourable variances from actual profit. Standard profit on actual sales is exactly what
it says, actual units multiplied by standard profit per unit. As it is based on actual units, a profit
adjustment for the difference between budgeted and actual volumes is not required, and hence
the sales volume variance should be ignored. The calculation can be most easily understood by
looking at the standard cost operating statement below.
$
Budgeted profit not required
Sales volume variance not needed
Standard profit on actual 109,000
Sales price variance 5,000 favourable
Total variable cost variance 7,000 adverse
Fixed cost expenditure variance 3,000 favourable
Fixed cost volume variance 2,000 adverse
Actual profit 108,000
If candidates understand how the operating statement works the correct answer can be quickly
calculated as $108,000 + $2,000 – $3,000 + $7,000 – $5,000 = $109,000.
Incorrect answers were fairly evenly spread across the other 3 alternatives, suggesting a large
amount of guessing by candidates. Alternative D, $115,000, represents the correct calculation of
budgeted profit (that is the standard profit figure for budgeted volume). This was not the question
asked.
Alternative B, represents the answer obtained if candidates added back favourable variances and
subtracted adverse variances. Finally alternative A , represents a calculation of budgeted profit if
candidates added back favourable variances and subtracted adverse variances.
Performance on another question involving standard cost operating statements on the same paper
was also poor.
This suggests a lack of understanding in this area.
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ANSWERS
195
23 Performance measurement
23.1 B Attainable (which is part of the SMART objectives framework) is different from 'easily achievable'.
The objectives should be motivational which means that they should be at least a little bit
challenging.
23.2 C Cashflow information is a financial performance measure. Options A, B and D are all nonfinancial
indicators (NFIs).
23.3 C Efficiency
23.4 D Factors fundamental to strategic success
23.5 A Acid test ratio =
Current assets inventory
Current liabilities
=
40,000 1,250
60,000
= 0.6875
23.6 C (i), (ii) and (iv) only. The mission states the aims of the organisation. The strategy outlines what
the organisation should be doing; the values and the policies set limits to the ways the strategy
may be converted into performance. Profitability is an objective and relates to the critical success
factors for business success.
23.7 A Reducing training costs may mean that the business is faced with a skills shortage in the long
term. (ii) and (iii) should benefit the business in the long term.
23.8 A Both are true.
23.9 C It is when there is a bias towards short term rather than long term performance. Longer term
objectives are sacrificed.
23.10 C CO2 emissions are probably more likely to be measured because of government legislation. They
are not one of the usual measures of performance (depending on the industry).
23.11 A Both statements are true.
23.12 D
ACCA examining team comments
This question relates to study guide reference E2(a).
The correct answer is D, both ratios will decrease. The opening current ratio (current
assets/current liabilities) is $1.8m/$1.0m = 1.8, and the opening acid test (current assets less
stock/ current liabilities) is $1.3m/$1.0m =1.3. Purchasing (say) $1.0m of inventory on short
term credit will decrease the current ratio to ($1.8m + $1m)/ ($1.0m+ $1.0m) = 1.4. The acid
test would also decrease to $1.8m/ ($1.0m+ $1.0m) = 0.9. Only 23% of candidates selected
this alternative. The most frequently chosen alternative was C (41% of candidates). On this type
of question if the answer is not immediately clear candidates should substitute in some simple
numbers to test out the effects of a transaction.
23.13 D
ACCA examining team comments
The question relates to study guide reference E2f. The correct answer is D. The new project's
return on investment is less than that of the investment centre and this will result in a reduction
in its return on investment. However because the project offers a return higher than the cost of
capital it will increase the investment centre's residual income. The most popular answer was C,
with 29% of candidates mistakenly believing that the new project would result in a decrease in
both return on investment and residual income. This mistake suggests a lack of understanding of
residual income.
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23.14 C Performance measurement involves comparing actual performance against a target and the
mission statement represents the organisation's overall target.
23.15 A Tactical objectives are middle-tier objectives that facilitate the planning and control of individual
functions within the organisation.
23.16 B Sales and revenue are likely to decrease in the second half of the year and performance should be
measured in that context.
23.17 B Governments don't tend to get overly involved in management accounting reporting. The
implementation of a particular reporting tool in private sector organisations would be outside the
remit of government.
23.18 C $3,450,000 / $5,400,000 = 63.9%
23.19 D Strategic objectives are long-term objectives for the organisation as a whole.
23.20 C $1,735,000 / $7,200,000 = 24.1%
23.21 C The current ratio measures liquidity.
23.22 A $670,000 / ($670,000 + $585,000) = 53.4%
23.23 B The Balanced Scorecard approach enables organisations to consider all areas of performance
relevant to achieving their strategic goals.
23.24 C The acid test ratio measures liquidity.
23.25 B To prevent a narrow focus on short-term financial performance.
23.26 D Customer satisfaction, growth, financial success and process efficiency.
24 Applications of performance measurement
24.1 A Return on investment =
Profit
Capital employed
100%
For 20X7 ROI =
7,500
37,500
100% = 20%
For 20X8 ROI =
9,000
60,000
100% = 15%
24.2 C Asset turnover =
Sales
Capital employed
=
450,000
60,000
= 7.5 times
24.3 C Profit is a measure that most non-financial managers can understand, which raises rather than
reduces its popularity in business. Option A supports the criticism because customers are often
omitted from consideration. (Their interests can be accounted for using a model such as the
balanced scorecard.) Option B means that expenditure on intangible assets such as training,
marketing and R&D is discouraged. This can have an adverse effect on a business's long term
prospects. Option D means that profit is less reliable as a performance measure.
24.4 B Effectiveness can only be measured in terms of achieved performance. Economy consists of
minimising costs, for example, by obtaining suitable inputs at the lowest price. Efficiency, in the
narrow sense used here, consists of achieving the greatest output per unit of input: avoiding
waste of inputs would contribute to this. Achieving a given level of profit is a measure of overall
efficiency in its wider sense and would require proper attention to all three of these matters.
24.5 D Level of refunds given. The level of refunds given should be used in the customer perspective. If
Balance Co has to offer a high level of refunds, this is likely to indicate a low level of customer
satisfaction with its product.
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24.6 A The number of customer complaints and the number of repeat orders as a proportion of total
orders will reflect the quality of service customers feel they have received from the business.
Although sales volume will be affected by the business's ability to retain customers, increasing
sales is a more direct measure of the business's marketing effectiveness than its service quality.
24.7 B (i), (ii) and (iii) are non-financial objectives.
24.8 D Staff turnover. A, B and C are performance measures of service quality. D is a performance
measure of human resources.
24.9 B The ROI target is 13% and the cost of capital is 12%. The ROI is calculated as
$30,000/$200,000 × 100% = 15% and so the project would be accepted. The RI is
calculated as $30,000 – (12% × $200,000) = $6,000. The project would be accepted.
24.10 D (i), (ii) and (iii). The figures needed to calculate ROI are easily available from the financial
accounting records.
24.11 C Variance analysis and defective units would be more appropriate for manufacturing organisations
with large production volumes.
24.12 A Relative market share is usually a measure of competitiveness. Efficiency and productivity are
measures of resource utilisation.
24.13 B Cost per consignment. Number of customer complaints and client evaluation interviews would be
measures of quality. Depot profit league tables is a measure of profit.
24.14 B Work study.
24.15 B (i) and (ii) only. Value analysis focuses on costs, not sales volumes or prices.
24.16 D (i) and (iii) only. Benchmarking can be internal, for example comparison against another
department. The main aim of benchmarking is improved performance, which could just as readily
be in the area of quality as in cost.
24.17 C This is an example of functional benchmarking.
24.18 A Value analysis considers cost value, exchange value, use value and esteem value.
24.19 A Presenting numbers that are likely to be in the millions or hundreds of thousands, to the nearest
whole Euro, would clutter the report with unnecessary detail.
24.20 B This is an example of competitive benchmarking.
24.21 D Return on capital employed.
24.22 C Short-termism involves prioritising short-term results above the organisation's long-term
prospects.
25 Mixed Bank 1
25.1 C
$ per unit
Material 20.00
Labour 69.40
Production overhead (14 hours $12.58) 176.12
Total production cost 265.52
General overhead (8% $265.52) 21.24
286.76
25.2 A
Process 1 Process 2
kg kg
Input 47,000 42,000
Normal loss ( 8%) 3,760 ( 5%) 2,100
Expected output 43,240 39,900
Actual output 42,000 38,915
Abnormal loss 1,240 985
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25.3 C The actual sales revenue is higher than the flexed budget sales revenue. Since the effect of a
sales volume change has been removed from this comparison the higher revenue must be caused
by a higher than standard selling price.
25.4 A Variable costs are conventionally deemed to increase or decrease in direct proportion to changes
in output. Therefore the correct answer is A. Descriptions B and D imply a changing unit rate,
which does not comply with this convention. Description C relates to a fixed cost.
25.5 D None of the criticisms apply in all circumstances.
Criticism (i) has some validity but even where output is not standardised it may be possible to
identify a number of standard components and activities whose costs may be controlled
effectively by the use of standard costs. Criticism (ii) also has some validity but the use of
information technology means that standards can be updated rapidly and more frequently, so
that they may be useful for the purposes of control by comparison. Criticism (iii) can also be
addressed in some circumstances. The use of ideal standards and more demanding performance
levels can combine the benefits of continuous improvement and standard costing control.
25.6 A Capital expenditure is the cost of acquiring or enhancing non-current assets.
25.7 D
A B C D
Overhead expenditure 18,757 29,025 46,340 42,293
Direct labour hours 3,080 6,750
Machine hours 3,380 2,640
Overhead absorption rate $6.09 $4.30 $13.71 $16.02
25.8 C Production cost per unit = $3.60 + ($258,000/60,000) = $7.90
Profit = 700,000 – (56,000 × 7.90) – 144,000 = $113,600
$ $
Revenue 700,000
Production costs:
Variable
(56,000 + 4,000) $3.60 216,000
Fixed 258,000
Closing inventory (4,000 $7.90) (31,600)
(442,200)
257,600
Fixed non-production costs (144,000)
113,600
25.9 C Inventory levels have decreased so marginal costing will result in higher profits and lower
inventory values than absorption costing.
25.10 D A by-product can be defined as being 'output of some value, produced incidentally while
manufacturing the main product'.
Option A is incorrect because a by-product has some value.
Option B is incorrect because this description could also apply to a joint product.
Option C is incorrect because the value of the product described could be relatively high, even
though the output volume is relatively low.
25.11 B Direct material cost per 1% activity = $2,000
Direct labour cost per 1% activity = $1,500
Production overhead $
At 60% activity 54,000
At 80% activity 62,000
Change 20% 8,000
Variable cost per 1% change in activity =
$8,000
20
= $400
Substituting in 80% activity:
$
Variable cost = 80 × $400 32,000
Total cost 62,000
Fixed cost 30,000
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199
Other overhead is a wholly fixed cost
Budget flexed at 77% level of activity
$'000
Direct material 77 × $2,000 154.0
Direct labour 77 × $1,500 115.5
Production overhead:
Variable 77 × $400 30.8
Fixed 30.0
Other overhead 40.0
370.3
If you selected option A you did not include a fixed cost allowance for the other overhead. Option
C ignores the fact that production overhead is a semi-variable cost and option D simply multiplies
the total cost for 70% activity by a factor of 1.1. This makes no allowance for the fact that there
is an element of fixed costs within production overhead, and other overhead is wholly fixed.
25.12 A IRR =
A
a% [ (b a)]%
A B
where a is one interest rate
b is the other interest rate
A is the NPV at rate a
B is the NPV at rate b
IRR = 14% +
16,000
20 14 %
16,000 10,500
= 14% + 3.6%
= 17.6%
25.13 C Present value = $8,000 + ($8,000 × 3.791) = $38,328
25.14 C Lowering the selling price by 15% is best described as a short term tactical plan.
25.15 B Fixed costs per unit = $16 4 = $4
Units in closing inventory = 17,500 – 15,000 = 2,500 units
Profit difference = inventory increase in units x fixed overhead per unit
= 2,500 × $4 = $10,000
Inventories increased, therefore fixed overhead would have been carried forward in inventory
using absorption costing and the profit would be higher than with marginal costing.
If you selected option A you calculated the correct profit difference, but misinterpreted the
'direction' of the difference.
If you selected option C or D you evaluated the inventory difference at variable cost and full cost
respectively.
25.16 C Total purchase costs = annual demand x purchase price
= 20,000 × $40 per unit
= $800,000
Order costs
Number of orders =
Annual demand
EOQ
=
20,000 units
500 units
= 40 orders per annum
Cost per = 40 orders x $25 per order
Total order costs = $1,000
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Holding costs
Average inventory held = EOQ/2= 500/2= 250 units
It costs $4 to hold each unit of inventory
Holding costs = average inventory held × $4 per unit
= 250 units × $4 per unit = $1,000
Total annual costs of inventory
$
Purchase costs 800,000
Order costs 1,000
Holding costs 1,000
Total 802,000
25.17 B The least squares method of linear regression analysis involves using the following formulae for a
and b in Y = a + bX.
b = 2 2
n XY X Y
n X ( X)
= 2
(5 8,104) (100 400)
(5 2,040) 100
=
40,520 40,000
10,200 10,000
=
520
200
= 2.6
At this stage, you can eliminate options A and C.
a =
Y X
b
n b
=
400
5
– 2.6 (
100
5
)
= 28.
25.18 A
Recruit Retrain
$'000 $'000
4 new employees (4 × $40,000) 160
Training cost 15
Replacements 100
160 115
The supervision cost would be incurred anyway and is not a relevant cost, since an existing
manager is used. Similarly, the salaries of the existing employees are not relevant.
The lowest cost option is to retrain the existing employees, at a total relevant cost of $115,000.
Therefore the correct answer is A.
25.19 C 0.17
r =
2 2 2 2
n xy x y
[n x ( x) ] [n y ( y) ]
=
2 2
(6 14) (2 15)
6 30 2 6 130 15
=
84 30
176 555
=
54
312.54
= 0.172778 = 0.17
(to 2 dec places)
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201
25.20 C The total production cost of the job is $440 (to the nearest $)
$
Direct materials 10 kg $10 100
Direct labour 20 hours $5 100
Prime cost 200
Variable production overhead 20 hours $2 40
Fixed production overhead 20 hours $10* 200
Total production cost 440
Selling, distribution and administration 50
Total cost 490
* Overhead absorption rate =
$100,000
10,000
= $10 per labour hour
26 Mixed Bank 2
26.1 B A target of providing at least 40 hours of training every year to improve skills and productivity has
a learning and growth perspective.
26.2 C Trend, seasonal variation and cyclical variation.
26.3 B Profit before interest and tax ÷ (Ordinary shareholders' funds + Non-current liabilities) × 100
26.4 C Performance testing. Re-inspection cost is an internal failure cost. Administration of customer
complaints section is an external failure cost and training in quality control is a prevention cost.
26.5 A Direct labour and variable production overhead
26.6 C Let x = the number of hours 12,250 units should have taken
12,250 units should have taken x hrs
but did take 41,000 hrs
Labour efficiency variance (in hrs) x – 41,000 hrs
Labour efficiency variance (in $) = $11,250 (F)
Labour efficiency variance (in hrs) =
$11,250 (F)
$6
= 1,875 (F)
1,875 hrs = (x – 41,000) hrs
standard hours for 12,250 units = 41,000 + 1,875
= 42,875 hrs
Standard hours per unit =
42,875 hrs
12,250 units
= 3.50 hrs
If you selected option A you treated the efficiency variance as adverse. Option B is the actual
hours taken per unit and option D is the figure for the standard wage rate per hour.
