1
Q
Define a cost object.(1)
A
Anything for which we are trying to ascertain the cost eg machine y, painting division
2
Q
Define a cost centre.(1)
A
A department, process or function where costs can be accumulated (e.g. goods inwards department, milling machines, production department canteen)
3
Q
Define a cost unit.(1)
A
A product or service for which costs are determined (eg the cost of making a widget, a batch of marmalade)
4
Q
Define a composite cost unit.(1)
A
Cost unit made up of two parts, mostly a service provided where a unit of production is hard to calcualte and compare eg cost per patient day in a hospital
5
Q
What is a direct cost (prime cost).(2)
A
Costs that can be traced directly in full to a cost unit.
There are 3 elements:
Direct material, direct labour and direct expenses
6
Q
What are production overheads?(3)
A
P overheads are costs incurred which cannot be traced directly and in full to a cost unit eg glue for tables are incurred in producing a cost unit
Can also be called manufacturing or factory overheads
ONLY type of overhead that can be included in the value of inventories
7
Q
What are non production overheads.(3)
A
None of these can be inc in valuation of inventories:
Admin-costs incurred in directing, controlling and administering the business eg FD salary, rent/rates of general offices, bad debt expense
Selling-include costs incurred in raising sales and customer retention eg sales rep commission, advertising, lighting costs of showroom
Distribution-costs incurred in packaging and delivering goods
8
Q
What is responsibility accounting?(1)
A
In responsibility accounting, a specific manager is given the responsibility for a particular aspect of the budget, and within the budgetary control system, he/she/they are then made accountable for actual performance.
Managers are, therefore, made accountable for their area of responsibility.
9
Q
What is the responsibility centre?(1)
A
The area of operations for which a manager is responsible is called a responsibility centre.
Within an organisation, there could be a hierarchy of responsibility centres.
There could be several cost centres within a profit centre, with the cost centre managers responsible for the costs of their particular area of operations, and the profit centre manager responsible for the profitability of the entire operation.
Each cost centre, profit centre and investment centre should have its own budget, and its manager should receive regular budgetary control information relating to the centre, for control and performance measurement purposes.
10
Q
What are controllable costs?(1)
A
If the principle of controllability is applied, a manager should be made responsible and accountable for the costs and revenues that he/she/they are in a position to control.
A controllable cost is a cost ‘which can be influenced by its budget holder.’ Controllable costs are generally assumed to be variable costs, and directly attributable fixed costs.
These are fixed costs that can be allocated in full as a cost of the centre.
It’s important to make managers responsible and accountable for costs they can control. Without accountability, managers do not have the incentive to control costs and manage their resources efficiently and effectively.
11
Q
What are uncontrollable costs?(1)
A
Uncontrollable costs are costs that cannot be influenced up or down by management action.
In responsibility accounting, it’s important to identify areas of responsibility.
Examples include allocations of costs from head office, or marketing costs if marketing campaigns are created and controlled centrally.
Uncontrollable costs may be included in the performance report of a responsibility centre so that the report shows the final profit of that centre.
This is sometimes done to make the manager aware of the other costs involved in running the business.
12
Q
What is marginal costing?
A
Marginak cost is the extra cost writing from producing one more unit or one more services.
It is prime cost plus variable production overheads.
Marginal costing treats all fixed costs as period costs, and deducts them from sales values as expenses during a particular period.
13
Q
What is absorption costing?
A
Fixed production overheads are treated as product costs and are absorbed into the cost of units of output that go into that inventory.
14
Q
An ICAEW member’s advice and work must be uncorrupted by self-interest and not be influenced by the interests of other parties. A member should not be associated with information that is false or misleading or supplied recklessly
A
Integrity
15
Q
Which of the following statements about cost behaviour is conventionally deemed to be correct?
As activity increases, unit variable cost increases and unit fixed cost remains the same.
As activity increases, total fixed cost remains the same and unit variable cost declines.
As activity increases, unit variable cost remains constant and unit fixed cost declines.
As activity increases, unit variable cost increases and unit fixed cost increases.
A
Feedback:
Conventionally unit variable costs are assumed to remain constant irrespective of production volumes. This assumption lies at the heart of marginal costing.
Available Answers
As activity increases, unit variable cost remains constant and unit fixed cost declines. (1 Mark)
16
Q
A company currently uses LIFO and the price of new purchases is falling due to market conditions.
If the company switches to FIFO, inventory values will fall and profits will fall.
A
Feedback:
In tFeedback:
In this example older inventory is more expensive than newer inventory. Switching to FIFO will lead to issue of this more expensive inventory, leading to both a fall in inventory values and profits (the cost of issues will rise).
Available Answers
True (1 Mark)his example older inventory is more expensive than newer inventory. Switching to FIFO will lead to issue of this more expensive inventory, leading to both a fall in inventory values and profits (the cost of issues will rise).
Available Answers
True (1 Mark)
17
Q
If inventory levels have increased during the period, the profit calculated using marginal costing would be _____ than the profit when compared with that calculated using absorption costing. The inventory value under marginal costing would be ______ than the value under absorption costing
Which pair of words correctly fills the two gaps?
A
Feedback:
Marginal costing values inventory at a lower amount because it does not include fixed overheads in the valuation.
As inventory levels increase the value of closing inventory deducted from cost of sale will be bigger than that of opening inventory added into cost of sale, meaning a net reduction of the cost of sale value due to inventory
As the marginal cost value of inventory is lower than that under absorption costing, this net reduction to cost of sale will be lower and profits will therefore also be lower.
Available Answers
Lower, lower (1 Mark)
18
Q
In a period when the inventory of finished goods falls, profit will be higher under absorption rather than marginal costing, but absorption costing inventory values will be lower than marginal.
True
False
A
Feedback:
Both parts of the statement are false. Inventory, if it exists, will always be worth more under absorption rather than marginal costing, because absorption costing includes fixed production overheads in inventory values. If inventory falls, profits in a period will be lower for absorption costing than for marginal costing, since each unit sold from inventory has a higher cost under absorption than marginal costing.
Available Answers
False (1 Mark)
19
Q
In a period where opening inventory was 2,000 units and closing inventory was 500 units , a firm had a profit of £56,000 Using absorption costing.
If the fixed overhead absorption rate was £6 per unit, the profit using marginal costing would be?
A
Feedback:
When opening inventory is higher than closing inventory the profit under MC will be higher than the profit under TAC. The difference will be the inventory value.
Difference = (2,000 – 500) x £6 = £9,000
So, the profit under MC will be £56,000 + £9,000 = £65,000
Available Answers
£65,000 (1 Mark)
20
Q
A company records a profit of £45,000 under absorption costing and a profit of £50,000 under marginal costing.
If the absorption rate is £5.00 per unit, what happened to inventory of finished goods during the period?
A
Feedback:
Marginal costing profit + Inventory change × Absorption rate = Absorption costing profit
Marginal costing profit = £50,000
Absorption costing profit = £45,000
Absorption rate = £5.00
Inventory change x absorption rate = (5,000)
Inventory change = (Absorption costing profit − Marginal costing profit) / Absorption rate
Inventory change = (£50,000 − 45,000) / £5.00 = -1,000
Available Answers
Inventory decreased by 1,000 units. (1 Mark)
21
Q
Flogit Ltd sets selling prices by adding a mark up of 25% to the variable cost per unit.
Flogit has carried out market research which indicates that if the selling price is increased by 20%, the quantity sold each period is expected to reduce by 20% but the variable cost per unit will remain unchanged.
Which one of the following statements is correct?
A
Feedback:
Let the current selling price be £P and the current sales volume be V units.
Since the mark up is 25% of variable costs,
Current variable cost per unit = £0.8P
Current contribution per unit = £0.2P
Current revenue = £VP
Current total contribution = £0.2VP
After the change in pricing policy, the sales volume will be 0.8V and the revised selling price will be £1.2P. The variable cost per unit remains at £0.8P.
