Section 1
OBJECTIVE TEST QUESTIONS SECTION A
SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES
ACTIVITY BASED COSTING
1
VPS is a large manufacturing business that is introducing an activity based costing system
into its business. VPS ships components via its own logistics operation to its central
manufacturing centre in Glasgow from a wide variety of locations. It is attempting to
identify the correct cost driver for the cost pool called 'component handling'.
Which of the following would be the correct figure to use?
A
B
C
D
2
Average components per unit
Total number of components shipped
Average distance travelled by a component
Total components-distance travelled
A company which makes two products, Alpha and Zeta, uses activity-based costing to
absorb its overheads. Jt has recently identified a new overhead cost pool for inspection
costs and has decided that the cost driver is the number of inspections.
The following information has been provided:
Total inspection costs
Production volume (units)
Machine hours per unit
Units per batch
Inspections per batch
$250,000
Alpha
2,500
1
500
4
Zeta
8,000
1.5
1,000
1
The inspection cost per unit for product Alpha is equal to !Pick from lisij
List options are as follows:
•
$23.81
•
$17.24
•
•
$71.43
$80.00
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3
Which of the following statements are true regarding ABC and cost drivers?
(1) A cost driver is any factor that causes a change in the cost of an activity.
(2) For long-term variable overhead costs, the cost driver will be the volume of activity.
(3) Traditional absorption costing tends to under-allocate overhead costs to low-volume
products.
A
1 and 3
B
2 and 3
1 and 2
C
1, 2 and 3
D
4
Which of the following statements are true regarding activity-based costing?
(1)
(2)
A
B
C
D
5
'
A cost pool is an activity which consumes resources and for which overhead costs are
identified and allocated.
The overhead absorption rate (OAR) is calculated in the same way as the absorption
costing OAR, and the same OAR will be calculated for each activity.
1 only
2 only
Neither 1 nor 2
Both 1 and 2
This objective test question contains a question type which will only appear in a computer­
based exam, but this question provides valuable practice for all students whichever version
of the exam they are taking.
The ABC Company manufactures two products, Product Alpha and Product Beta. Both are
produced in a very labour-intensive environment and use similar processes. Alpha and Beta
differ by volume. Beta is a high-volume product, while Alpha is a low-volume product.
Details of product inputs, outputs and the costs of activities are as follows:
Alpha
Beta
Direct labour
hours/unit
5
5
Annual output
(units)
1,200
12,000
Number of
purchase orders
75
85
Number of
set-ups
40
60
160
100
Fixed overhead costs amount to a total of $420,000 and have been analysed as follows:
$
100,000
145,000
175,000
Volume-related
Purchasing related
Set-up related
Using a traditional method of overhead absorption based on labour hours, what is the
overhead cost per unit for each unit of product Alpha? (2 d.p.)
$
2
31.82
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OBJECTIVE TEST QUESTIONS - SECTION A: SECTION 1
6
The ABC Company manufactures two products, Product Alpha and Product Beta. Both are
produced in a very labour-intensive environment and use similar processes. Alpha and Beta
differ by volume. Beta is a high-volume product, while Alpha is a low-volume product.
Details of product inputs, outputs and the costs of activities are as follows:
Direct labour
hours/unit
Annual output
(units)
Number of
purchase orders
Numberof
set-ups
5
1,200
12,000
75
85
40
60
160
100
Alpha
Beta
s
Fixed overhead costs amount to a total of $420,000 and have been analysed as follows:
$
100,000
145,000
175,000
Volume-related
Purchasing related
Set-up related
Using a traditional method of overhead absorption based on labour hours, what is the
overhead cost per unit for each unit of product Beta?
A
$6.36
B
$22.75
C
$31.82
D
$122.55
7
The ABC Company manufactures two products, Product Alpha and Product Beta. Both are
produced in a very labour-intensive environment and use similar processes. Alpha and Beta
differ by volume. Beta is a high-volume product, while Alpha is a low-volume product.
Details of product inputs, outputs and the costs of activities are as follows:
Direct labour
hours/unit
Annual output
(units)
Numberof
purchase orders
Numberof
set-ups
5
1,200
12,000
75
85
40
60
160
100
Alpha
Beta
s
Fixed overhead costs amount to a total of $420,000 and have been analysed as follows:
Volume-related
Purchasing related
Set-up related
.1
$
100,000
145,000
175,000
Using Activity Based Costing as method of overhead absorption, what is the overhead
cost per unit for each unit of product Alpha?