26.7 C ($200,000 + ((100,000 – 80,000) × $5) = $300,000
26.8 B You are not given any information in the question about the actual quantity of fuel used. You are
only told about the total cost. Don't be put off by the different number of km – all we want is the
difference in fuel quantity.
So, to decide how the quantity has changed from 20 × 8 to 20 × 9 we need to take account of
the price increase.
First, we can re-state the 20X9 price in terms of 20X8 prices. This is where the index numbers
come in.
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$1,440 million 120/240 = $720
So now we know that in 20X8 prices, the fuel cost $600 in 20X8 and $720 in 20X9. The
increase = 720 – 600 = 120. This is a percentage increase of 120/600 ×100% = 20%
26.9 A They are not an efficient method of storing text based files.
26.10 A (6,000 units – 5,000 units) $25,000 ÷ 5,000 units
26.11 A It recognises that overhead costs are not always driven by the volume of production
26.12 A IRR = a% + [
A
A B
× (b – a)]%
where a is one interest rate A is the NPV at rate a
b is the other interest rate B is the NPV at rate b
IRR = 14% + [(16,000/(16,000+10,500)) × 6%
= 14% + 3.6%
= 17.6%
26.13 A Adverse fixed overhead capacity variance.
26.14 D Current ratio Liquidity
Reduce by 10% Reduce by 20%
Before the new inventory is bought the current ratio is as follows:
Current assets of $40m divided by current liabilities of $20m = $40/$20 = 2
When the inventory of $5m is purchased, this increases the current assets (inventory) and the
current liabilities (payables – because it was bought 'on credit') so the new current ratio =
40+5
20+5
= 1.8
So you can see that the ratio has reduced from 2 to 1.8. A difference of 0.2. As a percentage this
is 0.2/2 × 100=10%
The quick ratio involves removing inventory. We are told in the question that after buying $5m,
there is $10m so we can deduce that before the new inventory purchase, there is $5m of
inventory.
40 5
20
= 1.75
After the purchase, the current liabilities increase by 5 so the quick ratio becomes:
40 5
25
= 1.4
So you can see that the quick ratio has reduced by 0.35. As a percentage this is 0.35/1.75 x
100 = 20%
26.15 D Cluster sampling
26.16 C (5,000 × $12 × 20 ÷ 120) + 8,000 = $18,000
26.17 C $57,200 – (5,200 × $50,000 ÷ 5,000 units) = $5,200 favourable
26.18 A (5,200 units – 5,000 units) × $20,000 ÷ 5,000 units = $800
26.19 A The variable cost per unit.
26.20 B RI will increase and ROI will decrease.
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ANSWERS
203
27 Mixed Bank 3
27.1 C The sample is selected in stages, firstly by constituencies. The correct answer is multi-stage
sampling as this method involves dividing the population into a number of sub-populations and
then selecting a small sample of these sub-populations at random. Each sub-population is then
divided further. Stratified sampling involves dividing the population into strata and then taking a
random sample from each stratum. Random sampling is where every member of the population
has an equal chance of being selected and systematic sampling is where every nth item after a
random start is selected.
27.2 B Change in inventories = (8,500 – 7,100) litres
= 1,400 litres
Difference in profit = 1,400 × $4
= $5,600
Absorption costing profit will be lower than marginal costing profits by $5,600.
Therefore absorption costing profit = $61,000 – $5,600
= $55,400
27.3 C The cost described is known as a semi-variable cost. Semi-variable costs consist 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 in introduced and the cost line slopes upwards at a
constant rate as the level of activity increases.
27.4 C $88,095
Variable overhead = ($83,585 – $73,950) / (15,100 – 12,750)
= $9,635 / 2,350
= $4.10 per square metre
Fixed overhead = $73,950 – ($4.10 × 12,750)
= $73,950 – $52,275
= $21,675
Overheads for 16,200m2 = $21,675 + ($4.10 × 16,200)
= $21,675 + $66,420
= $88,095
27.5 B $20.50
Actual overheads were $694,075 and under-recovered overheads were $35,000.
So overhead recovered for 32,150 hours at absorption rate x = $(694,075 – 35,000) =
$659,075.
32,150x = $659,075
x = $659,075 / 32,150
= $20.50
27.6 A 179 degrees
Total cost = $4,630,000
Cat food = $2,300,000 / $4,630,000 × 360 degrees = 179 degrees
27.7 A =SUM(B6:D6)
All formulae in spreadsheets need to start with an equals sign. The SUM function is used to total
values in spreadsheets.
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27.8 D Statements (iii) and (iv). ABC is an alternative to traditional volume-based costing models, where
production overhead is absorbed on the basis of the volume of direct labour hours or machine
hours worked. However, it is still a form of absorption costing because production overheads are
absorbed into product costs. ABC identifies costs with support activities and the overhead costs
of a product or service could reflect the long-run variable cost of that product or service. ABC can
be used for costing services as well as products. Although ABC looks at the costs of activities, it
is not a costing method for identifying relevant costs for decision-making.
27.9 A It may lead to excessive investment in short-term projects. Focusing on payback will lead to
choosing short-term projects. It tends to emphasise those projects which make a quick return.
27.10 D The correct answer is esteem value, exchange value, use value, cost value.
27.11 C $5
Whoopie prime cost $ per unit
Direct material 2.00
Direct labour 2.50
Direct expense 0.50
5.00
Remember that prime cost is the total of all direct costs. The fixed cost of $3.15 per unit is
excluded from the prime cost calculation.
27.12 A Absorption costing and marginal costing will give rise to the same profits if inventory levels do not
change, ie, when opening and closing inventory volumes are the same, when no inventory is held
as opening inventory and no inventory is held as closing inventory and when inventory levels are
constant.
27.13 C Notional whole units which represent incomplete work. Option A describes a cost unit. Option B
describes a standard hour. Option D is incorrect because all completed units in process costing
are identical.
27.14 A Total cost = $65,000 + ($3 × units produced)
Highest production 3,000 units $74,000
Lowest production 1,500 units $69,500
1,500 units $4,500
Variable cost per unit = $4,500 / 1,500 = $3 per unit
Total cost = fixed cost + ($3 × units produced)
$74,000 = fixed cost + ($3 × 3,000)
Fixed cost = $74,000 – $9,000
Fixed cost = $65,000
27.15 B (i) is false. Strategic planning is carried out by senior management. Line managers will be
concerned with operational planning. (ii) is true. The management accountant may frequently
have to take into account non-financial information.
27.16 C The only sampling method that does not require a sampling frame is quota sampling, therefore C
is the correct option.
27.17 D As this is a multiplicative model, the seasonal variations should sum (in this case) to 4 (an
average of 1) as there are four quarters.
Let X = seasonal variation in quarter 4
1.2 + 1.3 + 0.4 + X = 4
2.9 + X = 4
X = 4 – 2.9
X = 1.1
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ANSWERS
205
27.18 A For a multiplicative model, the seasonal component S = Y/T
T = Y/S
Quarter
1 2
Seasonal component (S) 1.2 1.3
Actual series (Y) $125,000 $130,000
Trend (T) (= Y/S) $104,167 $100,000
The trend line for sales has therefore decreased between quarter 1 and quarter 2.
27.19 D The intercept is the point at which the line on a graph crosses the y axis. It represents the total
fixed costs.
27.20 C Flexible budgets help managers to deal with uncertainty by allowing them to see the expected
outcomes for a range of activity levels. So Statement (i) is true. A flexed budget provides a more
meaningful comparison because it shows what costs should have been for the actual level of
activity achieved.
28 Mixed Bank 4
28.1 C Short-termism is when there is a bias towards the short-term rather long-term performance.
Option A encourages a long-term view and goal congruence. Option B uses multiple targets to
encourage a long-term view. If budget targets are unrealistically tough, a manager will be forced
to make tread-offs between the short and long-term, therefore option D is useful for encouraging
a long-term view. Setting cost cutting targets could lead to a reduction in R&D expenditure,
quality control, customer service and staff training. These could all hinder the long-term
performance of the business.
28.2 B Option A describes ABC. Option C describes life-cycle costing and option D describes target
costing.
28.3 A Normal loss = $840 Abnormal loss = $880
Step 1 Determine output and losses
Input 15,000 kg
Normal loss (10%) 1,500 kg
Expected output 13,500 kg
Actual output 13,000 kg
Abnormal loss 500 kg
Step 2 Calculate cost per unit of output and losses
Scrap value of normal loss (1,500 × $0.56) $840
Scrap value of abnormal loss (500 × $0.56) $280
$1,120
Cost per expected unit =
$22,500+$2,100 – $840
13,500
= $1.76
Step 3 Calculate total cost of output and losses
Output (13,000 × $1.76) $22,880
Normal loss (1,500 × $0.56) $840
Abnormal loss (500 × $1.76) $880
$24,600
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28.4 B Statement of profit or loss for May under marginal costing
May
$ $
Sales A (4,300 × $85) 365,500
U (2,600 × $60) 156,000
521,500
Opening inventory A 0
U 0
0
Variable costs A (4,500 × $50) 225,000
U (3,100 × $48) 148,800
373,800
Less closing inventory A (200 × $50) (10,000)
U (500 × $48) (24,000)
Variable cost of goods sold 339,800
Contribution 181,700
Fixed costs 75,000
Profit 106,700
28.5 D This is a question in which you have to work backwards.
750 kg should have cost (× $p) ?
But did cost $13,500
Material price variance $1,125 (F)
The 750 kg should have cost $13,500 + $1,125 = $14,625
The standard cost per kg is therefore $14,625/750 = $19.50
28.6 D Stratified sampling is a method of sampling which involves dividing the population into strata or
categories.
28.7 B 100 × 1
0
P
P
= 125
P1 = $31.50
0
100×$31.50
P
= 125
100×$31.50
125
= P0 = $25.20
28.8 B Both statements are true.
28.9 B The point at which the straight line crosses the y axis is the intercept and this is the value of a.
The gradient is b.
y = a + bx
$270 = $20 + (b × 50)
$270 – $20 = 50b
$250
50
= b
b = 5
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ANSWERS
207
28.10 B Marginal costing:
$'000 $'000
Sales (25,000 × $80) 2,000
Opening inventory .
Variable production overhead (W1) , 1,560
1,560
Less closing inventory (W2) 60 .
Variable cost of sales 1,500
Contribution 1, 500
Less fixed costs (W3) 182
Profit 318
Workings
(1) 26,000 units × $60 = $1,560,000
(2) Production units + opening inventory – sales = closing inventory
= 26,000 + 0 – 25,000 = 1,000 units
Valued at marginal cost: 1,000 × $60 = $60,000
(3) Fixed production overhead + fixed selling costs = $113,000 + $69,000 = $182,000
28.11 C Absorption costing
OAR = Budgeted overhead / budgeted production = $143,000/26,000 = $5.5/unit
As inventory has increased, absorption costing will report a higher profit than marginal costing.
The difference in profit = change in inventory volume fixed production overhead per unit
= 1,000 $5.5
= $5,500
Marginal profit = $318,000
absorption profit = $318,000 + $5,500 = $323,500
28.12 B Step 1 Find the highest and lowest levels of activity (note that this is the activity level and is not
necessarily the highest and lowest cost).
In this case we only have two levels of activity so we have to use those.
Step 2 Compare the activity level and costs for each of these but deduct the extra step up fixed
cost for 34,000 units
Number of Cost
units $
Highest 34,000 208,000 – 30,000=178,000
Lowest 28,000 160,000
Increase 6,000 18,000
This shows that for an increase in 6,000 units there has been a cost increase of $18,000.
Therefore the variable cost per unit can be estimated as:
Variable rate of increase = $18,000/6,000 units
= $3 per unit
Alternative approach
$'000
Total contribution (25,000 $20 (W1)) 500
Less fixed production overhead (113).
Less fixed selling costs (69).
MC profit 318
Workings
1 contribution per unit = $80 – $60 = $20
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Step 3 We can now find the fixed element of the cost at each activity level, by substituting the
variable rate into the activity levels, with the fixed element appearing as the balancing figure.
Fixed cost at 28,000 units = $160,000 – (28,000 × $3) = $76,000
Fixed cost at 34,000 units = $208,000 – (34,000 × $3) = $106,000
Notice that the fixed cost at 34,000 units is $30,000 higher than at 28,000 units. This is
reassuring as we were told this originally. Alternatively to find the fixed cost at 34,000 units we
could have just calculated the fixed cost at 28,000 units and then added on the extra $30,000.
Cost at 29,000 units = $76,000 + (29,000 × $3) = $163,000
Cost at 35,000 units = $106,000 + (35,000 × $3) = $211,000
28.13 A
$
9,200 hours should have cost (× $12.50) 115,000
but did cost 110,750
Direct labour rate variance 4,250 (F)
28.14 D
2,195 units should have taken (× 4 hours) 8,780 hours
but did take 9,200 hours
Direct labour efficiency variance (in hours) 420 hours (A)
x standard rate pre hour × 12.50
5,250 (A)
28.15 B EOQ =
2CoD
Ch
=
2 15 (2 50,000)
110 3%
=
3,000,000
3.3
= 953 (to the nearest whole unit)
29 Mixed Bank 5
29.1 A Step 1 We have been told what the fixed cost element is for 22,000 units so we can break the
total cost into its fixed and variable elements and then find the variable cost per unit from this.
Variable cost of 22,000 units = $245,000 – $25,000
Variable cost per unit =
$245,000 – $25,000
=$10
22,000
Step 2 Now that we have the variable cost per unit, we can substitute this into the lower level
activity to find the fixed element for an activity level below 20,000.
Fixed element for lower activity level = $200,000 – (18,000 × $10) = $20,000.
Step 3 We can now find the cost at activity levels of 19,000 and 21,000 units. Remember the
fixed element will be different in each case because of the step.
Cost at 19,000 units = $20,000 + (19,000 × $10) = $210,000
Cost at 21,000 units = $25,000 + (21,000 × $10) = $235,000
29.2 D Return on investment = Profit/capital employed
Profit = $30,000 + ($300,000 × 10%)
= $60,000
ROI = $60,000/$300,000
= 20%
29.3 D A purchase requisition is completed in the department which requires the goods and then sent to
the purchasing department where a purchase order is raised to send to the supplier. Therefore
statement (i) is false. Statement (ii) is true.
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209
29.4 D The fixed overhead expenditure variance is not relevant to a reconciliation of budgeted and actual
contributions. Fixed costs are deducted afterwards from contribution to arrive at profit. The figure
of $40,000 given in the question as the 'standard contribution on actual sales' means that the
effect of the sales volume contribution variance has already been taken into account in arriving at
that figure of $40,000. Budgeted contribution is adjusted for the sales volume contribution
variance to arrive at the figure for 'standard contribution on actual sales'. Therefore the only
variance that needs to be taken into account in this particular question is the favourable sales
price variance as follows: [40,000 + 1,000] = $41,000.
29.5 A The actual costs were $93,600 and when compared with the flexed budget this gave an
adverse variance of $2,400. Therefore the flexed budget was [93,600 − 2,400] = $91,200.
Budgets are flexed based on activity levels. As $100,000 of direct costs represented a 100%
activity level then flexed budget direct costs of $91,200 represents a 91.2% level of activity
[actual activity as a % of the fixed budget].