Revised revenue = volume sold × revised selling price
= 0.8V × £1.2P
= £0.96VP
Therefore the revenue will decrease.
Revised total contribution = 0.8V (£1.2P − £0.8P)
= £0.32VP
This is greater than £0.2VP therefore the total contribution will increase.
Available Answers
The revenue will decrease and the total contribution will increase. (1 Mark)
22
Q
Eggstra Inc. is in the process of preparing budgets for 20X8. The company manufactures and sells Easter eggs, and has estimated the following sales levels for boxes of its luxury white chocolate egg to confectioners:
Quarter 1 Quarter 2 Quarter 3 Quarter 4
450 boxes 600 boxes 100 boxes 80 boxes
Product details for one box of eggs are as follows:
Selling price: £60 for quarters 1 & 2.
Price is reduced by 25% for quarters 3 & 4 due to lower demand.
Sugar 2 kgs at £0.20 per kg
Cocoa 1.1 kgs at £1.90 per kg
Direct labour 4 hrs at £5.20 per hour
What is the sales revenue budget for the year 20X8 for Eggstra Inc?
A
eedback:
Price per box for quarters 3 & 4 = 60 × (1 − 0.25) = £45
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Boxes 450 600 100 80
X
Price per box (£) 60 60 45 45
Revenue (£) 27,000 36,000 4,500 3,600
Total revenue = £71,100
Available Answers
£71,100 (1 Mark)
REVENUE NOT PROFIT
23
Q
Which of the following is a criticism of incremental budgeting?
It is time consuming because it involves starting each budget from scratch
It does not allow any slack
It includes past inefficiencies as cost levels are not scrutinised
It is the same as zero-based budgeting
A
Feedback:
Incremental budgeting starts from a prior period’s budget rather than starting from scratch (a feature of zero-based budgeting). By building up a budget in this
incremental way then any past slack or inefficiency will again feature in the next period’s budget.
Available Answers
It includes past inefficiencies as cost levels are not scrutinised (1 Mark)
24
Q
A company is currently evaluating a project which requires investments of £12,000 now, and £4,800 at the end of year 1. The cash inflow from the project will be £16,800 at the end of year 2 and £14,400 at the end of year 3.
The cost of capital is 15%.
Select the Discounted Payback Period (DPP) and the Net Present Value (NPV).
A
Feedback:
Net present value
Year Cash flow Discount
factor Present
value
£ 15% £
0 (12,000) 1.000 (12,000)
1 (4,800) 0.870 (4,176)
2 16,800 0.756 12,701
3 14,400 0.658 9,475
_______
Net present value (NPV) 6,000
_______
If you selected an NPV of £4,440 you treated the £12,000 cash flow as occurring in year 1 and discounted it. Cash flows occurring ‘now’ should not be discounted.
Year Present
value (PV) Cumulative
PV
£ £
0 (12,000) (12,000)
1 (4,176) (16,176)
2 12,701 (3,475)
3 9,475 6,000
DPP = 2 years + ((3,475/9,475) × 1 year)
= 2.36 years
If you selected 2.0 years you calculated the non-discounted payback period.
Available Answers
DPP: 2.36 years, NPV: £6,000 (1 Mark)
25
A company is considering investing in a two-year project. The initial investment in machinery and set-up costs will be £360,000 payable immediately. In addition, working capital of £24,000 is required at the beginning of the contract which will be released at the end of the two years. The company's cost of capital is 15%.
In order to make the project financially viable, what is the minimum acceptable contract price to be received at the end of the contract (to the nearest thousand)?
Available Answers
£484,000 (1 Mark)
26
The following information is available for a project:
Discount Rate NPV
£
6% 3,500
10% (2,500)
What is the IRR of the project?
Feedback:
IRR is calculated as:
IRR ≈ L + (NL/ NL− NH) × (H − L)
L = low discount rate
H = high discount rate
NL= net present value at low rate
NH= net present value at high rate
6% + [(3,500 / 3,500 − -2,500) × (10 − 6)] = 8.33%
Available Answers
8.33% (1 Mark)
27
A project has an initial cash outflow followed by three annual positive cash inflows and has a payback period of two years.
What is the validity of the following statements?
(1) The project always has a unique internal rate of return.
(2) If the internal rate of return is less than the cost of capital then the project has a positive NPV at the cost of capital
Feedback:
The project is normal i.e. outflow and inflows which exceed the outflow, therefore it will have a single IRR (statement 1 is true) and if the IRR is less than the cost of capital the NPV will be negative (think about the normal NPV graph where IRR is intercept) so statement 2 is false.
Available Answers
Statement 1 - True; Statement 2 - False (1 Mark)
28
A company has agreed to rent a disused building to a small local company. It has been agreed that a rent of $8,000 will be paid over the agreed period of ten years. The first payment is due now.
If interest rates are 8%, then the present value of this rental income is equal to:
Feedback:
As the first rent payment is due now, the 10 payments will be made from years 0 through to year 9.
From the cumulative present value table, the 9 year, 8% annuity factor is 6.247. This gives us years 1 through to 9.
As the first payment is due now, we have to add in the discount factor for year 0, which is 1.
So the factor = (1 + 6.247) = 7.247
Present value = $8,000 × 7.247 = $57,976
Available Answers
$57,976 (1 Mark)
29
Division W of Stoak Limited produced the following results in the last financial year.
Profit £200,000
Gross capital employed £1,000,000
For evaluation purposes all divisional assets are valued at original cost.
A proposed project will increase the division's profit by £22,000, but will require gross assets to increase by £100,000. Stoak Limited imposes a 20% capital charge on its divisions.
Will the evaluation criteria of return on investment (ROI) and residual income (RI) motivate division W's managers to accept the project?
Feedback:
Option one is the correct answer because:
Current ROI 20%
Project ROI 22%
Therefore yes.
£
Increase in profit 22,000
Interest charge 20,000
______
Residual income 2,000
______
Therefore yes.
Available Answers
ROI: Yes, RI: Yes (1 Mark)
30
In the balanced scorecard approach to performance measurement, which of the following would not appear on the customer perspective?
Customer satisfaction measure
Pricing index
Market share measure
Revenue from new production
Feedback:
Revenue from new production is not a measurement from a customers perspective.
Available Answers
Revenue from new production (1 Mark)
31
Suretream is a service company that holds no inventories. Each month the following relationships hold:
Gross profit 30% of sales
Closing trade payables 40% of cost of sales
Suretream has budgeted sales of £116,400 in July and £87,600 in August.
How much cash is budgeted to be paid in August to Suretream’s suppliers?
Feedback:
July cost of sales = 70% × £116,400 = £81,480
Closing payables balance for July = £81,480 × 40% = £32,592
August cost of sales = 70% × £87,600 = £61,320
Closing payables balance for August = £61,320 × 40% = £24,528
__________
Reduction in payables balance in August = £8,064
Cost of sales for August = £61,320
__________
Supplier Payments in August = £69,384
_________________ __________
If you selected £53,256 you deducted the change in payables balance from the cost of sales. The reduction in the payables balance should have been added, since this means that higher payments were made to suppliers to reduce the balance owed.
The option of £61,320 is the cost of sales, which takes no account of the change in the payables balance.
If you selected £64,776 you took the cost of sales to be 30% of the sales value, instead of 70%.
Available Answers
£69,384 (1 Mark)
32
A company sells inventory for cash to a customer, at a selling price which is below the cost of the inventory items.
How will this transaction affect the current ratio and the quick (liquidity) ratio immediately after the transaction?
Feedback:
The current liabilities figures used as the denominator will stay the same in both cases. The total of the current assets will decrease because the reduction in the inventory value will be greater than the increase in cash. Therefore the current ratio will decrease.
The total of the liquid assets will increase because of the higher cash balance. Therefore the quick (liquidity) ratio will increase.
Available Answers
Current Ratio: Decrease, Quick (liquidity) ratio: Increase (1 Mark)
33
The board of directors of Spillane Ltd have asked the finance director to reconcile the budgeted contribution to the actual contribution in future management reports.