$6.36
A
B
$22.75
C
$122.55
Cannot be determined without more information
D
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A company makes two products using the same type of materials and skilled workers. The
following information is available:
Budgeted volume (units)
Material per unit {$)
Labour per unit($)
Product B
2,000
20
20
Product A
1,000
10
5
Fixed costs relating to material handling amount to $100,000. The cost driver for these
costs is the volume of material purchased.
General fixed costs, absorbed on the basis of labour hours, amount to $180,000.
Using activity-based costing, what is the total fixed overhead amount to be absorbed into
each unit of product B (to the nearest whole$)?
A
B
C
D
9
$113
$120
$40
$105
This objective test question contains a question type which will only appear in a computer­
based exam, but this question provides valuable practice for all students whichever version
of the exam they are toking.
A company manufactures two products, C and D, for which the following information is
available:
ProductC
1,000
8
13
5
Budgeted production (units)
Labour hours per unit/in total
Number of production runs required
Number of inspections during production
Product D
4,000
10
15
3
Total
5,000
48,000
28
8
Total production set up costs $140,000
Total inspection costs $80,000
Other overhead costs $96,000
Other overhead costs are absorbed on the basis of labour hours per unit.
Using activity-based costing, what is the budgeted overhead cost per unit of product D?
(2 d.p.)
$
4
46.25
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OBJECTIVE TEST QUESTIONS - SECTION A: SECTION 1
10
A company is changing its costing system from traditional absorption costing based on
labour hours to Activity Based Costing. It has overheads of $156,000 which are related to
taking material deliveries.
The delivery information about each product is below.
Z
Y
Product:
X
Total units required
1,000
2,000
3,000
Delivery size
200
400
1,000
Total labour costs are $360,000 for 45,000 hours. Each unit of each product takes the same
number of direct hours.
Assuming that the company uses the number of deliveries as its cost driver, is there an
increase or a decrease in unit costs arising from the change from Absorption Costing to
Activity Based Costing?
Increase
Decrease
Product X
ProductY
Product Z
11
A company uses activity-based costing to calculate the unit cost of its products. The figures
for Period 3 are as follows: production set-up costs are $84,000. Total production is 40,000
units of each of products A and B, and each run is 2,000 units of A or 5,000 units of B.
What is the set-up cost per unit of B? (2 d.p.)
$
,
12
DRP Ltd has recently introduced an ABC system. It manufactures three products, details of
which are set out below:
Product:
Budgeted annual production (units)
Batch size (units)
Machine set-ups per batch
Purchase orders per batch
Processing time per unit (minutes)
D
100,000
100
3
2
2
R
100,000
50
4
1
3
p
50,000
25
6
1
3
Three cost pools have been identified. Their budgeted costs for the year ending 30 June
2003 are as follows:
Machine set-up costs
Purchasing of materials
Processing
$150,000
$70,000
$80,000
What is the budgeted machine set-up cost per unit of product R?
A
B
C
D
$6.52
$0.52
$18.75
$1.82
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This objective test question contains a question type which will only appear in a computer­
based exam, but this question provides valuable practice for all students whichever version
of the exam they are taking.
A company makes products A and B. It is experimenting with Activity Based Costing.
Production set-up costs are $12,000; total production will be 20,000 units of each of
products A and B. Each run is 1,000 units of A or 5,000 units of B.
What is the set-up cost per unit of A, using ABC?
$
TARGET COSTING
14
The following are all steps in the implementation of the target costing process for a
product:
(1) Calculate the target cost.
(2) Calculate the estimated current cost based on the existing product specification.
(3) Set the required profit.
(4) Set the selling price.
(5) Calculate the target cost gap.
Which of the following represents the correct sequence if target costing were to be used?
A
B
C
D
15
In target costing, which of the following would be a legitimate strategy to reduce a cost
gap for a product that existed in a competitive industry with demanding shareholders?
A
B
C
D
16
Increase the selling price
Reduce the expectation gap by reducing the selling price
Reducing the desired margin on the product
Mechanising production in order to reduce average production cost
Which of the following strategies would be immediately acceptable methods to reduce an
identified cost gap?