29.6 C $13,800
Step 1 Determine output and losses
Input 10,000 litres
Normal loss (5%) 500 litres
Expected output 9,500 litres
Actual output 9,200 litres
Abnormal loss 300 litres
Step 2 Calculate cost per unit of output and losses
Scrap value of normal loss (500 × $38) $19,000
Scrap value of abnormal loss (300 × $38) $11,400
$30,400
Cost per expected unit =
$456,000 – $19,000
9,500
= $46
Step 3 Calculate total cost of output and losses
Output (9,200 × $46) $423,200
Normal loss (500 × $38) $19,000
Abnormal loss (300 × $46) $13,800
$456,000
29.7 C 100 × 1
0
P
P
= 175
P1 = $92.70
0
100×$92.70
P
= 175
100×$92.70
175
= P0 = $52.97
29.8 C $200,000 ÷
120
360
= $600,000
29.9 A The point at which the straight line crosses the y axis is the intercept and this is the value of a.
The gradient is b = $40.
y = a + bx
$1,100 = a + ($40 × 20)
$1,100 – $800 = a
a = 300
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29.10 D
$
Actual fixed production overheads X
Absorbed fixed production overheads (5,500 × $7) 38,500
Under-absorbed fixed production overheads 9,000
Actual fixed production overheads = $38,500 + $9,000
= $47,500
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211
30 Budgeting
30.1 (a) Monthly sales = 48,000 / 12 = 4,000 units per month (closing inv = 8,000 units)
Production = Closing inventory + sales – opening inventory
= 8,000 + 48,000 – 2,000
= 54,000 units of M to be produced
(b) Material X required for production
= Production units of M × 3 kg
= 162,000 kg
(c) Material X purchases budget (in kg)
= Closing inventory + production – opening inventory
= (162,000 / 12) + 162,000 – 5,000
= 170,500 kg
(d) Material X purchases budget (in $)
= 170,500 kg × $4
= $682,000
(e) (i) Purchase of non-current assets
For example, suppose an asset is purchased for $20,000 and depreciation is charged at
10% of the original cost. The cash outflow during the year = $20,000 (which does not
appear in the statement of profit or loss). The depreciation charge = 10% × $20,000 =
$2,000. This is charged to the statement of profit or loss and will reduce overall profits.
(ii) Sale of non-current assets
When an asset is sold there is usually a profit or loss on sale. For example, an asset with a
net book value of $15,000 could be sold for $11,000, giving rise to a loss on disposal of
$4,000.
The increase in cash flow during the year = $11,000 sale proceeds. There will be no
effect on the statement of profit or loss.
The loss on sale of non-current assets = $4,000. This will be recorded in the firm's
statement of profit or loss and will reduce overall profits.
(iii) Matching receipts from receivables and sales invoices raised
If goods are sold on credit, the cash receipts will be the same as the value of the sales
(ignoring early settlement discounts and bad debts). However, receipts may occur in a
different period as a result of the timing of payments.
30.2 (a)
$'000
Sales receipts 820
Purchase payments 575
Overhead payments 95
Workings
Sales receipts = 860 + 45 – 85 = 820
Purchase payments = 600 + 75 – 100 = 575
Overhead payments = 100 + 40 – 45 = 95
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(b)
$
Receipts in March relating to January sales 21,000 × $30 × 60% 378,000
Receipts in March relating to February sales 22,000 × $30 × 1.04 × 40% 274,560
Total March receipts 652,560
(c) D A flexible budget is a budget which is designed to change as volumes of output change.
30.3 (a)
Top tips. Make sure that you always read the question carefully. Note that sales are invoiced at the end
of the month.
October November December January Total
$'000 $'000 $'000 $'000 $'000
Class A customers (W1)
October sales 50 30 80
November sales 75 75
50 105 155
Class B customers (W2)
October sales 36 15 6 57
November sales 48 20 68
December sales 24 24
36 63 50 149
Total cash received 36 113 155 304
Workings
(1) Class A customers
October sales
50% received December $100,000 50% = $50,000
30% received January $100,000 0% = 30,000
November sales
50% received January $150,000 50% = $75,000
(2) Class B customers
October sales
60% received November $60,000 60% = $36,000
25% received December $60,000 25% = $15,000
10% received January $60,000 10% = $6,000
November sales
60% received December $80,000 60% = $48,000
25% received January $80,000 25% = $20,000
December sales
60% received January $40,000 60% = $24,000
(b) Two advantages
It is easy to use and understand.
It needs just two activity levels.
Two disadvantages
It uses two extreme data points which may not be representative of normal conditions.
Using only two points to determine a formula may mean that the formula is not very accurate.
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ANSWERS
213
30.4 (a) Index numbers provide a standardised way of comparing the values, over time, of prices, wages,
volume of output and so on. An index is a measure, over time, of the average changes in the
values (prices or quantities) of a group of items. An index comprises a series of index numbers.
Although it is possible to prepare an index for a single item, for example the price of an ounce of
gold, such an index would probably be unnecessary. It is only when there is a group of items that
a simple list of changes in their values over time becomes rather hard to interpret, and an index
provides a useful single measure of comparison.
(b) Workings
20X6 20X7 Laspeyre
Qo Po Qn Pn PoQo PoQn
Material A 200 0.98 300 1.40 196 294
Material B 500 0.95 400 1.10 475 380
Material C 300 1.20 500 0.92 360 600
Material D 400 1.10 100 1.14 440 110
1,471 1,384
Quantity index number for 20X7 is as follows.
Laspeyre method = 100
1,384
1,471
= 94.09 (to 2 dp)
(c) B = SUM(E4:E8)
This formula will add up the values of XY in the column above to give a total.
(d) Tick box
Cashflow forecasting
Monthly sales analysis by market
Writing a memo
Calculation of depreciation
Spreadsheets are useful for many types of calculation, but are not generally used for memoranda
or report writing, except as an import of eg a table of data.
30.5 (a) C = (E2 – B2) / (E3 – B3)
(b) $ Units
High 259,541 85,620
Low (214,559) (64,200)
Variable cost = 44,982 21,420 = $2.1/unit
Fixed cost = $259,541 – (85,620 × $2.1) = $79,739
y = $79,739 + 2.1 x
(c) Period 5 costs = y
Y = $79,739 + ($2.1 × 87,500) = $263,489
(d) The computation is an extrapolation from the known data. That is, the output is greater than the
maximum used in establishing the known function. There is no evidence that a linear cost
function is appropriate outside the limits of the known data. The further one goes from the known
data, the greater is the likelihood that influences on cost will behave in new and different ways.
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30.6 (a) B Savings are 50,000 ($6 – $4.50) = $75,000 per annum.
Additional costs are $15,000 per annum (75% $20,000)
Net cash savings are therefore $60,000 per annum.
(b) Only those future cash flows arising as a direct consequence of the decision should be taken into
account, and depreciation should be ignored. It is assumed that the machine will be sold for
$50,000 at the end of year 5.
Year
Cash
invested
Savings
made
Cash
received
PV factor
10% NPV
$ $ $ $
0 (250,000) 1.000 (250,000)
1 60,000 0.909 54,540
2 60,000 0.826 49,560
3 60,000 0.751 45,060
4 60,000 0.683 40,980
5 60,000 50,000 0.621 68,310
8,450
The NPV is positive and so the project is expected to earn more than 10% per annum, and is
therefore acceptable.
(c) Try using a discount rate of 15%:
Year
Cash
invested
Savings
made
Cash
received
PV factor
15% NPV
$ $ $ $
0 (250,000) 1.000 (250,000)
1 60,000 0.870 52,200
2 60,000 0.756 45,360
3 60,000 0.658 39,480
4 60,000 0.572 34,320
5 60,000 50,000 0.497 54,670
(23,970)
The IRR must be less than 15%, but higher than 10%. The NPVs at these two costs of capital
can be used to estimate the IRR using the interpolation formula:
IRR = 10% +
8,450
15% –10% %
8,450 – 23,970
= 10% + (0.261 5) %
= 10% + 1.305%
= 11.305%
(d) The following are advantages of using IRR (two required):
It takes into account the time value of money, unlike other approaches such as payback
Results are expressed as a simple percentage, and may be more easily understood
It indicates how sensitive calculations are to changes in interest rates
(e) If capital expenditure is treated as revenue expenditure, profits will be understated in the
statement of profit or loss, and non-current assets will be understated in the statement of
financial position.
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ANSWERS
215
30.7 (a) (i) Relevant – because if the investment is not made this equipment would not be purchased.
(ii) Irrelevant – depreciation is a notional amount (ie an accounting entry) and not a cash
flow, therefore it is never a relevant cost
(iii) Relevant – this training is a future cost because it will only need to be incurred if the
equipment is purchased.
(iv) Irrelevant – the manager is not going to be paid any extra salary as a result of the project,
as there is no incremental cost to the company as a whole this is not a relevant cost.
(v) Irrelevant – the conference and this training has already happened and the cost of it is a
sunk cost. The company will not get the money back if the equipment is not purchased.
(vi) Irrelevant – interest is a finance cost, the discount rate provides the investor compensation
for interest, which means that interest is never a relevant cost.
(b) (i) $90,000
(ii) $37,910
(iii) $27,500
Workings:
(i) Increase in sales = ($550,000 - $500,000) = $50,000
Increase due to the project = ($50,000 + $40,000) = $90,000
(ii) Annuity factor for five years at 10% = 3.791
Present value = (3.791 $10,000) = $37,910
(iii) Total sales in Year 1 = $550,000
Additional electricity = ($550,000 0.05) = $27,500
30.8 (a)
Expenditure Capital Revenue
Purchase of new delivery van x
Road tax for new delivery van x
Repairs to customer toilets x
Extension of customer car
park
x
The purchase of the new delivery van and the extension to the customer car park are both
classified as capital expenditure because they will deliver benefits to the company, for more than
one year.
The road tax is a running cost of the van and should be treated as revenue for the period, along
with the repairs to the toilets. The toilets have not been improved or enhanced by the
expenditure, merely their use has been maintained.
(b) C
Units
Sales 200
Less: opening inventory (15)
Add: closing inventory (W1) 50
Manufacture 235
W1: Sales for July: 200 1.25 = 250 units
Closing inventory is 20% July’s sales = 0.2 250 = 50 units
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(c) (i) 1000 m2
M2
Required for production (90 10m2) 900
Plus waste 100
Purchase 1,000
(ii) $10,800
90 units 8 hours $15 per hour = $10,800
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ANSWERS
217
31 Standard costing
31.1 (a) The sales volume variance in a marginal costing system is valued at standard contribution per
unit rather than standard profit per unit.
Contribution per unit of DG = $22 – $12 = $10
Sales volume variance in terms of contribution =
$12,000
$6
× $10 = $20,000 Adverse.
(b) What is standard costing?
The CIMA Official Terminology definition of standard costing is 'A control technique that reports
variances by comparing actual costs to pre-set standards so facilitating action through
management by exception.
(c) Advantage of ideal standard
Ideal standards and variances from ideal standards are useful for pinpointing areas where a close
examination may result in large savings in order to maximise efficiency and minimise waste.
(d) Disadvantage of ideal standard
Ideal standards are likely to have an unfavourable motivational impact because reported
variances will always be adverse. Employees will often feel that the goals are unattainable and
not work so hard.
(e) B
$
53,000 kg should have cost (× $2.50*) 132,500
But was 136,000
Material price variance 3,500(A)
*Budgeted material cost per kg = $125,000/(25,000 units × 2 kg)
31.2 (a) TWO main reasons for using standards:
(i) To value inventories and to enable the cost of production to be established. This
information enables management to make better informed decisions, for example
regarding pricing.
(ii) To act as a control device by establishing standards (planned costs) and highlighting (via
variance analysis) activities that are not conforming to plan. This process highlights
management attention on areas which may require corrective action.
(b) A Sales price variance:
Actual sales @ standard rate 4,650 × $6 = $27,900
Standard sales at actual price = $30,225
Labour efficiency variance $2,325 F
Sales volume contribution variance:
Standard contribution = $6 60% = $3.60 per unit
Volume variance = 5,000 – 4,650 = 350 units A
@ $3.60 = $1,260 A
(c) Variances should not be looked at in isolation. One variance might be inter-related with another,
and much of it might have occurred only because the other, inter-related, variance occurred too.
Considering a variance in isolation is likely to lead to inaccurate conclusions being drawn.
(d) When two variances are interdependent (interrelated) they impact upon each other. For example,
if it is decided to purchase cheaper materials for a job, a favourable price variance is likely.
However, the use of cheaper materials may lead to higher levels of rework and materials
wastage, resulting in an adverse materials usage variance.
Note. You may have provided a different but equally valid explanation. For example, labour rate
and efficiency variances are also interrelated. Using a highly skilled team is likely to result in an
adverse labour rate variance but a favourable efficiency variance.
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31.3 (a) Direct labour efficiency variance
5,000 units should have taken ( × 6 hrs) 30,000 hrs
But did take 33,000 hrs
Efficiency variance in hrs 3,000 hrs (A)
× standard rate × $20
Efficiency variance in $ $60,000 (A)
(b) Adverse labour efficiency variances could arise if lower grade material is used. This is because
the lower grade material may mean that labour have to take longer to produce the output.
Another possible reason for an adverse labour variance is incorrect allocation of time to jobs. For
example, time spent on Job A may accidentally be recorded against Job B which would make the
labour on Job B look inefficient.
(c) There are two differences between the way that variances are calculated in a marginal costing
system and in an absorption costing system.
In marginal costing, fixed costs are not absorbed into product costs and so there are no fixed
cost variances to explain any under or over absorption of overheads. There will, therefore, be no
fixed overhead volume variance. There will, however, be a fixed overhead expenditure variance
which is calculated in exactly the same way as for absorption costing systems.
In marginal costing the sales volume variance in units will be valued at standard contribution
margin and called the sales volume contribution variance. In standard absorption costing
standard profit is used instead of standard contribution.
31.4 (a) High-low method
(i) Budgeted variable overhead per tonne
Using the high-low technique,
Budgeted variable overhead per tonne =
Chnge in total budgeted overhead
Change in volume
=
–
–
($264,000 $200,000)
(9,000 5,000 tonnes)
=$16 per tonne
(ii) Budgeted fixed overhead for the period
$
If total overhead at 9,000 tonnes = 264,000
Variable overhead = 9,000 tonnes $16 per tonne = (144,000)
Budgeted fixed overheads 120,000
(b) Variances
(i) Fixed overhead expenditure variance
Budgeted expenditure $120,000
Actual expenditure $125,000
Fixed overhead expenditure variance $5,000 (A)
(ii) Fixed overhead volume variance
Actual production at standard rate (6,500 × $24) $156,000
Budgeted production at standard rate $120,000
Fixed overhead volume variance $ 36,000 (F)
(c) Possible operational causes for each of the two variances
(i) Adverse expenditure variance
Potential causes of an adverse expenditure variance are:
(1) An increase in the cost of services used
(2) Wasteful expenditure
(3) A change in the type of services used
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ANSWERS
219
(ii) Favourable volume variance
Potential causes of a favourable volume variance are:
(1) Seasonal demand leading to higher than average production levels
(2) Favourable labour efficiency leading to increased production
(3) Increased factory capacity due to the removal of a bottleneck
(only one cause of each was requested)
31.5 (a) Variances
(i) Fixed overhead expenditure variance
$
Budgeted fixed overheads 26,000
Actual fixed overheads 23,000
Fixed overhead expenditure variance 3,000 F
(ii) Fixed overhead efficiency variance
14,000 sets should have taken ( 0.5 hrs) 7,000 hrs
But did take 8,000 hrs
1,000 hrs A
× std fixed overhead abs rate per hour × $4
$4,000 A
(iii) Fixed overhead capacity variance
Budgeted hours of work 6,500 hrs
Actual hours of work 8,000 hrs
1,500 hrs F
× std fixed overhead abs rate per hour × $4
6,000 F
(iv) Fixed overhead volume variance
$
Actual production at standard rate (14,000 × $2 per unit) 28,000
Budgeted production at standard rate (13,000 × $2 per unit) 26,000
Fixed overhead expenditure variance 2,000 F
Alternatively:
Capacity + efficiency
6,000 (F) + 4,000 (A) = $2,000 (F)
(b) The capacity and efficiency variances attempt to explain the cause of over-absorption indicated
by the volume variance.