Which of the following should the finance director not need to account for?
Sales price variances
Fixed overhead variances
Marginal cost variances
Sales volume variances
Feedback:
Budgeted contribution is different from actual contribution because of all of the sales and marginal cost variances which have arisen. Overheads and overhead variances do not feature when calculating contribution.
Available Answers
Fixed overhead variances (1 Mark)
34
Which of the following would help to explain a favourable materials price variance?
A reduction in quality control checking standards.
Using a higher quality of materials than specified in the standard.
Achieving a lower output volume than budgeted.
A discount offered by a materials supplier.
Feedback:
A discount would reduce the cost of materials and create a favourable materials price variance.
Lower quality control standards should lead to fewer items being rejected but should have no impact on materials price variances.
A higher quality material might reduce wastage or scrap levels but would normally be more expensive and therefore create an adverse materials price variance.
Variations in output volume should not affect the price of materials.
Available Answers
A discount offered by a materials supplier. (1 Mark)
35
Sudan plc makes a single product and incurs fixed costs of £125,000 per month. Variable cost per unit is £55 and each unit sells for £105. Monthly sales demand is 6,000 units.
The breakeven point in terms of monthly sales units is:
Feedback:
Breakeven point = Fixed costs / Contribution per unit
= £125,000 / (£105 − £55)
= 2,500 units
If you selected 1,190 units you divided the fixed cost by the selling price, but remember that the selling price also has to cover the variable cost.
The option of 3,500 units is the margin of safety, and if you selected 2,273 units you seem to have divided the fixed cost by the variable cost per unit.
Available Answers
2,500 units (1 Mark)
36
A company has calculated its margin of safety to be 15% of budgeted sales. Budgeted sales are 165,000 units per month and budgeted contribution is £12 per unit.
What are the budgeted fixed costs per month?
Feedback:
Margin of safety = 15% × 165,000 units
= 24,750 units
Break-even sales = budget sales − margin of safety
= (165,000 − 24,750) units
= 140,250 units
Break-even sales volume = Total fixed costs/contribution per unit
Therefore 140,250 = Total fixed costs / £12
Total fixed costs = £140,250 × £12
= £1,683,000
Available Answers
£1,683,000 (1 Mark)
37
Howard Ltd manufactures a product which has a selling price of £28 and a variable cost of £12 per unit. The company incurs annual fixed costs of £560,400. Annual sales demand is 38,000 units.
New production methods are under consideration, which would cause a 20% increase in fixed costs but secure a reduction of £2 in the variable cost per unit. The new production methods would result in a superior product and would enable the sales price to be increased by £2 per unit.
If Howard Ltd implements the new production methods and wishes to achieve a profit 10% higher than that under the existing method, the number of units to be produced and sold annually would be:
Feedback:
Current profit = total contribution – fixed costs
= (38,000 × [£28 − £12]) – £560,400
= £47,600
Required profit = £47,600 × 1.1
= £52,360
If the new production methods are implemented the required contribution will be:
Required contribution = revised fixed costs + required profit
Required contribution = revised fixed costs + required profit
= (£560,400 × 1.20) + £52,360
= £674,280 + £52,360
= 724,840
Required sales = Contribution required
Contribution per unit (revised)
= £724,840 / (£30 − £10)
= 36,242 units
If you selected 33,714 units you calculated the breakeven point with the revised fixed costs. The fixed costs must be added to the target profit.
If you selected 24,161 units you divided the required contribution by the selling price but this does not take account of the need to cover the variable costs.
If you selected 72,484 units you divided the required contribution by the unit variable cost rather than the unit contribution.
Available Answers
36,242 (1 Mark)
38
R Company currently sells a single product at a selling price of $40. The total fixed costs are $192,000 per year.
The breakeven level of sales is 12,000 units.
What is the product's contribution to sales ratio (to the nearest whole percentage point)?
Feedback:
With fixed costs of $192,000, contribution must also be $192,000 at the breakeven point.
The breakeven point is 12,000 units, so contribution per unit must be $192,000 / 12,000 = $16
This is 40% of the $40 selling price.
Available Answers
40% (1 Mark)
39
Grant Leeve is an assembly worker in the main assembly plant of Gonnaway Co.
Details of his gross pay for the week are as follows.
Basic pay for normal hours worked: 38 hours at £5 per hour £190
Overtime: 8 hours at time and a half £60
Gross pay £250
Although he is paid for normal hours in full, Grant had been idle for 10 hours during the week because of the absence of any output from the machining department.
Requirement
The indirect labour costs that are included in his total gross pay of £250 are
Feedback:
C
£70
The indirect labour costs are made up of idle time costs and overtime premiums.
Idle time costs = 10 hours x £5 per hour = £50
Overtime premium = ½ x £5 = £2.50 per hour
Overtime premium for 8 hours = £2.50 x 8 hours = £20
Therefore indirect labour costs = £50 + £20 = £70
If you selected £20 you calculated the overtime premium correctly but did not add on the cost of idle time payments. Wages paid for idle time cannot be traced to a specific cost unit and are therefore a part of indirect labour cost.
If you selected £50 you classified the idle time payments correctly but did not add on the cost of the overtime premium. If the overtime had been worked for a specific cost unit then the premium could have been a direct labour cost of that unit, but this is not the case here.
If you selected £110 you included all of the overtime cost as an indirect labour cost. However, the basic pay for overtime hours can be traced to specific cost units and is therefore a direct labour cost.
LO1c
Available Answers
£70 (2.5 Marks)
40
If a 20% return on sales is required from product X, its selling price per unit should be
(not q more for q phrasing)
The option of £286.66 is the price derived using a 20% mark up on a cost, rather than a 20% margin on the selling price.
Therefore 20% return on sales is margin not mark up
41
A company is considering investing £46,000 in a machine that will be operated for four years, after which time it will sell for £4,000. Depreciation is charged on the straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows:
Year £
1 16,500
2 23,500
3 13,500
4 (1,500)
Requirement
What are the Payback Period (PP) and the Accounting Rate of Return (ARR), calculated as average annual profits divided by the average investment?
Feedback:
A PP = 1.56 years; ARR = 52.0%
Depreciation must be added back to the annual profit figures to derive the annual cash flows.
Annual depreciation = £(46,000 – 4,000)/4 years
= £10,500
If you selected a payback period of 2.44 years you based your calculations on the accounting profits after the deduction of depreciation. The calculation of the payback period should be based on cash flows.
Accounting rate of return (ARR)
Average profit = £(16,500 + 23,500 + 13,500 – 1,500)/4
= £13,000
Average investment = £(46,000 + 4,000)/2
= £25,000
ARR = £(13,000/25,000) × 100%
= 52.0%
If you selected an ARR of 56.5% you forgot to include the residual value of £4,000 in your calculation of the average investment.
LO 4c
Available Answers
PP = 1.56 years; ARR = 52.0% (2.5 Marks)
42
A leasing agreement is for five years. £10,000 must be paid at the beginning of the first year, to be followed by four equal payments at the beginning of Years 2, 3, 4 and 5. At a discount rate of 8%, the present value of the four equal payments is £26,496.
Requirement
The total amount to be paid during the lease period is
The present value of the four equal payments is £26,496.
Therefore, each payment = x = £26,496/3.312 = £8,000
The total amount to be paid during the lease period is therefore (£10,000 + (4 x £8,000)) = £10,000 + £32,000 = £42,000.
If you selected £32,480 you made the common mistake of discounting each year's payment by the factor for the year in which the payment is made. However, the payments are made at the beginning of each year. The convention used in discounted cash flow is treated as though it occurs at the end of the previous year. Hence a cash flow at the beginning of Year 2 is discounted using the factor for Year 1 and so on.
43
For a project with a normal pattern of cash flows (ie, an initial outflow followed by several years of inflows) the internal rate of return is the interest rate that equates the present value of expected future cash inflows to
Feedback:
D The initial cost of the investment outlay
A project's IRR is defined as the return at which the net present value (NPV) of the cash flows is zero. This means that for a project with a normal pattern of cash flows the internal rate of return is the interest rate that equates the present value of expected future cash inflows to the initial cost of the investment outlay.