A
B
C
D
6
(1), (2), {3}, (4), (S)
{2), (3), (4), (1), (5)
(4), (3), (1), (2), (S}
(4), (5), (3), (1), {2)
Reduce the desired margin without discussion with business owners
Reduce the predicted selling price
Source similar quality materials from another supplier at reduced cost
Increase the predicted selling price
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25
Which of the following statements are true regarding the Justification of the use of life
cycle costing?
(1)
(2)
(3)
(4)
A
B
C
D
26
Which of the following statements is/are true regarding lifecycle costing?
(1)
(2)
{3)
A
B
C
D
27
Product life cycles are becoming increasingly short. This means that the initial costs
are an increasingly important component in the product's overall costs.
Product costs are increasingly weighted to the start of a product's life cycle, and to
properly understand the profitability of a product these costs must be matched to
the ultimate revenues.
The high costs of {for example) research, design and marketing in the early stages in a
product's life cycle necessitate a high initial selling price.
Traditional capital budgeting techniques do not attempt to minimise the costs or
maximise the revenues over the product life cycle.
1, 2 and 4
2 and 3 only
1 and 3 only
1, 2, 3 and 4
life cycle costing takes into account all costs incurred in a product life cycle with
exception of sunk costs incurred on research and development.
Life cycle costing ensures a profit is generated over the life of the product.
Life cycle costing is most useful for products with an even weighting of costs over
their life.
1 and 2
2 only
2 and 3
1, 2 and 3
Company B is about to being developing a new product for launch in its existing market.
They have forecast sales of 20,000 units and the marketing department suggest a selling
price of $43/unit. The company seeks to make a mark-up of 40% product cost. It is
estimated that the lifetime costs of the product will be as follows:
(1) Design and development costs $43,000.
(2) Manufacturing costs $15/unit.
(3) Plant decommissioning costs $30,000.
The company estimates that if it were to spend an additional $15,000 on design,
manufacturing costs/unit could be reduced.
What is the life cycle cost?
A
B
C
D
10
$18.65
$22
$22.87
$24
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43
W Company has been asked to quote for a special contract. The contract requires
100 hours of labour. However, the labourers, who are each paid $15 per hour, are working
at full capacity.
There is a shortage of labour in the market. The labour required to undertake this special
contract would have to be taken from another contract, 2, which currently utilises
500 hours of labour and generates $5,000 worth of contribution.
If the labour was taken from contract Z, then the whole of contract Z would have to be
delayed, and such delay would invoke a penalty fee of $1,000.
What is the relevant cost of the labour for the special contract?
A
B
C
0
44
$1,000
$1,500
$2,500
$7,500
An organisation is considering the costs to be incurred in respect of a special order
opportunity. The order would require 1,250 kgs of material D, that is readily available and
regularly used by the organisation on its normal products.
There are 265 kgs of material D in inventory which cost $795 last week. The current market
price is $3.24 per kg. Material D is normally used to make product X. Each unit of X requires
3 kgs of material D, and if material D is costed at $3 per kg, each unit of X yields a
contribution of $15.
What is the relevant cost of material D to be included in the costing of the special order?
A
B
C
D
45
$3,990
$4,050
$10,000
$10,300
,
H has in inventory 15,000 kg of M, a raw material which it bought for $3/kg five years ago,
for a product line which was discontinued four years ago. M has no use in its existing state
but could be sold as scrap for $1.00 per kg. One of the company's current products (HN)
requires 4 kg of a raw material, available for $5.00 per kg. M can be modified at a cost of
$0.75 per kg so that it may be used as a substitute for this material. However, after
modification, 5 kg of M is required for every unit of HN to be produced.
H has now received an invitation to tender for a product which could use M in its present
state.
What is the relevant cost per kg of M to be included in the cost estimate for the tender?
A
B
C
0
16
$0.75
$1.00
$3.00
$3.25
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Blunt is considering a new project but is unsure how much overhead to include in the
calculations to help him decide whether or not to proceed. Existing fixed overheads are
absorbed at the rate of $8 per hour worked. Blunt is certain that the project will involve an
incremental 500 labour hours.
The project will involve extra machine running costs and these variable overheads cost him
$4 per hour. The number of extra machine hours is expected to be 450 hours. The
difference between this figure and the 500 labour hours above is expected idle time.
The project will require a little more temporary space that can be rented at a fixed cost of
$1,200 for the period of hire. This overhead is not included in the fixed overhead
absorption rate above.
49
What is the overhead to be charged against the project decision?