The higher number of labour hours worked compared to budget resulted in $6,000 more
overhead absorbed than budgeted. However, the higher hours of labour worked were a result of
inefficient labour use as indicated by the labour efficiency variance. This resulted in the $4,000
adverse fixed overhead efficiency variance. Therefore the overall volume variance is only $2,000
favourable.
31.6 (a) (i) The direct material total variance
$
2,500 units should have cost 225,000
but did cost 175,000
Direct material total variance 50,000 (F)
(ii) The direct material price variance
$
12,000 kg of W should have cost 180,000
but did cost 175,000
Material W price variance 5,000 (F)
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(iii) The direct material usage variance
2,500 units should have used ( 6 kg) 15,000 kg
but did use 12,000 kg
Usage variance in kg 3,000 kg (F)
Standard cost per kilogram × $15
Usage variance in $ $45,000 (F)
Summary
$
Price variance 5,000 (F)
Usage variance 45,000 (F)
Total variance 50,000 (F)
(b) C This is calculated by finding the balancing figure. The total variance between budgeted
contribution and actual contribution is $10,000 adverse ($30,000 – $20,000). The sales
volume and sales price variances sum to $5,000 favourable, so to balance, the variable
cost variance must be $15,000 adverse.
(c) An operating statement shows how the combination of variances work together to produce
a reconciliation of budgeted profit to actual profit.
31.7 (a) (i) Fixed overhead total variance is the difference between fixed overhead incurred and fixed
overhead absorbed.
(ii) Fixed overhead expenditure variance is the difference between the budgeted fixed
overhead expenditure and actual fixed overhead expenditure.
(iii) Fixed overhead volume variance is the difference between actual and budgeted volume,
multiplied by the standard absorption rate per unit.
(iv) Fixed overhead volume efficiency variance is the difference between the number of hours
that actual production should have taken, and the number of hours actually taken,
multiplied by the standard absorption rate per hour.
(v) Fixed overhead volume capacity variance is the difference between budgeted hours of
work and the actual hours worked, multiplied by the standard absorption rate per hour
(b) D
Absorbed overhead = Actual hours fixed overhead absorption rate =
8,000 $5 per unit = $40,000
Actual overhead = $55,000
(Under) absorbed overhead ($15,000)
(c) (Three required):
The materiality of the variance – is it significant?
How controllable it is – some are not controllable, even once the cause is discovered
The type of standard being used – ideal standards will always create adverse variances
The interdependence of variances – do not just look at one variance in isolation
The cost of an investigation – will it be worth the time taken?
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ANSWERS
221
31.8 (a) (i) and (ii)
STANDARD COST CARD FOR A WIDGET
Direct materials $ $
X – 5 kg $2 10
Z – 2 litres $5 10
20
Direct labour
Skilled – 3 $15 45
Unskilled – 6 $3 18
63
Standard direct cost 83
Variable production overhead – 3 $3.00 9
Standard variable cost of production 92
Fixed production overhead – 3 $3.33 (W) 10
Standard full production cost 102
Administration, selling and distribution overhead 20
Standard cost of sale 122
Standard profit (15% 122) 18
Standard sales price 140
Working
Fixed overhead absorption rate = ($100,000/(10,000 3)) = $3.33 per skilled labour hour
(b) D
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32 Performance measurement
32.1 (a) Two financial performance measures to monitor the credit control department
(i) Monthly cost centre cost per $ of credit sales
(ii) Salary cost per customer account
(b) Two non-financial performance measures to monitor the credit control department
(i) Number of customer accounts handled per employee
(ii) Average days of debt outstanding
(c)
Note. You will have to apply a bit of imagination and common sense in this part of the question, as well
as your understanding of performance measures. You must gain confidence in applying your knowledge
in an unfamiliar situation. It is highly unlikely that you will have worked in many of the situations
described in examination questions!
Monitoring the output of remote workers
Remote workers are different from employees who work on an organisation's premises because
they cannot be observed and therefore it is impossible to see what they are doing and to note
how many hours they are working. The focus must therefore be on monitoring their output,
rather than their input.
Rediphone will need to devise systems to monitor the output of each individual home worker.
Alternatively it may be more appropriate to monitor the output of a team or group of
homeworkers. The computer systems used to send work to and collect work from homeworkers
should provide the basic information for monitoring their output and efficiency and effectiveness.
(d) Four examples of information to assist in monitoring the efficiency and effectiveness of remote
workers
(i) The number of customer complaints related to tasks completed by each remote worker
(ii) The number of customer accounts handled by each remote worker
(iii) The average 'turn-around' time between a task being communicated to the remote worker
and the job being returned in a satisfactorily completed state
(iv) Customer satisfaction ratings relevant to each remote worker (from customer feedback)
32.2 (a) Residual income (RI)
20X2 20X3
$'000 $'000
Operating profit 16,000 17,000
Attributable financing cost (W1) (14,000) (18,000)
RI 2,000 (1,000)
Working 1
Capital employed cost of capital applicable
20X2: $70m 20% = $14m
20X3: $90m 20% = $18m
(b) and (c)
Please note that the question asks for one CSF in each category and one related KPI only. Providing
more will not gain extra marks. We have only done so for completeness.
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Part (b)
Critical success factor (CSF)
Part (c)
Key performance indicator (KPI)
(i) Financial success Shareholder value
Profitability
Cash flow
Revenue growth
Earnings per share
Profit before tax
Cash targets
% increase in revenue
(ii) Customer satisfaction Standard of facilities
Standard of service
Catering standards
Questionnaire results
Complaints
% utilisation of in-house catering
(iii) Process efficiency Utilisation of conference
facilities
Utilisation of information
technology
% occupation of conference facilities
% utilisation of technology
Daily cleaning Average cleaning time per specified
area
Check in Average check in time per customer
(iv) Organisational learning
and growth
Market share % growth in business conference
market
Growth in business % increase in customer numbers
Staff satisfaction Staff turnover
32.3 (a) Role of mission statements in performance measurement
A mission statement provides a clear statement of an organisation's purpose, their reason for
existing and what they are trying to achieve. A mission statement therefore provides an important
context when measuring performance. Individual performance should contribute to group
performance, group to department and so on all the way up to overall organisational
performance. In the same way as performance at each level supports that at each higher level, so
the targets at each level flow downwards from higher levels, deriving ultimately from the
organisational mission.
(b) Balanced scorecard approach to performance measurement
Kaplan and Norton's Balanced Scorecard suggests performance should be measured from four
perspectives:
(i) Financial performance
(ii) Customer satisfaction
(iii) Efficiency of internal processes
(iv) Learning and innovation
This approach ensures a broad range of performance measures are used. Dysfunctional decisionmaking,
short-termism and manipulation of single-measure outputs are discouraged, since
progress and performance are required on a broad front. Managers understand more clearly that
broader performance is important and are motivated to achieve it.
(c)
Remember that you only needed to provide one critical success factor and KPI for three of the
categories. For completeness, we provide answers for all four of them.
Note also that it is necessary to use your imagination and business awareness to answer a question like
this.
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Perspective
Financial performance
Critical success factor Key performance indicator
Profitability ROI, gross margin, net margin, average margin per order
Cashflow Daily bankings, customer days, supplier days, bank
balance, cashflow forecast
Customer satisfaction
Critical success factor Key performance indicator
Delivery on time Ratio of late deliveries to those on time, number of
complaints as a percentage of orders
Reliability Number of deliveries lost as percentage of deliveries
Number of parcels damaged as percentage of deliveries
Percentage of late collections
Process efficiency
Central success factor Key performance indicator
Route efficiency Fuel cost per delivery compared to budget and earlier
periods *
Vehicle and driver idle time
Transport costs Van downtime, servicing cost per route mile, vehicle
availability each day
*Route distances will vary from depot to
depot
Innovation
Critical success factor Key performance indicator
Introduction of new services Percentage of revenue from services introduced within
previous year
Technical innovation Growth in use of IT for planning and control/reduction in
head count
32.4 (a) Advantages of residual income
TWO required – we provide more than two below for study purposes.
(i) As an absolute measure, RI does not lead to dysfunctional decision making that relative
measures may do. Projects with a positive contribution to profit would not be rejected if
they have a lower percentage return than existing ones.
(ii) By attributing an imputed interest charge to the capital used, managers are made aware of
the funding cost of their division.
(iii) Residual income is consistent in the long run with the net present value approach (NPV).
Criteria that maximise NPV in the long run are normally likely to be consistent with RI
maximisation.
(b) Disadvantages of residual income
TWO required – we provide more than two below for study purposes.
(i) Defining the appropriate parameters such as controllable profits and the attributable
interest charge (or cost of capital) may be difficult.
(ii) Comparisons between divisions of different sizes may present problems where economies
of scale offer advantages.
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(iii) When organisations value assets at net book value, ROI and RI generally increase as
assets get older. Consequently, management may hold on to out-of-date plant and
machinery.
(iv) Both ROI and RI measure divisional performance based on a single value. Most
organisations these days are of such a complex nature that a single figure is unlikely to be
adequate enough upon which to base an investment decision.
(v) As a general rule, most investment projects with positive NPVs have correspondingly low
ROI and RI figures in early years. This in turn can lead to the project managers being
rejected in the first few years of a new investment.
(c) D Say current assets are $75,000
Current liabilities are $50,000
30% decrease in both will be $15,000. Current assets will then be $60,000, current
liabilities $35,000, and current ratio will be 60:35 = 1.71. This is an increase of less
than 30%.
(d) Benchmarking is an attempt to identify best practices by a comparison of operations to achieve
improved performance. It is a type of comparison exercise through which an organisation
attempts to improve performance. The idea is to seek the best available performance against
which the organisation can monitor its own performance.
(e) Limitations of benchmarking
TWO required – we provide more than two below for study purposes.
Difficulties in deciding which activities to benchmark
Identifying the 'best in class' for each activity
Persuading other organisations to share information
Successful practices in one organisation or department may not transfer successfully to
another
32.5 (a) Return on capital employed (ROCE). This ratio shows the percentage rate of profit which has
been earned on the capital invested in the business, that is the return on the resources controlled
by management. The expected return varies depending on the type of business and it is usually
calculated as follows.
Return on capital employed = (Profit before interest and tax/capital employed) 100%.
(b) Asset turnover. This ratio shows how effectively the assets of a business are being used to
generate sales.
Asset turnover = (Sales revenue/capital employed)
If the same figure for capital employed is used as in ROCE, than ratios (i) to (iii) can be related
together: (i) ROCE = (ii) net operating profit margin (iii) asset turnover.
(c) Gross margin. This ratio measures the profitability of sales.
Gross margin = (Gross profit/sales revenue) 100%
The gross profit is calculated as sales revenue less the cost of goods sold, and this ratio therefore
focuses on the company's manufacturing and trading activities.
(d) WH's ROCE
WH's ROCE is lower than the trade association average, possibly indicating that the company's
assets are not being used as profitably as in the industry as a whole. On the other hand, the ratio
could reflect higher levels of capital investment at WH.
(e) WH's Asset Turnover
WH's asset turnover ratio is lower than the trade association average. This may mean that assets
are not being used as effectively in WH than in other companies in the industry as a whole. The
ratio may also reflect relatively recent investment at WH.
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32.6 (a)
20X6
(i) Gross profit margin 43.90%
(ii) Return on capital employed 19.43%
(iii) Asset turnover 0.96 times
(iv) Current ratio 1.77
(v) Quick ratio 1.20
(vi) Inventory holding period in days 46.11 days
(vii) Payables payment period in days 81.45 days
(viii) Receivables period in days 49.86 days
Workings
20X6
(i) Gross profit margin (2,540 – 1,425/2,540) 100% = 43.90
(ii) Return on capital employed (2,540 –1,425 – 600)/(2,400 + 250) 100% =
19.43
(iii) Asset turnover (2,540/2,650) = 0.96
(iv) Current ratio (347 + 180 + 36/318) = 1.77
(v) Quick ratio (347 + 36/318) = 1.20
(vi) Inventory holding period in days (180/1,425) 365 = 46.11
(vii) Payables payment period in days (318/1,425) 365 = 81.45
(viii) Receivables period in days (347/2,540) 365 = 49.86
(b) D The quality of products or services is an aspect of operational performance. Quality affects
customer perceptions, but is under the control of management.
32.7 (a) (i) Surplus = $32,000
Capital employed (total assets less liabilities) = $219,000
Therefore ROCE = ($32,000/$219,000) × 100% = 14.6%
(ii) Average cost per loan made = $93,000/864,000 = 10.8c
(b) Return on capital employed (ROCE) is calculated as (profit/capital employed) 100%. In the
case of the library, it shows how much surplus has been made in relation to the amount of
resources invested.
Average cost per loan. In this case we would take the cost of providing the service as $93,000
(the operating expenses of wages, other expenses and depreciation) and divide by the number of
loans made in the year, to reach the average cost to the charity of each loan that is made. This
can then be compared to budget, and/or sector averages, to assess performance.
(c) Performance is often judged in terms of inputs and outputs. This ties in with the 'value for money'
criteria often used to assess some non- profit making organisations.
(i) Economy (spending money carefully). This is usually based on the level of expenditure.
(ii) Efficiency (getting out as much as possible, when considering the resources used). This is
a measure of input in relation to output, linking the economy of the service with its overall
effectiveness: how successfully the library has provided its services with the money that it
has spent.
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(iii) Effectiveness (getting done, by means of economy and efficiency, what was supposed to
be done). This is an output measure, and measures what the organisation achieves in
relation to its objectives, in this case the provision of 'friendly, reliable and comprehensive
library facilities'.
Interpreting these for a library service:
Economy would mean spending as little money as possible to provide an acceptable service. This
would be measured by, say, total expenditure on wages and other operating expenses when
compared to the library budget.
Efficiency would mean providing the best service for the money available, so for instance the cost
of each loan made. Wychwood has a much lower cost per loan than the average for a library
service, so it would seem that it is efficient by this measure.
Effectiveness is providing the service that is supposed to be provided for the best price, and so
can be measured by the number of loans made.
32.8 (a)
Level Maintenance cost Sales value lost Total cost
$ $ $
X 8,000 21 $1,000 29,000
Y 9,750 19 $1,000 28,750
Z 7,500 27 $1,000 34,500
Level Y should be chosen. The difference in cost against Level X is marginal, but in the absence
of any other information it is the lowest cost option.
(b)
Measure CSF KPI
95% customer complaint resolution X
Successful relationships with key suppliers X
Negotiation of favourable terms for new project finance X
Gain in market share by 2% each month X
Lower the cost of capital by 1.5% X
(c) The correct answer is Option C.
Option A describes strategic objectives; Option B describes a KPI; Option D describes
organisational values and culture.