A project's cost of capital is the benchmark return that is used to evaluate the residual income of a project.
Zero is the present value of expected future cash inflows and the initial cash outflow discounted at a project's IRR.
The terminal (compounded) value of future cash receipts for a project will bear no resemblance to the present value of expected future cash inflows.
LO4d
Available Answers
the initial cost of the investment outlay (2.5 Marks)
44
For a company with the objective of maximising net present value, what is the validity of the following statements for a conventional investment project?
(1) The accounting rate of return (ARR) method of project appraisal usually gives too little weight to cash flows which occur late in the project’s life.
(2) For a project with a (unique) IRR greater than the opportunity cost of capital, the IRR method of project appraisal usually gives too little weight to cash flows which occur late in the project’s life.
Feedback:
D Statement (1) = False; Statement (2) = True
ARR places equal value on all cash flows throughout a project’s life. NPV places less value on later cash flows. Therefore, Statement (1) is false.
The IRR is the rate that equates PV of inflows with the PV of the initial outflow(s). If the IRR is greater than the cost of capital, later cash flows have been discounted too much. Therefore, Statement (2) is true.
LO 4d
Available Answers
Statement (1) = False; Statement (2) = True (2.5 Marks)
45
A two-year project has the following annual cash flows:
£
Initial cost (400,000)
12 months later 300,000
24 months later 200,000
The cost of capital is estimated at 15% per annum during the first year and 17% per annum during the second year.
Requirement
What is the net present value of the project (to the nearest £500)?
Feedback:
B £9,500
NPV = –£400,000 + (£300,000)/1.15 + (£200,000)/(1.15 x 1.17)
= £9,500
If you selected £2,500 or £12,000 you discounted both years' cash flows at 17% and 15% respectively.
If you selected £32,000 you used a discount factor of (1/1.17) for the year 2 cash flow instead of (1/(1.17 x 1.15)).
The Year 2 cash flow has to be discounted twice: one year at 17% and one year at 15%.
LO 4c
Available Answers
£9,500 (2.5 Marks)
46
Which of the following statements about contract costing are correct?
(1) Work is undertaken to customer's special requirements
(2) Work is usually undertaken on the contractor's premises
(3) Work is usually of a relatively long duration
Feedback:
B
(1) and (3) only
Statement (2) is not correct. Contract costing often applies to projects which are based on sites away from the contractor's premises.
LO 1d
Available Answers
(1) and (3) only (2.5 Marks)
47
A hospital has total costs of £1 million for 20X1. During 20X1, 200,000 patients were treated and doctors were paid £500,000.
Requirement
What is the most appropriate cost per patient for the hospital to use?
Feedback:
C
£5.00
Cost per unit = Total cost/Number of patients treated
= £1m/200,000 patients
= £5.00 per patient
If you answered £0.20 your calculation was upside down. The figure of £7.50 double counts the payments to doctors, which are already included in total costs. The answer of £2.50 was only the doctors' costs, which is understating the total cost.
LO1b
Available Answers
£5.00 (2.5 Marks)
48
Which of the following is an aspect of a just-in-time (JIT) system?
(1) The use of small frequent deliveries against bulk contracts
(2) Flexible production planning in small batch sizes
(3) A reduction in machine set-up time
(4) Production driven by demand
Feedback:
B (1), (2), (3) and (4)
(1) JIT requires close integration of suppliers with the company’s manufacturing
(2) To respond immediately to customer requirements, production must be flexible and in small batch
(3) JIT systems attempt to reduce set-up times in order to achieve fast
(4) Each component on a production line is produced only when needed for the next
LO 2h
Available Answers
(1), (2), (3) and (4) (2.5 Marks)
49
RI=
Profit-cost*cpaital charge
if negatvie reject
50
Which of the following statements is/are correct?
(1) Fixed budgets are not useful for control purposes.
(2) A prerequisite of flexible budgeting is a knowledge of cost behaviour patterns.
(3) Budgetary control procedures are useful only to maintain control over an organisation's expenditure.
Feedback:
D (2) only
Statement (1) is not correct. A fixed budget may be useful for control purposes where activity levels are not prone to change, or where a significant proportion of costs is fixed, so that alterations in activity levels do not affect the costs incurred.
Statement (2) is correct. Fixed and variable costs must be separately identified so that the allowance for variable costs may be flexed according to the actual activity level.
Statement (3) is not correct. Budgetary control procedures can be used to monitor and control income as well as expenditure.
LO 3c
Available Answers
(2) only (2.5 Marks)
51
Extracts from Verona Ltd’s records for June are as follows.
Budget Actual
Production 520 units 560 units
Variable production overhead cost £3,120 £4,032
Labour hours worked 1,560 2,240
Requirement
The variable production overhead expenditure variance for June is
Feedback:
A £448 favourable
Standard variable production overhead cost per hour = £3,120/1,560 = £2 per hour
£
2,240 hours of variable production overhead should cost (x £2) 4,480
But did cost 4,032
448(F)
If you selected £448 adverse you calculated the correct money value of the variance but you misinterpreted its direction.
£672 adverse is the variable production overhead total variance. The variance of £912 adverse is the difference between the standard cost for 520 units and the actual cost for 560 units. This is not a valid comparison for control purposes because of the different output volumes.
LO 3c
Available Answers
£448 favourable (2.5 Marks)
52
The shared service centre (SSC) of Oilspill Ltd operates its payroll, finance and project management functions. It has adopted the balanced scorecard for measuring its performance.
Requirement
Which two of the following would be appropriate for the SSC to use as performance measures in the ‘customer perspective’ quadrant?
✓Cost per accounting transaction processed
✓Time saved updating payroll file for overtime payments
✓Number of complaints about processing delays
✓Number of new projects set up
✓Training days per employee
✓Percentage of reports issued to department heads on time
C, F
Options C and F focus on the internal customer. Number of complaints and reports delivered to department heads on time will both measure customer satisfaction levels.
Cost per accounting transaction processed = financial perspective
Time saved updating payroll file for overtime payments = internal business perspective
Number of new projects set up = internal business perspective
Training days per employee = innovation and learning perspective
LO 3f
Available Answers
Number of complaints about processing delays (Correct)
Percentage of reports issued to department heads on time (Correct)
53
Doer Ltd makes a single product, the Whizzo. This product sells for £15, and makes a contribution of £5 per unit. Total fixed costs per annum are £11,125.
Requirement
If Doer Ltd wishes to make an annual profit of £11,875 how many Whizzos do they need to sell?
Feedback:
D 4,600 units
Sales units that will earn a required profit = (Fixed costs + Required profit)/Unit contribution = (£11,125 + £11,875)/£5 = 4,600
If you selected 1,533 units you divided the target contribution by the selling price, but the variable costs must also be taken into account.
If you selected 2,225 units, you calculated the breakeven point.
If you selected 2,375 units, you divided the £11,875 target profit by the £5 contribution per unit. But the fixed costs must be covered before any profit can be earned.
LO 4a
Available Answers
4,600 units (2.5 Marks)
54
Which of the following statements about Net Present Value (NPV) and Internal Rate of Return (IRR) methods are correct?
(1) An investment with a positive NPV is financially viable.
(2) NPV is a superior method to IRR.
(3) The graph of NPV against discount rate has a negative slope for most projects.
(4) NPV is the present value of expected future net cash receipts less the cost of the investment.
Feedback:
D (1), (2), (3) and (4)
NPVs are extensively used in practice to ascertain whether or not a project is a viable investment or not.
LO 4d
Available Answers
(1), (2), (3) and (4) (2.5 Marks)
55
A project has an initial outflow followed by several years of inflows.
Requirement
What would be the effects on the internal rate of return (IRR) of the project and its payback period of an increase in the company's cost of capital?