A
$3,000
8
$3,200
C
D
$7,000
$7,200
Cleverclogs is short of labour for a new one-off project needing 600 hours of labour and has
choices as to where to source this. He could hire new people temporarily from an agency
at a cost of $9 per hour. Alternatively he could recruit new temporary staff at a fixed cost
of advertising of $1,200 but then only pay $6 per hour for the time. He could also redirect
some staff from existing work who are currently paid $7 per hour and who make sandals
that generate a contribution of $3 per hour after all variable costs. Sandals are a good
selling product and Cleverclogs will lose the production and the related sales whilst staff is
working on the new one-off project.
50
What is the relevant cash flow?
' C
B
$1,800
$3,600
$4,200
D
$4,800
A
51
,.
Drippy is producing a list of relevant cash flows regarding a decision she has to make. She is
considering launching a new type of USB memory stick that guarantees better protection to
the host computer.
Drippy manages many existing products and has a standing arrangement with a technology
magazine for advertising space entitling her to advertise each month. The contract has just
been signed and covers the next twelve months. Payment is made in the month following
an advert appearing. Drippy is going to use the magazine to advertise her exciting new USB
stick.
Is the cost of the advertising space best described as a:
A
B
C
D
18
Sunk cost
Historic cost
Relevant cost
Committed cost
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OBJECTIVE TEST QUESTIONS - SECTION A: SECTION 1
52
Which of the following terms would not normally be used to describe a relevant cost for a
decision?
Incremental
A
Future
B
C
Material
D
Cash
53
X pie intends to use relevant costs as the basis of the selling price for a special order: the
printing of a brochure. The brochure requires a particular type of paper that is not regularly
used by X pie although a limited amount is in X pie's inventory which was left over from a
previous job. The cost when X pie bought this paper last year was $15 per ream and there
are 100 reams in inventory. The brochure requires 250 reams. The current market price of
the paper is $26 per ream, and the resale value of the paper in inventory is $10 per ream.
What is the relevant cost of the paper to be used in printing the brochure?
A
B
C
D
$2,500
$4,900
$5,400
$6,500
COST VOLUME PROFIT ANALYSIS
54
A company makes and sells product X and product Y. Twice as many units of product Y are
made and sold as that of product X. Each unit of product X makes a contribution of $10 and
each unit of product Y makes a contribution of $4. Fixed costs are $90,000.
What is the total number of units which must be made and sold to make a profit of
$45,000?
A
B
C
D
55
7,500
22,500
15,000
16,875
Betis limited is considering changing the way it is structured by asking its employed staff to
become freelance. Employees are currently paid a fixed salary of $240,000 per annum, but
would instead be paid $200 per working day. On a typical working day, staff can produce
40 units. Other fixed costs are $400,000 pa.
The selling price of a unit is $60 and material costs are $20 per unit.
What will be the effect of the change on the breakeven point of the business and the
level of operating risk?
A
B
C
D
The breakeven point reduces by 6,000 units and the operating risk goes down
The breakeven point reduces by 4,571 units and the operating risk goes down
The breakeven point reduces by 4,571 units and the operating risk goes up
The breakeven point reduces by 6,000 units and the operating risk goes up
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This objective test question contains a question type which will only appear in a computer­
based exam, but this question provides valuable practice for all students whichever version
of the exam they are taking.
P CO makes two products - Pl and P2 - budgeted details of which are as follows:
P2
Pl
Selling price
Cost per unit:
Direct materials
Direct labour
Variable overhead
Fixed overhead
Profit per unit
$
10.00
$
8.00
3.50
1.50
0.60
1.20
3.20
4.00
1.00
0.40
1.00
1.60
Budgeted production and sales for the year ended 30 November 2015 are:
Product Pl
Product P2
10,000 units
12,500 units
The fixed overhead costs included in Pl relate to apportionment of general overhead costs
only. However P2 also includes specific fixed overheads totalling $2,500.
If only product Pl were to be made, how many units (to the nearest unit) would need to
be sold In order to achieve a profit of $60,000 each year?
57
This objective test question contains a question type which will only appear in a computer­
based exam, but this question provides valuable practice for all students whichever version
of the exam they are taking.
The CS ratio for a business is 0.4 and its fixed costs are $1,600,000. Budget revenue has
been set at 6 times the amount of the fixed costs.
What is the margin of safety% measured in revenue?
"
20
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