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Appendix – Formula sheet and
tables
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Formula sheet given in the exam
Regression analysis
y= a + bx
a =
Y b x
n n
b = 2 2
n xy x y
n x ( x)
r =
2 2 2 2
n xy x y
(n x ( x) )(n y ( y) )
Economic order quantity
0
h
2C D
C
Economic batch quantity
0
h
2C D
D
C (1 )
R
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Present value table
Present value of £1 ie (1+r)-n
where r = interest rate,
n = number of periods until payment
Periods Discount rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
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Annuity table
Present value of an annuity of 1 ie
1 (1 r) n
r
where r = interest rate,
n = number of periods
Periods Discount rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
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Mock Exam 1
(Specimen Exam June 2014)
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ACCA
Paper FMA/F2
Management Accounting
Mock Examination 1
(Specimen exam)
Question Paper
Time allowed 2 hours
This paper is divided into two sections:
Section A – ALL 35 questions are compulsory and MUST be attempted
Section B – BOTH questions are compulsory and MUST be attempted
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
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Section A – ALL 35 questions are compulsory and MUST be attempted
1 A manufacturing company benchmarks the performance of its accounts receivable department with that
of a leading credit card company.
What type of benchmarking is the company using?
A Internal benchmarking
B Competitive benchmarking
C Functional benchmarking
D Strategic benchmarking (2 marks)
2 Which of the following BEST describes target costing?
A Setting a cost by subtracting a desired profit margin from a competitive market price
B Setting a price by adding a desired profit margin to a production cost
C Setting a cost for the use in the calculation of variances
D Setting a selling price for the company to aim for in the long run (2 marks)
3 Information relating to two processes (F and G) was as follows:
Process Normal loss as Input Output
% of input (litres) (litres)
F 8 65,000 58,900
G 5 37,500 35,700
For each process, was there an abnormal loss or an abnormal gain?
Process F Process G
A Abnormal gain Abnormal gain
B Abnormal gain Abnormal loss
C Abnormal loss Abnormal gain
D Abnormal loss Abnormal loss (2 marks)
4 The following budgeted information relates to a manufacturing company for next period:
Units $
Production 14,000 Fixed production costs 63,000
Sales 12,000 Fixed selling costs 12,000
The normal level of activity is 14,000 units per period.
Using absorption costing the profit for next period has been calculated as $36,000
What would be the profit for next period using marginal costing?
A $25,000
B $27,000
C $45,000
D $47,000 (2 marks)
5 The Eastland Postal Service is government owned. The government requires it to provide a parcel
delivery service to every home and business in Eastland at a low price which is set by the government.
Express Couriers Co is a privately owned parcel delivery company that also operates in Eastland. It is not
subject to government regulation and most of its deliveries are to large businesses located in Eastland's
capital city. You have been asked to assess the relative efficiency of the management of the two
organisations.
Which of the following factors should NOT be allowed for when comparing the ROCE of the two
organisations to assess the efficiency of their management?
A Differences in prices charged
B Differences in objectives pursued
C Differences in workforce motivation
D Differences in geographic areas served (2 marks)
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6 Under which sampling method does every member of the target population have an equal chance of
being in the sample?
A Stratified sampling
B Random sampling
C Systematic sampling
D Cluster sampling (2 marks)
7 A Company manufactures and sells one product which requires 8 kg of raw material in its manufacture.
The budgeted data relating to the next period are as follows:
Units
Sales 19,000
Opening inventory of finished goods 4,000
Closing inventory of finished goods 3,000
Kg
Opening inventory of raw materials 50,000
Closing inventory of raw materials 53,000
What is the budgeted raw material purchases for next period (in kg)?
A 141,000
B 147,000
C 157,000
D 163,000 (2 marks)
8 Up to a given level of activity in each period the purchase price per unit of a raw material is constant.
After that point a lower price per unit applies both to further units purchased and also retrospectively to
all units already purchased.
Which of the following graphs depicts the total cost of the raw materials for a period?
$
0
A $
0
B
$
0
C $
0
D
A Graph A
B Graph B
C Graph C
D Graph D (2 marks)
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9 Which of the following are benefits of budgeting?
1 It helps coordinate the activities of different departments
2 It fulfils legal reporting obligations
3 It establishes a system of control
4 It is a starting point for strategic planning
A 1 and 4 only
B 1 and 3 only
C 2 and 3 only
D 2 and 4 only (2 marks)
10 The following statements relate to the participation of junior management in setting budgets:
1 It speeds up the setting of budgets
2 It increases the motivation of junior managers
3 It reduces the level of budget padding
Which statements are true?
A 1 only
B 2 only
C 2 and 3 only
D 1, 2 and 3 (2 marks)
11 A company has a capital employed of $200,000. It has a cost of capital of 12% per year. Its residual
income is $36,000.
What is the company's return on investment?
A 30%
B 12%
C 18%
D 22% (2 marks)
12 A company has calculated a $10,000 adverse direct material variance by subtracting its flexed budget
direct material cost from its actual direct material cost for the period.
Which of the following could have caused the variance?
1 An increase in direct material prices
2 An increase in raw material usage per unit
3 Units produced being greater than budgeted
4 Units sold being greater than budgeted
A 2 and 3 only
B 3 and 4 only
C 1 and 2 only
D 1 and 4 only (2 marks)
13 A company has recorded the following variances for a period:
Sales volume variance $10,000 Adverse
Sales price variance $5,000 Favourable
Total cost variance $12,000 Adverse
Standard profit on actual sales for the period was $120,000.
What was the fixed budget profit for the period?
A $137,000
B $103,000
C $110,000
D $130,000 (2 marks)
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14 Which of the following are suitable measures of performance at the strategic level?
1 Return on investment
2 Market share
3 Number of customer complaints
A 1 and 2
B 2 only
C 2 and 3
D 1 and 3 (2 marks)
15 Which of the following are feasible values for the correlation coefficient?
1 +1.40
2 +1.04
3 0
4 –0.94
A 1 and 2 only
B 3 and 4 only
C 1, 2 and 4 only
D 1, 2, 3 and 4 (2 marks)
16 A company's operating costs are 60% variable and 40% fixed.
Which of the following variances' values would change if the company switched from standard marginal
costing to standard absorption costing?
A Direct material efficiency variance
B Variable overhead efficiency variance
C Sales volume variance
D Fixed overhead expenditure variance (2 marks)
17 ABC Co has a manufacturing capacity of 10,000 units. The flexed production cost budget of the
company is as follows:
Capacity 60% 100%
Total production costs $11,280 $15,120
What is the budgeted total production cost if it operates at 85% capacity?
A $13,680
B $12,852
C $14,025
D $12,340 (2 marks)
18 Using an interest rate of 10% per year the net present value (NPV) of a project has been correctly
calculated as $50. If the interest rate is increased by 1% the NPV of the project falls by $20.
What is the internal rate of return (IRR) of the project?
A 7.5%
B 11.7%
C 12.5%
D 20.0% (2 marks)
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19 A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The
total allocated and apportioned overhead for each is as follows:
P Q X Y
$95,000 $82,000 $46,000 $30,000
It has been estimated that each service cost centre does work for other cost centres in the following
proportions:
P Q X Y
Percentage of service cost centre X to 50 50 – –
Percentage of service cost centre Y to 30 60 10 –
The reapportionment of service cost centre costs to other cost centres fully reflects the above
proportions.
After the reapportionment of service cost centre costs has been carried out, what is the total overhead
for production cost centre P?
A $124,500
B $126,100
C $127,000
D $128,500 (2 marks)
20 A company always determines its order quantity for a raw material by using the Economic Order
Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of
ordering a batch of raw material?
EOQ Annual holding cost
A Higher Lower
B Higher Higher
C Lower Higher
D Lower Lower (2 marks)
21 A company which operates a process costing system had work-in-progress at the start of last month of
300 units (valued at $1,710) which were 60% complete in respect of all costs. Last month a total of
2,000 units were completed and transferred to the finished goods warehouse. The cost per equivalent
unit for costs arising last month was $10. The company uses the FIFO method of cost allocation.
What was the total value of the 2,000 units transferred to the finished goods warehouse last month?
A $19,910
B $20,000
C $20,510
D $21,710 (2 marks)
22 A manufacturing company operates a standard absorption costing system. Last month 25,000
production hours were budgeted and the budgeted fixed production cost was $125,000. Last month the
actual hours worked were 24,000 and standard hours for actual production were 27,000.
What was the fixed production overhead capacity variance for last month?
A $5,000 Adverse
B $5,000 Favourable
C $10,000 Adverse
D $10,000 Favourable (2 marks)
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23 The following statements have been made about value analysis.
1 It seeks the lowest cost method of achieving a desired function
2 It always results in inferior products
3 It ignores esteem value
4 It is applicable to both physical products and services
Which TWO of the above statements are true?
A 1 and 4
B 1 and 2
C 3 and 4
D 2 and 3 (2 marks)
24 Under which of the following labour remuneration methods will direct labour cost always be a variable
cost?
A Day rate
B Piece rate
C Differential piece rate
D Group bonus scheme (2 marks)
25 A company manufactures and sells a single product. In two consecutive months the following levels of
production and sales (in units) occurred:
Month 1 Month 2
Sales 3,800 4,400
Production 3,900 4,200
The opening inventory for Month 1 was 400 units. Profits or losses have been calculated for each month
using both absorption and marginal costing principles.
Which of the following combinations of profits and losses for the two months is consistent with the
above data?
Absorption costing profit/(loss) Marginal costing profit/(loss)
Month 1 Month 2 Month 1 Month 2
$ $ $ $
A 200 4,400 (400) 3,200
B (400) 4,400 200 3,200
C 200 3,200 (400) 4,400
D (400) 3,200 200 4,400 (2 marks)
26 The following statements relate to the advantages that linear regression analysis has over the high low
method in the analysis of cost behaviour:
1 The reliability of the analysis can be statistically tested
2 It takes into account all of the data
3 It assumes linear cost behaviour
Which statements are true?
A 1 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3 (2 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
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27 A company operates a process in which no losses are incurred. The process account for last month,
when there was no opening work-in-progress, was as follows:
Process account
$ $
Costs arising 624,000 Finished output (10,000 units) 480,000
Closing work-in-progress (4,000 units) 144,000
–––––––– ––––––––
624,000 624,000
–––––––– ––––––––
The closing work in progress was complete to the same degree for all elements of cost.
What was the percentage degree of completion of the closing work-in-progress?
A 12%
B 30%
C 40%
D 75% (2 marks)
28 Which of the following would not be expected to appear in an organisation's mission statement?
A The organisation's values and beliefs
B The products or services offered by the organisation
C Quantified short term targets the organisation seeks to achieve
D The organisation's major stakeholders (2 marks)
29 An organisation operates a piecework system of remuneration, but also guarantees its employees 80% of
a time-based rate of pay which is based on $20 per hour for an eight hour working day. Three minutes
is the standard time allowed per unit of output. Piecework is paid at the rate of $18 per standard hour.
If an employee produces 200 units in eight hours on a particular day, what is the employee's gross pay
for that day?
A $128
B $144
C $160
D $180 (2 marks)
30 A company uses an overhead absorption rate of $3.50 per machine hour, based on 32,000 budgeted
machine hours for the period. During the same period the actual total overhead expenditure amounted to
$108,875 and 30,000 machine hours were recorded on actual production.
By how much was the total overhead under or over absorbed for the period?
A Under absorbed by $3,875
B Under absorbed by $7,000
C Over absorbed by $3,875
D Over absorbed by $7,000 (2 marks)
31 Which of the following statements relating to management information are true?
1 It is produced for parties external to the organisation
2 There is usually a legal requirement for the information to be produced
3 No strict rules govern the way in which the information is presented
4 It may be presented in monetary or non monetary terms
A 1 and 2
B 3 and 4
C 1 and 3
D 2 and 4 (2 marks)
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32 A company's sales in the last year in its three different markets were as follows
$
Market 1 100,000
Market 2 149,000
Market 3 51,000
Total 300,000
In a pie chart representing the proportion of sales made by each region what would be the angle of the
section representing Market 3?
A 17 degrees
B 50 degrees
C 61 degrees
D 120 degrees (2 marks)
33 Which of the following BEST describes a flexible budget?
A A budget which shows variable production costs only
B A monthly budget which is changed to reflect the number of days in the month
C A budget which shows sales revenue and costs at different levels of activity
D A budget that is updated halfway through the year to incorporate the actual results for the first
half of the year (2 marks)
34 The purchase price of an item of inventory is $25 per unit. In each three month period the usage of the
item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase
price. The cost of placing an order for the item is $20.
What is the Economic Order Quantity (EOQ) for the inventory item to the nearest whole unit?
A 730
B 894
C 1,461
D 1,633 (2 marks)
35 Two products G and H are created from a joint process. G can be sold immediately after split-off. H
requires further processing into product HH before it is in a saleable condition. There are no opening
inventories and no work in progress of products G, H or HH. The following data are available for last
period:
$
Total joint production costs 350,000
Further processing costs of product H 66,000
Product Production units Closing inventory
G 420,000 20,000
HH 330,000 30,000
Using the physical unit method for apportioning joint production costs, what was the cost value of the
closing inventory of product HH for last period?
A $16,640
B $18,625
C $20,000
D $21,600 (2 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
247
Section B – ALL THREE questions are compulsory and MUST be
attempted
1 Cab Co owns and runs 350 taxis and had sales of $10 million in the last year. Cab Co is considering
introducing a new computerised taxi tracking system.
The expected costs and benefits of the new computerised tracking system are as follows:
(i) The system would cost $2,100,000 to implement.
(ii) Depreciation would be provided at $420,000 per annum.
(iii) $75,000 has already been spent on staff training in order to evaluate the potential of the new
system. Further training costs of $425,000 would be required in the first year if the new
system is implemented.
(iv) Sales are expected to rise to $11 million in Year 1 if the new system is implemented, thereafter
increasing by 5% per annum. If the new system is not implemented, sales would be expected
to increase by $200,000 per annum.
(v) Despite increased sales, savings in vehicle running costs are expected as a result of the new
system. These are estimated at 1% of total sales.
(vi) Six new members of staff would be recruited to manage the new system at a total cost of
$120,000 per annum.
(vii) Cab Co would have to take out a maintenance contract for the new system at a cost of
$75,000 per annum for five years.
(viii) Interest on money borrowed to finance the project would cost $150,000 per annum.
(ix) Cab Co's cost of capital is 10% per annum.
Required
(a) State whether each of the following items are relevant or irrelevant cashflows for a net present
value (NPV) evaluation of whether to introduce the computerised tracking system.
(i) Computerised tracking system investment of $2,100,000
(ii) Depreciation of $420,000 in each of the five years
(iii) Staff training costs of $425,000
(iv) New staff total salary of $120,000 per annum
(v) Staff training costs of $75,000
(vi) Interest cost of $150,000 per annum
Note. The following mark allocation is provided as guidance for this requirement:
(i) 0.5 marks
(ii) 1 mark
(iii) 0.5 marks
(iv) 1 mark
(v) 1 mark
(vi) 1 mark (5 marks)
(b) Calculate the following values if the computerised tracking system is implemented.
(i) Incremental sales in Year 1
(ii) Savings in vehicle running costs in Year 1
(iii) Present value of the maintenance costs over the life of the contract
Note. The following mark allocation is provided as guidance for this requirement:
(i) 1 mark
(ii) 0.5 marks
(iii) 1.5 marks (3 marks)
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(c) Cab Co wishes to maximise the wealth of its shareholders. It has correctly calculated the
following measures for the proposed computerised tracking system project:
– The internal rate of return (IRR) is 14%
– The return on average capital employed (ROCE) is 20%
– The payback period is four years
Required
Which of the following is true?