Feedback:
D - IRR = No change; Payback period = No change
Both the IRR and payback period do not involve the cost of capital in their calculation.
LO 4c
Available Answers
IRR = No change; Payback period = No change (2.5 Marks)
56
Sales volume variance and sales price variance
Sales volume:
(AQ-BQ)*SCPU
Sales price variance:
(AP-SP)*AQ
Where:
AQ is actual quantity
BQ is budgeted quantity
SCPU standard contribution per unit
AP is actual selling price per unit
SP standard selling price per unit
57
Material price and material usage variances
Material price:
(SP-AP)*AQ
Material usage:
(SQ used-AQ used)*SP
Where;
AQ is actual quantity
SP is standard price of material
AP is actual price of material
SQ is standard quantity of material to make actual number of units produced
58
Labour rate and labour efficiency variances
Labour rate:
(SR-AR)*AH
Labour efficiency:
(SH-AH)*SR
Where
AH is actual hours
AR is actual rate per labour hour
SR is standard rate per labour hour
SH is standard hours for actual number of cost units produced
59
Variable overhead expenditure and efficiency variance
Expenditure:
(SR-AR)*AH
Efficiency:
(SH-AH)*SR
Where:
SH is standard hours for actual number of cost units produced
AH is actual hours
SR is standard rate per labour hour
AR is actual rate per labour hour
60
Marginal v absorption costing
Different ways to value inventory:
Absorption-inventory is valued at full production cost (ie including both variable and fixed elements of production take
Marginal-inventory is valued at variable production cost only
Neither method includes non-production costs in inventory value!
61
Fixed production overheads=
Production cost
62
Three stages of absorption costing.(3)
1) allocation and apportionment
2) reapportionment
3) absorption
63
Reapportionment
Service cost centre costs must be apportioned to production cost centres
If there is more than one service centre for which costs need reapportioned then either:
Firstly reapportion the biggest costing service centre
Or
Firstly reapportion the service centre which gives the biggest proportion of its services to other service centre costs
64
What is overhead absorption rate
OAR is the rate of absorption following apportionment to production cost centres and is:
Budgeted overhead cost/budgeted level of activity
You can over and under absorb based on actuals:
Actual overheads less OAR*actual activity is the over/under absorption
65
Specific order vs continuous operation costing
Specific order:
Identifiable separate jobs or batches
Continuous:
Similar products or services as a result of a sequence of continuous steps
66
Four types of costing:
Job costing-specific one off jobs includes prime cost and absorbed overheads
Contract costing-one off jobs but longer eg building a hospital includes prime cost absorbed overheads and allocated overheads
Batch costing- group of identical units includes prime and absorbed overheads
Process costing-continuous flow eg brewing. Total process includes prime and absorbed overheads
67
Adopting MC or TAC impacts
Valuation of inventory and COS and profit as a result of
Format of P&L
68
Contribution per unit (CPU)=
Selling price per unit less ALL unit variable costs
69
Profit=
Total contribution-fixed costs
As one fixed costs are covered contribution is how much one extra unit will bring how much extra profit
70
MC vs TAC PL
TAC uses tradition PL eg revenue less cos=gross profit then less non production costs gives net
MC uses new so revenue less variable costs gives contribution and then less fixed costs is profit (think of the two formulas)
Inventories will also differ as MC will value at variable production whilst TAC will value at full production , MC therefore expenses all fixed costs to Pl in period incurred but TAC will only expense fixed prod costs once inventory is sold-note ALL OTHER VALUES SAME EXCEPT INVENTORY!
Also in TAC will be over under absorption due to OAR estimation
71
How much should TP be?
4 methods:
Market-optimum provided supplying division is at full capacity, this should be reduced for savings from internal transfers
Cost plus
Two part transfer part 1: standard variable part 2 periodic fixed charge
Dual pricing-each division records the TP different ie supplying records at market price or total cost plus whilst receiving at supplying divisions standard variable cost only
72
High low method
1) determine highest and lowest activity and their costs
2) find variable cost per unit as increase in cost/increase in activity
3) using either activity :
Total semi variable costs= fixed costs+ variable cost per unit*activity level
Therefore fixed= semi-total variable cost
4) expected cost=fixed costs+variable cost per unit*aftivity level
Basically find variable cost and using g full cost given and the variable cost per unit*units also given you should find fixed costs
Once you have all pieces you can find the cost at a requested unit amount as you’ll have e the variable cost per unit and the fixed cost amount
73
Additive and multiplicative model for seasonal variation in time series
When you have the running average and variations you can see seasonal variation either through additive eg of value is 26 in feb and trend is 19 then the seasonal variation is 26-19=7 using additive
In multiplicative this would simply be 7/19 meaning 37% seasonal variance
74
3 types of budget
Continuous/rolling-update regularly per period
Zero based-budget from 0 (from scratch)
Incremental - previous period budget as starting point then adjusts and increments as beccesary
75
What is beyond budgeting
The idea companies need to move beyond budgeting because of the inherent flaws
Common in fast paced environment companies
Greater use of rolling budgets and non financial targets
Innovation rewarded
Budgets set locally
Targets based on externally observed benchmarks
76
Working capital=
Current assets-current liabilities
Which equals=
Inventory+receiveables+cash-payables
This needs balance between profitability and liquidity
77
Current ratio=
Current assets/current liabilities
Measured how much of total current assets are financed by current liabilities
Higher=more liquid less than 1 means will struggle to pay debts
78
Quick (liquidity/acid) ratio
(Current assets-inventory)/current liabilities
79
Inventory turnover period in days
Inventory/COS*365
80
Rate of inventory turnover=
COS/average inventory
Higher the rate lower the level of inv and lower holding costs
81
Receivables days =
(Receivables/revenue) *365
82
Payable days=
(Payables/purchase) *365
83
Working capital /cash operating cycle
Add everything bar payment payable period
The longer the cycle gets more cash is tied up in the cycle and if this is unbalanced extra short term finance is needed
84
Hopwoods research.(3)
Budget constrained - achieve budget in short term (stick to the budget)
Profit conscious -long profit increase over short term cost
Non accounting -quality and customer satisfaction
85
ROI in performance management
Controllable divisional profit/controllable divisional investment
Remember to exclude any central assets which are not controllable by the manager of the cost centre
If > target then accept
86
Residual income for divisional profits=
Controllable divisional profit-imputed interest cost on controllable divisional investment if >0 accept
Better than ROI in that it doesn’t encourage the divisional manger to hold old assets as much
87
Contribution ratio=
Either total cont/total revenue or CPU/selling PU
To find break even in terms of sales revenue you do fixed costs over the cont ratio instead of cont
88
Margin of safety=
Budget output less break even out put/budgeted output
89
Profit targets
How many units to sell to achieve certain profit :
Sales volume for target profit= fixed costs+target profit /CPU
Sales revenue for target profit= fixed costs* target profit /CS ratio
90
Limiting factor ananlyis method
Calc CPU and calc CPU of limiting factor then rank in order of highest
If another restriction you must fulfill that first
91
How to calc payback period in between years
Take amount over the period ie from negative to positive say -400 to plus 100 from y3 to y4 then to get positive it must have been 400/500 to get there hence 0.8 of a year thus 0.8*12=10 months in
92
Accounting rate of return =
ARR initial = average annual profit /initial investment*100
ARR avg= average annual profit/average investment *100
Where average investment=0.5*(initial investment+ final/scrap value)
If rate>target rate accept
93
Linear interpolation to find IRR
L+ (H-L)* Nl/(Nl-Nh)
Nl/Nh are the NPVs at a particular rate of interest
L/N are the rates of interest
94
Uula plc makes a single product, which it sells for £16 per unit. Fixed costs are £76,800 per month and the product has a contribution ratio of 40%.
