CALCULATING AND REPORTING PROFIT
1. Which statements about marginal and absorption costing are true?
I.
II.
III.
Under marginal costing, the cost per unit calculation will not include fixed
production costs
Absorption costing treats fixed production costs as a period cost
Marginal costing treats fixed production costs as a product cost
A. I only
B. I and II only
C. All these statements are true
D. None of these statements are true
The following costs and sales information is available for an organisation which
makes and sells a range of kitchen utensils.
Sales revenue
Direct labour
Direct materials
Production overhead
$
435,000
120,000
105,000
80,000
Other overhead costs 65,000
There was no opening or closing inventory in this period.
The organisation uses absorption costing.
2. What profit will it report?
A. $130,000
B. $65,000
C. $210,000
D. Insufficient information to calculate profit
3. Under absorption costing, what costs are included in the cost of output
produced?
A. Direct costs only
B. Fixed costs only
C. Overheads only
D. Fixed and variable costs
A factory overhead of $25,000 is a fixed cost. The factory uses an absorption
costing approach.
4. Which statement is true?
A. The fixed cost per unit decreases as productivity decreases.
PAGE 1
B. The fixed cost per unit decreases as productivity increases.
C. The fixed cost per unit will remain the same irrespective of the level of
productivity.
D. The fixed cost is not associated with unit costs as it is a factory overhead.
B Co manufactures a product called Zed. The direct labour cost per unit is $24.00,
and total prime costs are $35.00 per unit. B Co manufactures four units per labour
hour. Factory overheads are absorbed at $16.00 per labour hour. B Co uses
absorption costing to cost a unit of production.
5. What is the total production cost per unit of product Zed?
A. $75.00
B. $63.00
C. $51.00
D. $39.00
Dee Co is a service business. It prices its service using marginal costing plus 40%.
Direct labour costs $60 per hour. A customer required a 4-hour call out in which
$220 of direct material was used.
6. What is the total price charged to the customer?
A. $336
B. $392
C. $556
D. $644
Cee Co manufactures 50,000 units during a period but only sells 45,000 units. The
company incurred the following costs:
$ per unit
Direct costs
12.00
Fixed production overheads
6.80
Fixed administration overheads
3.20
7. If Cee Co uses marginal costing, what is the profit difference from
absorption costing?
A. Marginal costing profit is $50,000 higher than absorption costing
B. Marginal costing profit is $50,000 lower than absorption costing
C. Marginal costing profit is $34,000 higher than absorption costing
D. Marginal costing profit is $34,000 lower than absorption costing
8. Which statements are FALSE?
(1) Under marginal costing systems, all fixed production overhead is charged to the
period irrespective of the change in inventory levels.
(2) Under absorption costing, profits will remain the same irrespective of the level of
sales activity.
A. 1 only
B. 2 only
C. 1 and 2
D. Neither
PAGE 2
The following costs and sales information is available for an organisation which
makes and sells plastic buckets.
$
Sales revenue 450,000
Direct labour
40,000
Direct materials 125,000
Production overhead
70,000
Other overhead costs
55,000
There was no opening or closing inventory in this period.
9. What is the profit under absorption costing?
A. $215,000
B. $270,000
C. $160,000
D. $305,000
The following information is available for product Beta:
The prime cost is $24 per unit. Direct labour is paid at a rate of $6 per hour. Direct
labour cost is $18 per unit. Production overheads are absorbed at $5 per direct
labour hour.
10. Using absorption costing, what is the total production cost per unit of
product Beta?
A. $39
B. $57
C. $114
D. $42
ACCOUNTING FOR OVERHEAD
1. Which option gives the correct order for charging indirect costs to cost
units?
A. Absorption, Reapportionment, Allocation, Apportionment
B. Allocation, Apportionment, Reapportionment, Absorption
C. Reapportionment, Allocation, Absorption, Apportionment
D. Apportionment, Absorption, Reapportionment, Allocation
A company has two cost centres, A and B, with total apportioned indirect costs of
$450,000 and $600,000.
Cost centre A is machine orientated, whereas cost centre B is labour orientated. The
cost centres use the following labour and machine hours:
A
B
Labour hours
2,500
30,000
Machine hours
90,000
3,000
PAGE 3
2. What absorption rates would be most appropriate for cost centres A and B?
Cost centre A
A. $180/labour hour
B. $5/labour hour
C. $5/machine hour
D. $5/machine hour
Cost centre B
$20/labour hour
$20/machine hour
$20/labour hour
$200/labour hour
he budgeted absorption rate for a product is $6/machine hour. This is based on
200,000 budgeted machine hours. Each unit will require 4 machine hours.
During the last period, the factory manufactured 40,000 units. Each unit was made in
the standard machine time.
3. Which statement best describes the factory’s position concerning
absorbed overhead?
A. The factory has over-absorbed the budgeted overhead because it has produced
more units than expected.
B. The factory has absorbed the correct amount of overhead.
C. The factory has under-absorbed because it has produced more units than
expected.
D. The factory has under-absorbed because it has produced fewer units than
expected
A company has over-absorbed fixed production overheads for May 20X8 by $5,000.