A The project is worthwhile because the IRR is a positive value
B The project is worthwhile because the IRR is greater than the cost of capital
C The project is not worthwhile because the IRR is less than the ROCE
D The project is not worthwhile because the payback is less than five years
(2 marks)
2 Castilda Co manufactures toy robots. The company operates a standard marginal costing system and
values inventory at standard cost.
The following is an extract of a partly completed spreadsheet for calculating variances in month 1.
A B C
1 Standard Cost Card – Toy Robot $ per robot
2 Selling price 120
3 Direct material 1 material per unit 20
4 Direct labour 6 hours @ $8 per hour 48
5 Production overhead 24
6 Standard contribution 28
7 Actual and budgeted activity levels in units Budget Actual
8 Sales 25,000 25,600
9 Production 25,000 26,000
10 Actual sales revenue and variable costs $
11 Sales 3,066,880
12 Direct material (purchased and used) 532,800
13 Direct labour (150,000 hours) 1,221,000
14 Variable production overhead 614,000
15 Variances $
16 Total direct materials variances 12,800 Adverse
17 Direct labour rate variances 21,000 Adverse
18 Direct labour efficiency variances 48,000 Favourable
19 Total variable production overhead variances 10,000 Favourable
Required
(a) Which formula will correctly calculate the direct labour efficiency variance in cell B18?
A = (C9*C4)–B13
B = B13–(C9*C4)
C = (C9*C4)–(150,000*8)
D = (150,000–(C9*6))*8 (2 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
249
(b) Calculate the following for month 1:
(i) Sales volume variance and state whether it is favourable or adverse
(ii) Sales price variance and state whether it is favourable or adverse
Note. The total marks will be split equally between each part
(5 marks)
(c) Castilda's management accountant thinks that the direct labour rate and efficiency variances for
Month 1 could be interrelated.
Required
Briefly explain how the two direct labour variances could be interrelated. (3 marks)
3 Nicholson Co sells mobile telephones. It supplies its customers with telephones and wireless telephone
connections. Customers pay an annual fee plus a monthly charge based on calls made.
The company has recently employed a consultant to install a balanced scorecard system of performance
measurement and to benchmark the results against those of Nicholson Co's competitors. Unfortunately
the consultant was called away before the work was finished. You have been asked to complete the
work. The following data is available.
Nicholson Co
Operating data for the year ended 30 November 2013
Sales revenue $480 million
Sales attributable to new products $8 million
Average capital employed $192 million
Profit before interest and tax $48 million
Average number of customers 1,960,000
Average number of telephones returned for repair each day 10,000
Number of bill queries 12,000
Number of customer complaints 21,600
Number of customers lost 117,600
Average number of telephones unrepaired at the end of each day 804
Required
(a) Calculate the following ratios and other statistics for Nicholson Co for the year ended
30 November 2013.
(i) Return on capital employed
(ii) Return on sales (net profit percentage)
(iii) Asset turnover
(iv) Average wait for telephone repair (in days)
(v) Percentage of customers lost per annum
(vi) Percentage of sales attributable to new products
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Note. The following mark allocation is provided as guidance for this requirement:
(i) 1.5 marks
(ii) 1.5 marks
(iii) 1.5 marks
(iv) 1.5 marks
(v) 1 mark
(vi) 1 mark (8 marks)
(b) A balanced scorecard measures performance from four perspectives: customer satisfaction,
growth, financial success and process efficiency.
Required
Briefly explain any ONE of the four perspectives above. (2 marks)
(Total = 100 marks)
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Answers to Mock Exam 1
DO NOT TURN THIS PAGE UNTIL YOU HAVE
COMPLETED THE MOCK EXAM
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // ANSWERS
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ACCA Examiner’s answers. The Examiner’s answers to all the questions in Mock Exam 1 are included after this
section.
SECTION A
1 C Functional benchmarking
2 A Setting a cost by subtracting a desired profit margin from a competitive market price
3 C F: normal loss = 65,000 × 8% = 5,200. Actual loss (65,000 – 58900) = 6,100
G: normal loss = 37,500 × 5% = 1,875. Actual loss (37,500 – 35,700) = 1,800
Therefore F shows an abnormal loss and G shows an abnormal gain
4 B OAR = Budgeted overhead/budgeted production = $63,000/14,000 = $4.50 per unit
Inventory has risen by 2,000 units so absorption costing will report a higher profit than marginal
costing. 2,000 × $4.50 = $9,000
Absorption costing profit $36,000
$9,000
Marginal costing profit $27,000
5 C Differences in workforce motivation
6 B Random sampling
7 B Production (units) = Closing inventory + sales – opening inventory
= 3,000 + 19,000 – 4,000
= 18,000
Raw material purchases = Closing inventory + production – opening inventory
= 53,000 kg + (18,000 × 8 kg) – 50,000 kg
= 147,000 kg
8 D Graph D
9 B Budgeting helps coordinate the activities of different departments and establishes a system of
control
10 B Participative budgeting increases the motivation of junior managers
11 A Return on investment = Profit/capital employed
Profit = $36,000 + ($200,000 × 12%)
= $60,000
ROI = $60,000/$200,000
= 30%
12 C An increase in material prices and an increase in raw material usage per unit could cause an
adverse direct material variance
13 D (Budgeted sales volume – actual sales volume) × standard profit per unit = $10,000 (A)
Standard profit on actual sales = (actual sales units × standard profit per unit) = $120,000
Fixed budget profit = $120,000 + $10,000 = $130,000
14 A Return on investment and market share
15 B The correlation coefficient should be between -1 and 1
16 C Sales volume variance
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17 A Use the high-low method to determine the fixed and variable elements
100 $15,120
60 $11,280
40 $3,840
$3,840/40 = $96 per %
Fixed element: $15,120 – (100 × 96) = $5,520
For 85% capacity, production cost would be 5,520 + (85 × $96) = $13,680
18 C IRR = A +
a
(B A)
a b
= 10 +
50
1
50 30
= 12.5%
19 D
P Q X Y
Total overhead 95,000 82,000 46,000 30,000
Reallocate Y 9,000 18,000 3,000 (30,000)
49,000
Reallocate X 24,500 24,500 (49,000)
128,500
20 D A decrease in the ordering cost would reduce the EOQ (as smaller quantities could now be
ordered) and also the holding cost (as lower inventories would be kept)
21 A $
Opening WIP 1,710
Completion of 300 units (300 40% 10) 1,200
1,700 units @ $10 17,000
Total value 2,000 units 19,910
22 A
Budgeted hours 25,000
Actual hours 24,000
Capacity variance in hours 1,000 (A)
× standard fixed overhead absorption rate per hour* ×$5
$5,000 (A)
*($125,000/25,000 = $5)
23 A Value analysis considers cost value, exchange value, use value and esteem value
24 B Piece rate
25 C Closing inventory at the end of Month 1 = opening inventory + production – sales
26 B 1 and 2 only
27 D Cost per unit of finished output (480,000/10,000) $48
Cost per unit of work-in-progress (144,000/4,000) $36
Therefore the WIP is 75% completed
28 C Quantified short term targets the organisation seeks to achieve
29 D Production in one standard hour = 20 units
Pay for 200 units = 200/20 18 = $180
This is above the guaranteed rate.
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // ANSWERS
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30 A
Overhead absorbed (30,000 $3.5) 105,000
Actual overhead 108,875
Under-absorbed 3,875
31 B No strict rules govern the way in which the information is presented. It may be presented in
monetary or non-monetary terms
32 C
51,000
300,000
× 360o = 61o
33 C A budget which shows sales revenue and costs at different levels of activity
34 C EOQ =
2CoD
Ch
=
2 20 (4 20,000)
25 6%
=
3,200,000
1.5
= 1,460.59
35 C $
Cost per unit joint production (350,000/
(420,000 + 330,000)
0.4666
Cost per unit further processing
(66,000/330,000)
0.2
Total cost per unit 0.66666
Value of closing inventory (0.66666 ×
30,000)
19,999
SECTION B
1 (a) Relevant costs are future incremental cash flows. Non-relevant costs include sunk costs,
committed costs and notional (imputed) costs.
(i) Relevant. This is a future incremental cash outflow.
(ii) Irrelevant. This is not a cash flow.
(iii) Relevant. This is a future incremental cash outflow.
(iv) Relevant. This is a future incremental cash outflow.
(v) Irrelevant. This cost has already been incurred and is therefore a sunk cost.
(vi) Irrelevant. The interest is only relevant if it represents an identified lost opportunity to use
the finance for some alternative purpose.
(b) (i) If the tracking system did not go ahead then the sales in Year 1 would be $10 million +
$200,000 = $10,200,000.
If the tracking system did go ahead then the sales in Year 1 would be $11,000,000. The
incremental sales are the difference between what the sales would have been without the
tracking system and what they would be with the tracking system.
$11,000,000 – $10,200,000 = $800,000.
(ii) $110,000
Year 1
$'000
Sales 11,000
Vehicle running savings (1%) 110
(iii) $284,325
The maintenance cost is an annuity, ie, it is the same amount every year for the five years.
We can therefore use the cumulative discount factor for 5 years at 10%.
NPV = $75,000 × 3.791 = $284,325.
It is also possible to calculate the present value of each year and add them up. There will
be a small rounding difference.
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Year 1 Year 2 Year 3 Year 4 Year 5
$ $ $ $ $
Maintenance cost 75,000 75,000 75,000 75,000 75,000
Discount factor 0.909 0.826 0.751 0.683 0.621
Present value 68,175 61,950 56,325 51,225 46,575
NPV 284,250
(c) B The project is worthwhile because the IRR is greater than the cost of capital. The cost of
capital is 10%.
Option A is incorrect because the IRR needs to exceed the cost of capital to make the
project worthwhile.
Option C is incorrect because the IRR needs to exceed the cost of capital to make the
project worthwhile.
Option D is incorrect because the cut-off period for deciding on the payback period is
arbitrary and we don't know what Cab Co considers to be acceptable.
2 (a) C = (C9*C4) – (150,000*8)
Actual production units should have taken (26,000 × 6 hours) 156,000 hours
But did take 150,000 hours
Labour efficiency variance in hours 6,000 units (F)
standard contribution per unit × $28
Labour efficiency variance in $ $48,000 (F)
Alternatively, this can be calculated as $
Actual production units should have taken
(26,000 × 6 hours × $8) (C9*C4 in a spreadsheet) 1,248,000
But did take
(150,000 hours × $8) or (150,000*8 in a spreadsheet) 1,200,000
Labour efficiency variance in $ $48,000 (F)
(b) (i) $16,800 Favourable
Budgeted sales volume 25,000 units
Actual sales volume 25,600 units
Sales volume variance in units 600 units (F)
standard contribution per unit × $28
Sales volume variance $16,800 (F)
(ii) $5,120 Adverse
$
Sales revenue from 25,600 units should have been ( $120) 3,072,000
but was ( $15.30) 3,066,880
Selling price variance 5,120 (A)
(c) When two variances are interdependent (interrelated) one will usually be adverse and the other
one favourable.
If employees in a workforce are paid higher rates for experience and skill, using a highly skilled
team should incur an adverse rate variance ($21,000 adverse in this case) at the same time as
a favourable efficiency variance ($48,000 favourable in this case).
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // ANSWERS
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3 (a) (i) 25%
Return on capital employed =
Profit
Capital employed
=
$48 million
$192 million
× 100%= 25%
(ii) 10%
Net profit percentage =
Net profit
Sales
× 100% =
$48 million
$480 million
× 100%= 10%
(iii) 2.5
Asset turnover =
Sales
Capital employed
× 100% =
$480 million
$192 million
= 2.5
(iv) 29.3 days
Average wait for telephone repair =
Average number of telephones unrepaired at end of day
Number of telephones returned for repair
× 365 days
=
804
10,000
×365 = 29.3 days
(v) 6%
Percentage of customers lost per annum =
Number of customers lost
Total number of customers
× 100%
=
117,600
1,960,000
× 100% = 6%
(vi) 1.67%
Percentage of sales attributable to new products =
Sales attributable to new products
Total sales
× 100%
=
$8m
$480m
× 100% = 1.67%
(b) Customer satisfaction
If customers are not satisfied then they will stop buying the product or service. This perspective
considers what existing and new customers value from the business. This gives rise to targets
that matter to customers such as quality, cost, delivery, inspection and handling.
Customer perspective performance measures might include:
– New customers acquired on a monthly basis
– Customer complaints as a percentage of total customer base
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ACCA exam answers
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ACCA EXAMINER'S ANSWERS TO SPECIMEN EXAM
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SECTION A
1 C
2 A
3 C
(litres) Normal loss Actual loss Abnormal loss Abnormal gain
Process F 5,200 6,100 900 –
Process G 1,875 1,800 – 75
4 B Marginal costing profit:
(36,000 – (2,000×(63,000/14,000))
$27,000
5 C
6 B
7 B Budgeted production (19,000 + 3,000 – 4,000) = 18,000 units
RM required for production (18,000 × 8) = 144,000 kg
RM purchases (144,000 + 53,000 – 50,000) = 147,000 kg
8 D
9 B
10 B
11 A (36,000 + (200,000 × 12%))/200,000 = 30%
12 C
13 D Sales volume variance: (budgeted sales units – actual sales units) * standard profit per unit =
10,000 adverse
Standard profit on actual sales: (actual sales units * std profit per unit) = $120,000
Fixed budget profit: (120,000 + 10,000) = $130,000
14 A
15 B
16 C
17 A Variable production cost per unit = (15,120 – 11,280)/(10,000– 6,000) = 3,840/4,000 =
$0.96
Fixed cost = 11,280 – (6,000 × 0.96) = $5,520
85% capacity = 8,500 units.
Flexible budget allowance for 8,500 units = $5,520 + (8,500 × 0.96) = $13,680
18 C At 13% NPV should be –10
Using interpolation: 10% + (50/60)(10% – 13%) = 12.5%
19 D
Direct cost $95,000
Proportion of cost centre X (46,000 + (0.10 × 30,000)) × 0.50 $24,500
Proportion of cost centre Y (30,000*0.3) $9,000
Total overhead cost for P $128,500
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20 D
21 A
1,700 units × 10 $17,000
300 units × 0.4 × 10 $1,200
Opening work in progress value $1,710
Total value $19,910
22 A (Actual hours – Budgeted hours) × Standard rate
(24,000 – 25,000) × 5 = $5,000 adverse
23 A
24 B
25 C Month 1: production > sales Absorption costing > marginal costing
Month 2: sales > production marginal costing profit > absorption costing profit
A and C satisfy month 1, C and D satisfy month 2; therefore C satisfies both
26 B
27 D Cost per equivalent unit (480,000/10,000) = $48
Degree of completion= ((144,000/48)/4,000) = 75%
28 C
29 D 200 units*(3/60)*18 = $180
30 A
Actual cost $108,875
Absorbed cost $105,000
Under absorbed $3,875
31 B
32 C Total number of degrees = 360
Proportion of market 3 sales: (51,000/300,000) = 0.17
0.17 × 360 = 61
33 C
34 C {(2 × 20 × (4 × 20,000))/(0.06 × 25)}0.5
1,461 units
35 C Joint costs apportioned to H: ((330,000/(420,000 + 330,000)) × 350,000 = $154,000
Closing inventory valuation(HH): (30,000/330,000) × (154,000 + 66,000) = $20,000
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ACCA EXAMINER'S ANSWERS TO SPECIMEN EXAM
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SECTION B
1 (a) (i) Relevant
(ii) Irrelevant
(iii) Relevant
(iv) Relevant
(v) Irrelevant
(vi) Irrelevant
(b) (i) Increase in sales = ($11m – $10m) = $1m
Increase due to the project = ($1m – $0.2m) = $800,000
(ii) Total sales in year 1 = $11m
Savings ($11m × 0.01) = $110,000
(iii) Annuity factor for five years at 10% = 3.791
Present value ($75,000 × 3.791) = $284,325
(c) B
2 (a) C
(b) (i) Sales volume variance:
Budgeted to sell 25,000 units but sold 25,600 units
(25,600 – 25,000) × $28
$16,800 Favourable
(ii) Sales price variance:
Budgeted to sell at $120 per unit (25,600 × $120) = $3,072,000
Actual sales were $3,066,880
Variance ($3,066,880 - $3,072,000) = $5,120 Adverse
(c) The direct labour variance is adverse while the efficiency variance is favourable for month 1. This
indicates some interdependences between the two variances. Possible reason could be that
Castilda employed a more skilled or experienced work force who demanded a higher rate of pay,
resulting in an adverse labour rate variance. However, the more experienced labour resulted in
high productivity, hence a favourable efficiency variance.