Requirement
In a month when actual sales were £224,000, Uula plc’s margin of safety, in units, was
Feedback:
Correct answer(s):
A 2,000
Breakeven point = Fixed costs/Contribution ratio
= £76,800/0.40
= £192,000
Actual sales = £224,000
Margin of safety = £224,000 – £192,000
= £32,000
Margin of safety in units = £32,000/£16
= 2,000 units
If you selected 12,000 units you calculated the breakeven point in units, but forgot to take the next step to calculate the margin of safety.
14,000 is the actual sales in units and 32,000 is the margin of safety in terms of sales value.
LO 4a
Available Answers
2,000 (2.5 Marks)
95
Telgar plc uses a standard costing system, with its material inventory account being maintained at standard cost. The following details have been extracted from the standard cost card in respect of materials.
8 kg @ £0.80/kg = £6.40 per unit
Budgeted production in April was 850 units.
The following details relate to actual materials purchased and issued to production during April when actual production was 870 units.
Materials purchased 8,200 kg costing £6,888
Materials issued to production 7,150 kg
Requirement
The material price variance for April was
Feedback:
Correct answer(s):
C £328 adverse
Material price variance
£
8,200 kg did cost 6,888
But should have cost (×£0.80) 6,560
328 (A)
If you calculated the variance to be £286 you based your calculations on the materials issued to production. However, the material inventory account is maintained at standard cost, therefore the material price variance is calculated when the materials are purchased. If you selected £328 favourable you calculated the size of the variance correctly but you misinterpreted it as favourable
LO 3c
Available Answers
£328 adverse (2.5 Marks)
96
Telgar plc uses a standard costing system, with its material inventory account being maintained at standard cost. The following details have been extracted from the standard cost card in respect of materials.
8 kg @ £0.80/kg = £6.40 per unit
Budgeted production in April was 850 units.
The following details relate to actual materials purchased and issued to production during April when actual production was 870 units.
Materials purchased 8,200 kg costing £6,888
Materials issued to production 7,150 kg
Requirement
The material usage variance for April was
Feedback:
Correct answer(s):
B £152.00 adverse
870 units did use 7,150 kg
But should have used (×8 kg)
6,960 kg
Usage variance in kg 190 (A)
Usage variance in £ = (190 kg ×standard price per kg £0.80) £152 A
If you selected £152 favourable you calculated the size of the variance correctly but you misinterpreted it as favourable.
If you selected £159.60 adverse you evaluated the usage variance in kg at the actual price per kg, instead of the standard price per kg.
The result of £280 adverse bases the calculation of standard usage on the budgeted production of 850 units. This is not comparing like with like. The comparison should be based on a flexed budget for the actual production level.
LO 3c
Available Answers
£152.00 adverse (2.5 Marks)
97
Consider the following factors for investigating a variance.
(1) Controllability of variance
(2) Cost of investigation
(3) Personnel involved
(4) Trend of variance
Requirement
Which of these would be a factor that would affect a decision as to whether to investigate the variance?
Feedback:
Correct answer(s):
D 1, 2 and 4 only
All of these apart from personnel would influence the decision to investigate a variance as they include cost/benefit considerations, whether the variance can be controlled and what the movement of the variance suggests is a trend.
LO 3c
Available Answers
1, 2 and 4 only (2.5 Marks)
98
A manager read on the internet that sales of its product are expected to increase by 40% next year.
They then read a different article that said that sales of its product are expected to increase by 25% next year, and another that suggested 22%. They decided to budget for an increase in 40%. A year later it was confirmed that sales had increased by 22%.
Requirement
What type of bias affected the manager’s decision making?
Feedback:
Correct answer(s):
B Anchoring
The manager has relied on the first percentage increase that they came across and this amount has anchored the decision.
LO 3d
Available Answers
Anchoring (2.5 Marks)
99
Jackson plc expects a new venture to yield a gross profit of 50% on sales.
Fixed salary costs are expected to be £23,520 per month and other expenses are expected to be 8% of sales.
Requirement
Calculate the sales revenue necessary to yield a monthly profit of £58,800.
Feedback:
Correct answer(s):
D £196,000
Contribution ratio = 50% – 8%
= 42%
Sales required to earn target profit = (Fixed costs + Required profit)/Contribution ratio = (£23,520 + £58,800)/0.42 = £196,000
If you selected £56,000, you calculated the breakeven point and did not allow for the target profit.
If you selected £140,000, you divided the £58,800 target profit by the contribution ratio, but the fixed costs must be covered before any profit can be earned.
If you selected £164,640, you based your calculations on a contribution ratio of 50% and did not allow for the other expenses which are 8% of sales.
LO 4a
Available Answers
£196,000 (2.5 Marks)
100
Which two of the following show how the breakeven point in units can be calculated?
✓Total fixed costs/contribution per unit
✓Contribution required to break even/contribution per unit
✓Contribution/sales
✓Fixed costs/costs to sales ratio
Feedback:
Correct answer(s):
A Total fixed costs/contribution per unit
B Contribution required to break even/contribution per unit
Breakeven point is the activity level at which there is neither a profit nor a loss. Alternatively, it is the activity level at which total contribution equals fixed costs.
LO 4a
Available Answers
Total fixed costs/contribution per unit (Correct)
Contribution required to break even/contribution per unit (Correct)
101
The Finance Assistant from Castle Associates has recently returned from a management accounting seminar at which she was introduced to some new management accounting terms and formulae. She has now got several of the terms and formulae mixed up in her mind.
Requirement
The contribution required to breakeven is best given by which of the following?
Unit selling price less unit variable cost
Unit contribution × number of units sold
Total fixed costs
Total fixed costs/contribution ratio
Feedback:
Correct answer(s):
C Total fixed costs
Contribution required to break even is the same value as total fixed costs.
Unit selling price less unit variable cost is the unit contribution.
Unit contribution × number of units sold is the total contribution.
Total fixed costs/Contribution ratio provides the sales revenue at breakeven point.
LO 4a
Available Answers
Total fixed costs (2.5 Marks)
102
Adams Ltd’s budget for its first month of trading, during which 1,000 units are expected to be produced and 800 units sold, is as follows:
£
Variable production costs 95,500
Fixed production costs 25,800
Selling price is £250 per unit.
Requirement
The profit calculated on the absorption cost basis compared with the profit calculated on the marginal cost basis is
Feedback:
Correct answer(s):
B £5,160 higher
Since production exceeded sales the inventory of 200 units carried forward to the next period would include fixed production costs of (200 × (£25,800/1,000)) = £5,160 with absorption costing.
Under marginal costing these fixed costs would be charged against the revenue for the period. Thus the absorption costing profit would be £5,160 higher.
If you selected £24,260 higher or lower you calculated the profit difference as the total production cost of the 200 units in inventory. However, the difference in inventory valuation is caused by the differing treatment of the fixed costs only.
LO 1c
Available Answers
£5,160 higher (2.5 Marks)
103
in deciding whether to sub con or buy and the amounts how would you calculate (method)?
you basically need to work out whihc is cheaper to make in house vs buy so you should do usual make buy decision type working eg if hours are a limit find cont for outsourcing cost and then find out how much itll cost to per huor saved so cont/hours per unit
the one with the larger purchase means itll be more expense to buy (outsource) per work hour saved therefore these should be produced in house to the extent they can then the next product can be moved onto (if hours are a limit then do usual calc and cut of so say in house can only produce 300 of the 400 units of the second prpdiyct then you would outsource the rest as compared tot he initial prduct this will cheaper to do so)
104
Which of the following statements about payment practices is/are true?
(1) Deliberate late payment is unethical
(2) It is good practice to employ transparent payment processes
(3) Prompt payment is essential for a prosperous economy.
Feedback:
Some businesses deliberately pay their suppliers late in order to improve their own cash flow but this is considered to be unethical.
Late payment to suppliers, particularly to small businesses, can have a severe impact on their cash flow, their ability to invest and grow and, in some cases, their ability to survive. Prompt payment is therefore essential for a prosperous economy, and it would be unethical to deliberately pay suppliers late.
In some countries, there is a legal obligation for businesses to report their payment practices and policies and, even when this is not the case, it is considered good
practice to have transparent payment processes.