The month's fixed production overhead absorption rate was $7 per unit. This rate
was based on the budgeted output of 5,000 units. The actual production for the
month was 4,500 units.
4. What amount of fixed production overheads did the company incur for April
20X8?
A. $26,500
B. $31,500
C. $35,000
D. $36,500
5. Which department would NOT be treated as a service centre in a factory
producing tables?
A. Goods Inwards department
B. Maintenance department
C. Assembly department
D. Goods Outwards department
PAGE 4
JOB, BATCH AND PROCESS COSTING
1. Which statement about job costing is FALSE?
A. Job costing is appropriate for a company which manufactures items to customer
specifications.
B. Job costing is used where unique orders from customers are received.
C. Job costing is a type of specific order costing method.
D. Job costing is used only in manufacturing organisations.
A company uses batch costing when pricing a unit of clothing.
Batch 1
Batch 2
Batch 3
$
$
$
Opening work in progress 15,800
NA
1,780
Direct materials
6,150
4,250
8,750
Direct labour
8,500
9,200
7,300
Overheads for the period were $27,200 and are absorbed based on direct labour
costs. Batches 1 and 3 were completed during the period. Batch 1 comprised 12,000
units and batch 3 15,000 units.
2. Calculate the unit cost of an item in batch 3.
A. $1.60
B. $2.08
C. $1.07
D. $1.72
3. Which business is LEAST likely to use batch costing?
A. Processed food manufacturer
B. Accountancy practice
C. Garment factory
D. Electronic components manufacturer
Two statements relating to overheads follow.
1. The procedure under which overheads are spread fairly across different cost
centres is known as absorption.
2. Over-absorbed overhead occurs when actual overhead is greater than absorbed
overhead.
6. Is each statement true or false?
A. Statement 1 is true, Statement 2 is false
B. Both statements are true
C. Statement 1 is false, Statement 2 is true
D. Both statements are false
PAGE 5
Zing Co produces candles in the shape of company logos. A company has ordered
50 candles using the design of their company logo. Zing Co will produce these
candles together in a batch.
Costs for the batch of 50 candles are:
Direct materials: $60
Direct wages: $40
Overheads: Zing Co absorbs overheads at a rate of 20% of direct wages cost
4. What was the cost per candle in this batch?
A. $1.84
B. $92.00
C. $2.16
D. $108.00
The cost information below relates to Quick Accounting Co (QAC).
Senior accountant salary cost per hour:
$80
‘Non-senior’ accountant salary cost per hour:
$60
Overhead absorption rate per salary hour:
$10
The fee QAC charges clients for each job is calculated by taking the cost and adding
30%.
Job 577 took 15 senior accountant hours plus 30 non-senior accountant hours.
5. What fee will QAC charge for Job 577?
A. $3,900
B. $3,450
C. $4,485
D. $2,415
X Furniture (XF) manufactures furniture for specific customer orders.
XF calculates the price to charge a customer for a particular job by taking the total of
the job’s prime cost plus overheads and then adding 40%.
The customer for job number XF772 paid $1,400. The job incurred overheads of
$120.
6. What was the prime cost of job XF772?
A. $1,280
B. $1,120
C. $880
D. $1,000
PAGE 6
Two statements relevant to job and batch costing are shown below.
1. Job costing is not suitable for use in service organisations.
2. Batch costing is used when several identical products are manufactured together.
7. Is each statement true or false?
A. Statement 1 is true, Statement 2 is false
B. Both statements are true
C. Statement 1 is false, Statement 2 is true
D. Both statements are false
8. Which costing method is appropriate when it is impossible to identify
separate production units
A. Job
B. Batch
C. Process
D. Marginal
Over a week, a truck delivered sand for construction purposes to two customers,
Customer A and Customer B.
The truck delivered 6 tonnes of sand to Customer A and 4 tonnes of sand to
Customer B. Each customer delivery was carried out separately, and the truck made
no other deliveries in the week. The truck covered a total distance of 600 kilometres
over the week and cost $30,000 to operate over the week.
9. What was the cost of carrying one tonne of sand for one kilometre in the
week?
A. $5
B. $0.50
C. $25
D. $50
10. What is NOT a cause of losses in a production process?
A. Waste
B. Spoilage
C. Evaporation
D. Depreciation
PAGE 7
Yellow Co operates a job costing system and will incur the following costs on Job
322:
Direct material
$850
Direct labour
$1,000
Other expenses
$250
Production overhead
$340
11. If Yellow Co charges $4,500 for Job 322, what is the profit for the job?
A. $2,400
B. $2,310
C. $2,650
D. $2,060
Consider the following statements:
1. Process costing is most suitable when output units vary significantly from other
output units.
2. When the actual output exceeds the expected output, an abnormal gain occurs.
12. Which statements are true?
A. 1 only
B. 2 only
C. Both 1 and 2
D. None
During manufacturing, a worker mistakenly set the mix temperature too high,
resulting in more product evaporation than expected from the process.
13. What is MOST likely to occur in the above scenario?
A. The normal loss changes.
B. An abnormal loss occurs.
C. The business makes more money
D. Actual output is more than expected.
PAGE 8