3 (a) (i) Profit before interest and tax / Capital employed:
$48m ÷ $192m = 25%
(ii) Profit before interest and tax / Sales revenue:
$48m ÷ $480m = 10%
(iii) Sales revenue / capital employed = $480 ÷ 192m = 2.5
(iv) Average number of telephones unrepaired at the end of each day / Number of telephones
returned for repair:
(804 ÷ 10,000)*365 days = 29.3 days
(v) Percentage of customers lost per annum = number of customers lost ÷ total number of
customers × 100% = 117,600 ÷1,960,000 = 6%
(vi) Percentage of sales attributable to new products = Sales attributable to new products /
total sales × 100% = $8m ÷ $480m = 1.67%
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(b) (i) Customer satisfaction perspective:
The customer perspective considers how the organisation appears to existing and new
customers. It aims to improve quality of service to customers and looks at cost, quality,
delivery, inspection, handling, etc.
(ii) Growth perspective:
The learning and growth perspective requires the organisation to ask itself whether it can
continue to improve and create value. If an organisation is to continue having loyal,
satisfied customers and make good use of its resources, it must keep learning and
developing.
(iii) Financial success perspective:
The financial perspective considers how the organisations create value for the
shareholders. It identifies core financial themes which will drive business strategy and
looks at traditional measures such as revenue growth and profitability.
(iv) Process efficiency perspective:
The process perspective requires the organisation to ask itself the question 'what must we
excel at to achieve our financial and customer objectives?' It must identify the business
processes which are critical to the implementation of the organisation's strategy and aims
to improve processes, decision making and resource utilisation.
(Note. Only one was required)
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FIA/ACCA
FMA/F2
Management Accounting
Mock Examination 2
Question Paper
Time allowed 2 hours
Section A – ALL 35 questions are compulsory and MUST be answered
Section B – ALL THREE questions are compulsory and MUST be answered
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
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MOCK EXAM 2 // QUESTIONS
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Section A – ALL 35 questions are compulsory and MUST be attempted
1 Three years ago the price index appropriate to Material Z had a value of 140. It now has a value of 180.
The material costs $3,500 per kg today.
What was its cost per kg three years ago?
A $1,167
B $2,722
C $4,500
D $6,222 (2 marks)
2 Which of the following statements are true?
(i) Quota sampling is a non-probability sampling method
(ii) Stratified random sampling involves dividing the population into categories
A Statement (i) is true and statement (ii) is false
B Statement (i) is false and statement (ii) is true
C Both statements are true
D Both statements are false (2 marks)
3 A manufacturing company has four types of cost (identified as T1, T2, T3 and T4)
The total cost for each type at two different production levels is:
Cost type Total cost for 125 units Total cost for 180 units
$ $
T1 1,000 1,260
T2 1,750 2,520
T3 2,475 2,826
T4 3,225 4,644
Which two cost types would be classified as being semi-variable?
A T1 and T3
B T1 and T4
C T2 and T3
D T2 and T4 (2 marks)
4 D Co has presented information on a particular cost in the form of a line graph.
200
250
300
350
400
450
500
10 20 30
Level of activity (units)
Cost
$
40
What does the graph show?
Statement 1 At a level of activity of 30 units the total cost is $350
Statement 2 The fixed element of the cost is $200
Statement 3 The cost appears to be linear
Statement 4 The variable element of the cost is $10 per unit
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A Statement 1 and 4
B Statements 2, 3 and 4
C Statements 1, 2 and 3
D Statements 1, 2, 3 and 4 (2 marks)
5 The performance of a publicly funded hospital is monitored using measures based upon the 'three Es'.
The most important performance measure is considered to be the achievement of hospital targets for the
successful treatment of patients.
Which of the three Es best describes this above measure?
A Economy
B Externality
C Effectiveness
D Efficiency (2 marks)
6 Are the following statements true or false?
(i) Life cycle costing assesses a product's profitability over its entire life
(ii) The aim of life cycle costing is to understand product profitability more fully
A Statement (i) is true and statement (ii) is true
B Statement (i) is false and statement (ii) is true
C Both statements are true
D Both statements are false (2 marks)
7 Which of the following tasks would usually be carried out first in the budgetary planning process?
A Identify the principal budget factor
B Establish the level of sales demand
C Calculate the predetermined overhead absorption rate
D Establish the organisation's long term objectives (2 marks)
8 Which of the following statements are correct?
(i) Strategic information is mainly used by senior management in an organisation
(ii) Productivity measurements are examples of tactical information
(iii) Operational information is required frequently by its main users
A (i) and (ii) only
B (i) and (iii) only
C (i), (ii) and (iii) (2 mark)
9 A company manufactures two products P1 and P2 in a factory divided into two cost centres, X and Y.
The following budgeted data are available:
Cost centre
X Y
Allocated and apportioned fixed overhead costs $88,000 $96,000
Direct labour hours per unit:
Product P1 3.0 1.0
Product P2 2.5 2.0
Budgeted output is 8,000 units of each product. Fixed overhead costs are absorbed on a direct labour
hour basis.
What is the budgeted fixed overhead cost per unit for Product P2?
A $10
B $11
C $12
D $13 (2 marks)
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10 A manufacturing company uses a machine hour rate to absorb production overheads, which were
budgeted to be $130,500 for 9,000 machine hours. Actual overhead incurred were $128,480 and
8,800 machine hours were recorded.
What was the total under absorption of production overheads?
A $880
B $900
C $2,020
D $2,900 (2 marks)
11 Which of the following are disadvantages of flexible budgets?
(i) They are not very useful for decision-making
(ii) They are more time consuming to prepare than fixed budgets
(iii) They fail to provide an appropriate yardstick for cost control purposes
(iv) They are based on a set of assumptions which may be over simplistic
A (ii) and (iv) only
B (ii), (iii) and (iv) only
C (i), (ii) and (iii) only
D (i), (iii) and (iv) only (2 marks)
12 A company operates a job costing system. Job number 605 requires $300 of direct materials and $400
of direct labour. Direct labour is paid at the rate of $8 per hour. Production overheads are absorbed at a
rate of $26 per direct labour hour and non-production overheads are absorbed at a rate of 120% of
prime cost.
What is the total cost of job number 605?
A $2,000
B $2,400
C $2,840
D $4,400 (2 marks)
13 Which of the following are advantages of a participative approach to budgeting?
(i) Improved acceptance of the budget
(ii) Budgetary slack is reduced
(iii) Improved motivation
(iv) Relatively fast budget preparation
A (i) only
B (ii) and (iii) only
C (i) and (iii) only
D (ii) and (iv) only (2 marks)
14 Which of the following variances would be shown in an operating statement prepared under a standard
marginal costing system?
(i) Variable overhead expenditure variance
(ii) Variable overhead efficiency variance
(iii) Fixed overhead expenditure variance
(iv) Fixed overhead volume variance
A (i), (ii) and (iv)
B (i), (iii) and (iv)
C (i), (ii) and (iii)
D (ii), (iii) and (iv) (2 marks)
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15 A company's budgeted sales for last month were 10,000 units with a standard selling price of $20 per
unit and a contribution to sales ratio of 40%. Last month actual sales of 10,500 units with total revenue
of $204,750 were achieved.
What were the sales price and sales volume contribution variances?
Sales price variance ($) Sales volume contribution variance ($)
A 5,250 Adverse 4,000 Favourable
B 5,250 Adverse 4,000 Adverse
C 5,000 Adverse 4,000 Favourable
D 5,000 Adverse 4,000 Adverse (2 marks)
16 A company operates a standard absorption costing system. The standard fixed production overhead rate
is $15 per hour.
The following data relate to last month: Actual hours worked 5,500
Budgeted hours 5,000
Standard hours for actual production 4,800
What was the fixed production overhead capacity variance?
A $7,500 Adverse
B $7,500 Favourable
C $10,500 Adverse
D $10,500 Favourable (2 marks)
17 Value analysis can achieve which of the following?
(i) Eliminate costs
(ii) Reduce costs
(iii) Increase quantity sold
(iv) Increase sales price
A (ii) and (iii) only
B (i) and (ii) only
C (iii) and (iv) only
D (i), (ii), (iii) and (iv) (2 marks)
18 How does setting objectives relate to the mission statement of an organisation?
A The mission gives managers a focus for setting objectives
B The mission states what the objectives are
C The mission has nothing to do with setting objectives
D The mission and the objectives are identical (2 marks)
19 Which of the following statements best describe critical success factors?
(i) The financial ratios used by analysts to evaluate the organisation
(ii) The personal objectives of the strategic management team
(iii) Derived from the mission statement and objectives of the organisation
(iv) The key areas that a business needs to succeed in, to ensure it achieves overall aims
A (i), (ii), (iii) and (iv)
B (ii) and (iv) only
C (i) and (iii) only
D (iii) and (iv) only (2 marks)
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20 Which of the following best describes tactical information?
A Mainly qualitative with some numerical analysis
B Sourced largely from external and informal sources
C Mainly quantitative, internal and generated frequently
D Based on operational information with some interpretation applied (2 marks)
21 A company has two production departments and two service departments with the following fixed
overheads:
Production Service
A B C D
$'000 $'000 $'000 $'000
1,000 1,200 1,200 1,600
Service department C divides its time between the other departments in the ratio 3:2:1 (for A, B, and D
respectively). Department D spends 40% of its time servicing Department A and 60% servicing
Department B. If all service departments' overheads are allocated to production departments, the total
fixed overhead cost of Department A is:
A $2,400,000
B $2,200,000
C $1,320,000
D $2,320,000 (2 marks)
22 An abnormal loss would arise when:
(i) Total losses are less than expected
(ii) Total losses are greater than expected
(iii) Total output is less than expected
(iv) Total output is greater than expected
Which one of the following is correct?
A (i) only
B (i) and (ii)
C (ii) and (iii)
D (iii) and (iv) (2 marks)
23 An investment will produce an annual return of $1,500 in perpetuity with the first receipt starting in
3 years' time.
What is the present value of this perpetuity discounted at 6%?
A $21,000
B $22,250
C $25,000
D $25,250 (2 marks)
24 Organisations often have to make a trade-off between short-term and long-term objectives. Which of the
following statements are correct?
(i) Making short-term targets realistic can encourage a long-term view
(ii) Linking managers' rewards to share price may encourage a long-term view
A Both are true
B Both are false
C (i) is true and (ii) is false
D (i) is false and (ii) is true (2 marks)
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25 A company uses 9,000 units of a component per annum. The component has a purchase price of $40
per unit and the cost of placing an order is $160. The annual holding cost of one component is equal to
8% of its purchase price.
What is the Economic Order Quantity (to the nearest unit) of the component?
A 530
B 671
C 949
D 1,342 (2 marks)
26 Consider the following statements:
(i) Job costing is only applicable to service organisations.
(ii) Batch costing can be used when a number of identical products are manufactured together to go
into finished inventory.
Is each statement TRUE or FALSE?
Statement (i) Statement (ii)
A False False
B False True
C True True
D True False (2 marks)
27 An organisation absorbs overheads on a machine hour basis. The planned level of activity for last month
was 30,000 machine hours with a total overhead cost of $247,500. Actual results showed that 28,000
machine hours were recorded with a total overhead cost of $238,000.
What was the total under absorption of overhead last month?
A $7,000
B $7,500
C $9,500
D $16,500 (2 marks)
28 The following information relates to a manufacturing company for next period:
units $
Production 14,000 Fixed production costs 63,000
Sales 12,000 Fixed selling costs 12,000
Using absorption costing for the profit for next period has been calculated as $36,000.
What would the profit for next period be using marginal costing?
A $25,000
B $27,000
C $45,000
D $47,000 (2 marks)
29 Information relating to two processes (F and G) was as follows:
Process Normal loss as % of input Input litres Output litres
F 8 65,000 58,900
G 5 37,500 35,700
For each process, was there an abnormal loss or an abnormal gain?
Process F Process G
A Abnormal gain Abnormal gain
B Abnormal gain Abnormal loss
C Abnormal loss Abnormal gain
D Abnormal loss Abnormal loss (2 marks)
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30 Last month 27,000 direct labour hours were worked at an actual cost of $236,385 and the standard
direct labour hours of production were 29,880. The standard direct labour cost per hour was $8.50.
What was the labour efficiency variance?
A $17,595 Adverse
B $17,595 Favourable
C $24,480 Adverse
D $24,480 Favourable (2 marks)
31 The pharmacy in a busy hospital uses pre-determined rates for absorbing total overheads, based on the
budgeted number of prescriptions to be handled. A rate of $7 per prescription has been calculated, and
the following overhead expenditures have been estimated at two activity levels.
Total overheads Number of prescriptions
$
97,000 13,000
109,000 16,000
During a particular period fixed overheads were $45,000.
Based on the data above, what was the budgeted level of activity in prescriptions to be handled during
the period in question?
A 13,000
B 15,000
C 16,000
D 33,333 (2 marks)
32 Which one of the following would be classified as indirect labour?
A Assembly workers on a car production line
B Bricklayers in a house building company
C Forklift truck drivers in the stores of an engineering company
D Tutors in a private education business (2 marks)
33 The correlation coefficient (r) for measuring the connection between two variables (x and y) has been
calculated as 0.6.
How much of the variation in the dependent variable (y) is explained by the variation in the independent
variable (x)?
A 36%
B 40%
C 60%
D 64% (2 marks)
34 In a process where there are no work–in–progress inventories, two joint products (J and K) are created.
Information (in units) relating to last month is as follows:
Opening inventory of Closing inventory of
Product Sales finished goods finished goods
J 6,000 100 300
K 4,000 400 200
Joint production costs last month were $110,000 and these were apportioned to joint products based
on the number of units produced.
What were the joint production costs apportioned to product J for last month?
A $63,800
B $64,000
C $66,000
D $68,200 (2 marks)
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35 Budgeted results and actual results for September are shown below.
Fixed budget Actual
12,000 units 11,200 units
$ $
Sales 600,000 571,200
Direct costs (144,000) (145,600)
Fixed costs (70,000) (69,500)
Profit/(loss) 386,000 356,100
What is the profit for the flexed budget?
A $360,267
B $355,600
C $356,100
D $425,600 (2 marks)
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Section B – ALL THREE questions are compulsory and MUST be
attempted
1 The graph below shows the standard fixed overhead cost per unit, the total budgeted fixed overhead cost
and the actual fixed overhead cost for the month of June. The actual number of units produced in June
was 7,500 units.