Available Answers
(1), (2) and (3) (2.5 Marks)
105
Sputnik Ltd is considering two separate investment projects. Both projects involve an initial outlay and both are expected to produce positive annual net cash flows throughout their expected lives. The projects are not mutually exclusive. The company uses the net present value (NPV) method and internal rate of return (IRR) method to evaluate its investment projects.
The following statements have been made in relation to the above projects:
(1) The IRR method may produce multiple solutions for one or both of the projects.
(2) The IRR method and NPV method may not give the same decision concerning acceptance or rejection of the projects.
(3) The IRR method and NPV method may not rank the projects in the same order of acceptability.
Which of the above statements is/are correct?
Feedback:
Both are normal projects so statement (1) is false. As they are normal projects there will be no conflict between the NPV and IRR methods so (2) is also false. However, the methods may rank the projects in a different order so (3) is true.
106
An investment will generate cash flows of £5,400 each year in years 3 to 10 (i.e. first amount to be received three years from now).
The discount rate is 20% per annum.
What is the present value of the cash flows (to the nearest £100)?
Feedback:
Using cumulative present value tables we require the 20% factor for years 3 – 10:
Cumulative discount factor for years 1 - 10 at 20% 4.192
Less: cumulative discount factor for years 1 - 2 at 20% (1.528)
Cumulative discount factor for years 3 - 10 at 20% 2.664
Present value = £5,400 × 2.664 = £14,386
If you selected £11,300 you made the common mistake of deriving the cumulative discount factor for years 4 to 10 instead of years 3 to 10.
If you selected £18,300 or £14,800 then you used cumulative discount factors for 15% rather than 20% over 3 to 10 and 4 to 10 respectively.
Available Answers
£14,400 (2 Marks)
107
Variances which are controllable can be described as which of the following:
Random deviations.
Either random deviations or planned deviations.
The result of a manager's actions and decisions.
Marginal costs.
Feedback:
Uncontrollable variances are variances which have arisen by chance and are random deviations. Controllable variances would not be random deviations but would result of a manager's actions and decisions.
The concept of planned variations does not sit with the definition of a controllable variance only.
Finally, marginal cost is the cost of producing one more unit of production and is not a controllable variance.
Available Answers
The result of a manager's actions and decisions. (2 Marks)
108
Which of the following statements is correct?
A cost-plus pricing method will enable a company to make a profit.
A selling price in excess of full cost will always ensure that an organisation will cover all its costs.
A higher selling price will be generated by using a percentage mark up on cost than by using the same percentage as a return on sales.
A percentage mark up based on marginal cost-plus pricing will always give a smaller profit than the same percentage mark up with full cost plus pricing.
Feedback:
A percentage mark up with marginal cost-plus pricing will always give a smaller profit than the same percentage mark up with full cost plus pricing.
A cost-plus pricing method does not enable a company to ensure it makes a profit because it fails to recognize that sales volume may be insufficient to allow fixed costs to be covered.
A selling price in excess of full cost will not always ensure that an organization will cover all of its costs. The full cost includes fixed costs per unit which have been derived based on estimated volumes. If this volume is not achieved then the actual fixed cost per unit will be higher and the selling price might be lower than the actual cost per unit.
A percentage mark up on costs (e.g. 25%) will translate a cost of £100 into a selling price of £125. However, if the cost price is £100 and a return on sales of 25% is required then the selling price would be set at £100 / 0.75 = £133.33.
Available Answers
A percentage mark up based on marginal cost-plus pricing will always give a smaller profit than the same percentage mark up with full cost plus pricing. (2 Marks)
109
Which of the following statements is/are correct?
Machine learning is when computer systems use pre-programmed rules to perform tasks such as forecasting
Machine learning is a subset of artificial intelligence
Budget holders need no knowledge of how their machine learning predictions are formed.
(2) only
(1) and (2) only
(1) and (3) only
(3) only
Feedback:
Machine learning is when computer systems do not use pre-programmed rules to perform tasks. Instead, a machine learning system analyses data for patterns and
derives algorithms on its own, which are further refined as more data is applied.
Budget holders must have a basic knowledge of how their machine learning predictions are formed because there is always potential for anomalies, or events that
machine learning cannot predict.
Available Answers
(2) only (2.5 Marks)
110
Which of the following is not a description of a 'top-down' budgeting process?
The process starts with sales, then progresses to production, materials usage and other functional budgets.
Top management prepare a budget with little or no input from operating personnel.
A top-down budget sets out the board's targets for the forthcoming period.
The top level budget is financial, and will contain an income statement, balance sheet and cash flow budget.
Feedback:
A 'top down' budgeting process is an imposed style of budgeting by management, setting out their targets for the forthcoming period. It is a type of master budget and will therefore contain an income statement, balance sheet and cash flow budget.
Available Answers
The process starts with sales, then progresses to production, materials usage and other functional budgets. (2.5 Marks)
111
Patricia Ltd has annual credit sales of $1,980,000, and its customers pay, on average, after 60 days.
In order to reduce the level of receivables, Patricia has decided to offer a 2% discount to customers that pay within 30 days. Patricia's working capital is financed at a cost of 10% per annum.
If all of Patricia's customers took advantage of the discount, then the annual cash effect of the discount policy (assuming a 360-day year) is?
$16,500 decrease
$16,500 increase
$23,100 decrease
$23,100 increase
Feedback:
Reduction in the financing cost of receivables All customers will pay after 30 days instead of 60, reducing receivables by
30/360 × $1,980,000
= $165,000
Finance cost saved at 10%pa
= $16,500
Discounts allowed
2% × $1,980,000
= $39,600
Net cash decrease from discount policy
= ($23,100)
If you selected a $16,500 increase you calculated the saving from the reduction in receivables correctly but did not then go on to account for the cost of the discounts.
Available Answers
$23,100 decrease (2.5 Marks)
112
Eve Ltd's production budget for its first year of trading, during which 2,500 units are expected to be manufactured is as follows:
£
Variable production costs
229,200
Fixed production costs
61,920
The unit selling price is £300 and budgeted sales are 2,200 units.
Eve's profit for its first year of trading calculated on the absorption cost basis compared with the profit calculated on the marginal cost basis is:
£34,934 lower
£34,934 higher
£7,430 lower
£7,430 higher
Feedback:
Eve Ltd's production is budgeted to exceed sales and therefore under absorption costing the closing inventory of (2,500 − 2,200) units carried forward to the next period would include fixed production costs. These amount to:
(300 × (£61,920 / 2,500)) = £7,430
Under marginal costing these fixed costs would be charged against the revenue for the period. Thus the absorption costing profit would be £7,430 higher.
If you selected £34,934 higher or lower you calculated the profit difference as the total production cost of the 300 units in closing inventory. However, the difference in inventory valuation is caused by the differing treatment of the fixed costs only.
Available Answers
£7,430 higher (2.5 Marks)
113
The following data relate to Metro Ltd, a manufacturing company with several divisions. Rover Division produces a single product which it sells to Morris Division and also to external customers.
Variable cost to make PU is 28.8
An external supplier offers to supply 5,000 units at £43.20 each to Morris Division.
If Morris Division buys from the external supplier and Rover Division cannot increase its external sales, the change in total profit of Metro Ltd will be:
a £24,000 decrease.
a £24,000 increase.
a £72,000 decrease.
a £72,000 increase.
Feedback:
The company will be buying 5,000 units at £43.20 each from the external supplier, rather than making the units for £28.80 each in Rover Division. Profit will therefore fall by:
5,000 × £(43.20 − 28.80) = £72,000
If you calculated a change in profit of £24,000 you calculated the difference of £4.80 between the transfer price of £48 and the external price of £43.20 and interpreted this as a saving for the company as a whole. However the transfer price of £48 is not an actual cost to the company. It is an external charge made for goods or services supplied between Rover and Morris divisions.