Number of units produced
1000
2500
5000
7500
10000
12500
15000
20000
2000 3000 4000 5000 6000 7000 8000 9000 x
Fixed
overhead
cost
$
Budget fixed overhead cost
Actual fixed overhead cost
17500
(a) What is the over- or under-absorbed overhead for the month of June? (2 marks)
(b) What is the fixed overhead expenditure variance for the month of June? (2 marks)
(c) What is the fixed overhead volume variance for the month of June? (2 marks)
(d) Briefly explain TWO factors that should be considered before deciding to investigate a variance.
(4 marks)
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2 HF Co is considering two different investment options, investment A and investment B. Investment B
requires an initial investment of $250,000, and has a net present value of $40,000 using a cost of
capital of 10%.
(a) Investment A generates the following cash flows.
$'000
Initial investment 350
Incremental cash flows: Year 1 50
Year 2 110
Year 3 130
Year 4 150
Year 5 100
(i) Calculate the net present value of investment A using a 10% cost of capital (to the nearest
$'000). (3 marks)
(ii) Calculate the Internal Rate of Return (IRR) of the investment. (4 marks)
(b) The directors have decided to ignore the IRR and focus on the NPV alone. Advise the company
directors how they should choose between the two investments and what they should consider.
(3 marks)
3 The management accountant of Vin Co has collected the following information for the year ending
31 December 20X8.
Vin Co operating data for the year ended 31 December 20X8
Capital employed $4,000,000
Operating profit $600,000
Sales revenue $3,600,000
Number of buses in operation 40 buses
Total number of passenger seats available 1,920 seats
Total number of passenger kilometres travelled 39,000,000 passenger kilometres
Total bus kilometres travelled 3,250,000 kilometres
Total fuel consumed 764,705 litres
Required
(a) Calculate the following ratios and other statistics for Vin Co for the year ended 31 December
20X8.
(i) Return on capital employed (1 mark)
(ii) Return on sales (1 mark)
(iii) Average maximum capacity per bus (1 mark)
(iv) Average bus occupancy as a percentage of maximum capacity (1.5 marks)
(v) Average bus km travelled per litre of fuel (1.5 marks)
(6 marks)
(b) The management accountant has calculated that Vin Co's fuel consumption per passenger
kilometre is higher than that of the industry average. Give two reasons apparent from your
analysis why Vin Co's fuel consumption per passenger kilometre is higher than that of the
industry average. (2 marks)
(c) 'Benchmarking involves the establishment, through data gathering, of targets and comparators
from which an organisation's relative level of performance can be measured. By the adoption of
the best practices identified, performance may be improved.'
Explain the type of benchmarking known as functional benchmarking. (2 marks)
(Total = 100 marks)
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Answers to
Mock Exam 2
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MOCK EXAM 2 // ANSWERS
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SECTION A
1 B $3,500 ×
140
180
= $2,722
2 C Both statements are true.
3 A
Cost type Total cost for
125 units
Cost per unit @
125 units
Total cost for
180 units
Cost per unit @
180 units
$ $ $ $
T1 1,000 8.00 1,260 7.00
T2 1,750 14.00 2,520 14.00
T3 2,475 19.80 2,826 13.75
T4 3,225 25.80 4,644 25.80
Cost types T1 and T3 have different costs per unit at different activity levels and are therefore
most likely to be classified as semi-variable costs.
Cost types T2 and T4 have the same cost per unit at different levels of activity and are therefore
wholly variable costs.
4 C The variable element of the cost is calculated using any number of units.
Using 10 units, total cost less fixed element = $250 – $200 = $50
$50 / 10 = $5 per unit.
Therefore statement 4 is incorrect.
5 C Effectiveness
6 C Both statements are true. Life cycle costing tracks and accumulated costs and revenues
attributable to each product over the entire product life cycle. This means that more accurate
feedback information is available on the organisation's success or failure in developing new
products.
7 D The annual budget is set within the framework of the long-term plan. It acts as the first step
towards the achievement of the organisation's long-term objectives. Therefore the long term
objectives must be established before any of the other budget tasks can be undertaken and the
correct answer is D.
8 C Statements (i), (ii) and (iii) are all correct.
9 D
Cost centre
x y
$ $
Overheads 88,000 96,000
Budgeted direct labour hours
Product P1 24,000 hours 8,000 hours
Product P2 20,000 hours 16,000 hours
44,000 hours 24,000 hours
Budgeted overhead absorption rate
Cost centre X =
$88,000
44,000 hours
= $2 per direct labour hour
Cost centre Y =
$96,000
24,000 hours
= $4 per direct labour hour
Budgeted fixed overhead cost per unit – Product P2
Cost centre x = 2.5 hours $2 per direct labour hour
= $5
Cost centre y = 2 hours @ $4 per direct labour hour
= $8
fixed overhead per unit of Product P2 = $(5+8)
= $13
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10 A
$
Overhead absorbed (8,800 machine hours × $14.50*) 127,600
Actual overhead 128,480
Under-absorbed overhead 880
* Budgeted overhead absorption rate =
$130,500
9,000 machine hours
= $14.50 per machine hour
11 A They are more time consuming than fixed budgets and they are based on a set of assumptions
which may be over simplistic. Managers may not have time available to prepare flexible budgets
to cover all possible scenarios. Therefore they will often make simplifying assumptions. They are
useful for decision making as they are flexed to the actual level of activity, and therefore allow
actual costs to be compared against the standard costs for that actual activity.
12 C Total cost – job number 605
$
Direct materials 300
Direct labour 400
Prime cost 700
Production overheads ($26 × $400/$8) 1,300
2,000
Non-production overheads (120% × $700) 840
Total cost – job number 605 2,840
13 C (i) and (iii) only. It usually takes longer to produce a participative budget than to produce an
imposed budget. In the process of participative budgeting, managers may deliberately
overestimate costs, introducing budgetary slack, so that they will not be blamed for possible
future poor results.
14 C (i), (ii) and (iii). The fixed overhead volume variance represents the over- or under-absorption of
overheads caused by a change in production volume. This means that the fixed overhead volume
variance cannot arise in a standard marginal costing system, only in an absorption costing
system.
* 900 units – 100 units = 800 units
15 A
$
Sales revenue from 10,500 units should have been × $20) 210,000
but was 204,750
Sales price variance 5,250 (A)
contributionper unit
$20
= 0.4
contribution per unit = 0.4 × $20
= $8
Budgeted sales 10,000 units
Actual sales 10,500 units
Sales volume variance 500 units (F)
× standard contribution per unit × $8
Sales volume contribution variance $4,000 (F)
16 B
Budgeted hours of work 5,000 hours
Actual hours of work 5,500 hours
Fixed production overhead capacity variance 500 hours (F)
× standard fixed production overhead rate × $15
Fixed production overhead capacity variance (in $) 7,500 (F)
17 B (i) and (ii) only. Value analysis focuses on costs, not sales volumes or prices.
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18 A The mission statement gives the purpose and strategy of the organisation. The business will then
use this as a focus for setting appropriate objectives.
19 D By monitoring the critical success factors, management ensure that they are on track to succeed
in their mission and objectives. The personal objectives of the strategic management team should
mirror the critical success factors of the organisation, but are likely to contain personal objectives
such as individual development targets. The CSFs may contain some of the financial ratios used
by analysts to evaluate the organisation but there will be other qualitative factors as well. The
CSFs should drive the information requirements of the organisation – not the other way round.
20 D Tactical information is medium term and drawn largely from internal/operational sources. It is the
job of middle management to analyse it further in order to use it for decision making. Quantitative
information that is generated frequently is normally found at the operational level and qualitative
information from a range of sources will be found more at the strategic level.
21 D
A B C D
$'000 $'000 $'000 $'000
Fixed overheads 1,000 1,200 1,200 1,600
C (3:2:1) 600 400 (1,200) 200
1,800
D (40:60) 720 1,080 (1,800)
2,320
22 C (ii) If more losses have been incurred than expected, the loss is abnormally high.
(iii) If output is less than expected, losses must be higher than expected.
23 B Value of income one year before first receipt is due:
$1,500/0.06 = $25,000
Discounting back to today using a discount factor of 6% over 2 years:
PV = $25,000 × 0.890
= $22,250
24 A Both are true. If budget targets are unrealistically tough, a manager will be forced to make tradeoffs
between the short and long term. Linking managers' rewards to share price may encourage
goal congruence.
25 C EOQ = 2 Co D / Ch
Co = $160
D = 9,000 units
Ch = 8% $40 = $3.20
EOQ = 21609,000 / 3.2
= 949 units
26 B Job costing can also be used in manufacturing organisations.
27 A Overhead absorption rate = $247,500/30,000 = $8.25
Absorbed overheads = 28,000 $8.25 = $231,000
Actual cost = $238,000
Under absorption = 238,000 – 231,000 = $7,000
28 B The fixed overhead absorbed into the inventory valuation is the difference in the marginal costing
profit.
Inventory = 14,000 – 12,000 = 2,000 units
Value of fixed production costs absorbed into inventory
= 2,000 63,000/14,000
= $9,000
Marginal costing profit = 36,000 – 9,000 = $27,000
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29 C Process F: Expected output = 92% 65,000 = 59,800 litres
Actual output = 58,900 litres
There is an abnormal loss
Process G: Expected output = 95% 37,500 = 35,625 litres
Actual output = 35,700 litres
There is an abnormal gain
30 D Labour efficiency variance
$
5,500 units should have taken (× 3 hours per unit) 29,880 hrs
but did take 27,000 hrs
Labour efficiency variance (in hours) 2,880 hrs (F)
x standard rate per unit × $8.50
$24,480 (F)
31 B 15,000
Variable overhead + fixed overhead = total overhead
Fixed overhead per prescription = $7 – $4 = $3
Total fixed overheads = $45,000
Budgeted activity level =
$45,000
$3
= 15,000 prescriptions
32 C The drivers are not working directly on engineering projects
33 A The variation is given by the coefficent of determination, r2
r2 = 0.6 x 0.6 = 0.36
34 D Production in units:
J: 6,000 – 100 + 300 = 6,200
K: 4,000 – 400 + 200 = 3,800
10,000
Joint costs apportioned to J:
6,200/10,000 x $110,000 = $68,200
35 B Budgeted sales per unit = $600,000/12,000 = $50 per unit
Budgeted direct costs per unit = $144,000/12,000 = $12 per unit
Budgeted fixed costs are $70,000
Flexed budget for 11,200 units
$
Sales (11,200 × $50) 560,000
Direct costs (11,200 × $12) (134,400)
Fixed costs (70,000)
Profit 355,600
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285
SECTION B
1
Number of units produced
1000
2500
5000
7500
10000
12500
15000
20000
2000 3000 4000 5000 6000 7000 8000
Actual = 7,500
9000 x
Budget fixed overhead variance
Fixed o/h expenditure varinace
Volume
variance
Std cost at
actual activity
level
=$15,000
Total
variance
Actual fixed overhead variance
17500
(a) $2,500 Under-absorbed
Total fixed overhead variance = $17,500 – $15,000 = $2,500 Adverse
(b) Fixed overhead expenditure variance = $12,500 – $17,500 = $5,000 Adverse
(c) Fixed overhead volume variance = $15,000 – $12,500 = $2,500 Favourable
(d) Factors to be considered before deciding to investigate a variance.
Materiality
Small variations in a single period are bound to occur and are unlikely to be significant.
Obtaining an 'explanation' is likely to be time-consuming and irritating for the manager concerned.
The explanation will often be 'chance', which is not, in any case, particularly helpful. For such
variations further investigation is not worthwhile.
Cost
The likely cost of an investigation needs to be weighed against the cost to the organisation of
allowing the variance to continue in future periods.
You only need to discuss three factors but your answer may also have included the following.
Fixed
overhead
cost
$
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Variance trend
Caution should be exercised before investigating a 'snapshot' variance in too much detail. For example,
an adverse materials usage variance in Month 1 could indicate that control action is needed, but in a
large company with many processes to monitor, it may be advisable to postpone direct action until the
variances for subsequent months have been analysed. If they show a favourable trend then intervention
will not be necessary.
Interrelationship of variances
Quite possibly, individual variances should not be looked at in isolation. One variance might be
inter-related with another, and much of it might have occurred only because the other, inter-related,
variance occurred too. When two variances are interdependent (interrelated) one will usually be adverse
and the other one favourable.
Controllability
Controllability must also influence the decision whether to investigate further. If there is a general
worldwide price increase in the price of an important raw material there is nothing that can be done
internally to control the effect of this. Uncontrollable variances call for a change in the plan, not an
investigation into the past.
2 (a) (i) Calculation of net present value at a discount rate of 10%.
Discount Present
Year Cash flow factor value
$'000 10% $'000
0 (350) 1.000 (350.00)
1 50 0.909 45.45
2 110 0.826 90.86
3 130 0.751 97.63
4 150 0.683 102.45
5 100 0.621 62.10
48.49
The NPV is $49,000 (to the nearest $'000)
(ii) The IRR defines the DCF rate of return at which a project's NPV is zero. At 10%, the
project has a positive NPV of $49,000. Therefore use a higher discount factor to calculate
a negative NPV for the project.
Choose a discount rate of say 15%.
Discount Present
Year Cash flow factor value
$'000 15% $'000
0 (350) 1.000 (350)
1 50 0.870 44
2 110 0.756 83
3 130 0.658 86
4 150 0.572 86
5 100 0.497 50
NPV = (1)
So IRR = 10 +
49
× 15 - 10
49 + 1
% = 14.9%, say 15%.
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MOCK EXAM 2 // ANSWERS
287
(b) A positive NPV means that the present value of the cash inflows from a project is greater than
the present value of the cash outflows. Both projects have a positive net present value and
therefore both projects are worthwhile. On the basis of NPV alone, the project with the higher
NPV should be chosen.
Project A, however, requires a much higher initial investment ($350,000 instead of
$250,000).Management need to consider whether there is any difference in risk between the
two projects and whether some other investment could be made if Project B were chosen
instead.
There could also be some non-financial aspects of the projects which management should
consider before making a decision.
3 (a) Ratios and statistics
(i) Return on capital employed
(Operating profit ÷ Capital employed 100)
$600,000 ÷ $4,000,000 100 = 15%
(ii) Return on sales (net profit percentage)
Operating profit ÷ Sales revenue 100
$600,000 ÷ $3,600,000 100 17%
(iii) Average maximum bus capacity
Total number of passenger seats available ÷ number of buses
1,920 seats ÷ 40 buses 48 seats per bus
(iv) Average bus occupancy
Total number of passenger km travelled ÷
(Total km travelled Average maximum bus capacity)
39,000,000 km ÷ (3,250,000 48 seats) 100% 25% of maximum capacity
(v) Average km travelled per litre of fuel
Total km travelled ÷ Total fuel consumed
3,250,000 kilometres ÷ 764,705 litres 4.25 km/litre
(b) Reasons why Vin Co's fuel consumption per passenger kilometre is higher than the industry
average.
– Vin Co's buses operate at only 25% capacity, this means that the fuel cost per bus km is
spread over fewer passengers.
– Vin Co's kilometres travelled per litre of fuel is lower than the industry average. This could
be due to it operating a city service. Even if it operated at industry average levels of bus
occupancy its fuel consumption per passenger kilometre would still be higher.
(c) Functional benchmarking (also known as operational or generic benchmarking) involves
comparisons with the performance of external practitioners of similar functions. These
practitioners need not be in the same industry. Vin Co could, for example, compare the fuel
consumption of its vehicles with those of a road haulage company.
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FM A/F2 MANAGEMENT ACCOUNTING (03/16)
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