Available Answers
a £72,000 decrease. (2.5 Marks)
114
How to calc min contract
Calculate NPV then divide yb the discount facyor used
115
The board of directors of Spillane Ltd have asked the finance director to reconcile the budgeted contribution to the actual contribution in future management reports. Which of the following should the finance director not need to account for?
Sales price variances
Fixed overhead variances
Marginal cost variances
Sales volume variances
Feedback:
Budgeted contribution is different from actual contribution because of all of the sales and marginal cost variances which have arisen. Overheads and overhead variances do not feature when calculating contribution.
Available Answers
Fixed overhead variances (1 Mark)
116
A conventional project has a payback period of 4 years and yields a constant annual cash flow. The cost of capital is 15%.
Which of the following statements is true?
The net present value of the project must always be negative.
The average accounting rate of return is never less than zero.
The internal rate of return of the project must equal 15%.
The net present value of the project must always be positive.
Imagine there are no cash flows beyond Year 4 ie, outflow equals inflows exactly. The NPV at 15% would be negative so D is ruled out. The IRR would be 0% so C is out. If cash flows occur beyond Year 4 there is no reason why the NPV could not be positive, so A is out.
Available Answers
The average accounting rate of return is never less than zero. (1 Mark)
117
A company's actual output for the period was 52,800 units and variable overhead costs per unit were in line with budget. The budgeted output was 54,000 and the budgeted variable overhead cost per unit was £4.20 and actual total overhead expenditure of £259,200 meant that fixed overheads were £19,200 under budget.
What was the budgeted level of fixed overheads for the period?
£56,640
£51,600
£21,600
£18,240
Feedback:
Actual expenditure on overheads 259,200
Less budgeted variable overhead expenditure = actual expenditure (£4.20 × 52,800) (221,760)
Actual expenditure on fixed overheads 37,440
Plus fixed overheads under budget 19,200
= Budgeted fixed overhead expenditure 56,640
Available Answers
£56,640 (1 Mark)
118
A business has a budgeted direct labour cost per unit of £19.50. During the month of July production details were as follows:
Budget
30,240 units
Actual
28,800 units
The actual labour cost for the month was £674,675. What was the labour total variance as a percentage of the flexed budgeted figure?
20.1% (A)
20.1% (F)
14.4% (A)
14.4% (F)
Should have done 19.5*28800=561600
Then 674675-561600=113075
As a percentage of budget 113,075 / 561,600 x 100 = 20.1% (A)
If you calculated the variance as 14.4% of budget you were basing your calculations on the original budgeted labour cost for 30,240 units.- needed FLEXED budgeted ie for the 28800 units produced but at the budgeted price
However, since the actual output was only 28,800 units the control comparison should be made of the actual cost with the flexible budget cost allowance for 28,800 units.
Available Answers
20.1% (A) (2 Marks)
119
Cilla plc had budgeted overheads for January 20X7 of £544,000. At the end of the period the actual labour hours worked were 2,105 hours and the actual overheads were £550,120. If overheads were over-absorbed by £22,440, how many labour hours were budgeted to be worked by Cilla (to the nearest hour)?
2,000
2,023
2,105
2,170
Feedback:
Actual overheads = £550,120
Over-absorption = £22,440
Absorbed overheads = Actual overheads + over-absorbed overheads = £550,120+£22,440 = £572,560.
If the absorbed overheads = £572,560 then the budgeted overhead absorption rate = absorbed overheads/actual labour hours = £572,560/2,105 = £272 per labour hour.
If budgeted overheads for the period were £544,000 and the budgeted overhead absorption rate is £272 per labour hour, then the budgeted labour hours = budgeted overheads/overhead absorption rate = £544,000/£272 = 2,000 hours.
Available Answers
2,000 (1 Mark)
120
Which two of the following statements are correct?
✓If the coefficient of determination is high, this proves that variations in one variable cause variations in the other.
✓Omitted variable bias leads to incorrect cause and effect conclusions.
✓Causation implies correlation.
✓Correlation occurring by chance is more likely to happen in a large data set.
Feedback:
The first statement is false because correlation does not prove a causal link.
Omitted variable bias is when a variable is excluded from the data model and therefore the cause of a change in one variable is incorrectly attributed to another variable in the model. Therefore the second statement is correct.
If there is a cause and effect relationship, there must be correlation and therefore the third statement is true.
Correlation may occur by pure chance and this is more likely to happen with a small set of data.
Available Answers
Omitted variable bias leads to incorrect cause and effect conclusions. (Correct)
Causation implies correlation. (Correct)
121
GardenRite Ltd manufactures wheelbarrows with a selling price of £100 per wheelbarrow. Budgeted production and sales volume is 2,000 wheelbarrows per month. During January 20X8 2,000 wheelbarrows were made of which 1,400 were sold. There was no opening inventory.
The variable cost per wheelbarrow is £55. Fixed costs in January were, as budgeted, £50,000.
Using marginal costing, calculate the contribution and profit for January:
Contribution £63,000, Profit £13,000
Contribution £63,000, Profit £28,000
Contribution £90,000, Profit £13,000
Contribution £90,000, Profit £28,000
Feedback:
Contribution = 1,400*£(100-55) = £63,000
Profit = £63,000 (cont) - £50,000 (FC) = £13,000
Available Answers
Contribution £63,000, Profit £13,000 (1 Mark)
122
Which of the following statements about profit measurement under absorption and marginal costing is not true (assuming that unit variable costs and fixed costs are constant)?
If inventory levels increase then profit measured using absorption costing will be higher than profits measured using marginal costing
If inventory levels decrease then profits measured using marginal costing will be higher than profits measured using absorption costing
Profits measured using absorption costing will be either lower or higher than profits measured using marginal costing
Profits measured using absorption costing may be the same as, or lower than, or higher than profit measured using marginal costing
Feedback:
Profits measured using absorption costing will be either lower or higher than profits measured using marginal costing.
Whether profits under absorption costing are the same as, lower than or higher than profits under marginal costing depends entirely on opening and closing inventory figures. For example, if there is no opening or closing inventory, then the two measures of profit will actually be the same.
If inventory levels increase, then profits under absorption costing will be higher than profits under marginal costing as more overhead is carried forward in the closing inventory valuation. The converse is true if inventory levels decrease.
Available Answers
Profits measured using absorption costing will be either lower or higher than profits measured using marginal costing (1 Mark)
123
A company sells inventory for cash to a customer, at a selling price which is below the cost of the inventory items. Assume the company has a positive cash balance.
How will this transaction affect the current ratio and the quick (liquidity) ratio immediately after the transaction?
Current ratio increase, Quick ratio increase
Current ratio increase, Quick ratio decrease
Current ratio decrease, Quick ratio increase
Current ratio decrease, Quick ratio stays the same
Feedback:
Current ratio will decrease; quick ratio will increase.
The current liabilities figures used as the denominator will stay the same in both cases. The total of the current assets will decrease because the reduction in the inventory value will be greater than the increase in cash. Therefore the current ratio will decrease.
The total of the liquid assets will increase because of the higher cash balance. Therefore the quick (liquidity) ratio will increase.
Available Answers
Current ratio decrease, Quick ratio increase (1 Mark)
124
A division has a residual income of £960,000 and a net profit before imputed interest of £2,560,000.
If it uses a rate of 10% for computing imputed interest on its invested capital, what is its return on investment?
6%
10%
16%
22%
Feedback:
Imputed interest is £2,560,000 – £960,000 = £1,600,000. With interest at 10%, capital must be £16 million. ROI = £2,560,000/£16,000,000 = 16%.
Available Answers
16% (1 Mark)
125
An item priced at £29.75, including local sales tax at 17.5%, is reduced in a sale by 25%.
The new price before sales tax is added is:
£18.41
£18.99
£22.31
£25.32
Feedback:
29.75/1.175 =25.32 *0.75=18.99
Remember as the tax would be a mark up have to treat as such
Available Answers
£18.99 (1 Mark)
126
For a company that does not have any production resource limitations, which of the following sets out a correct sequence for budget preparation?
Sales budget, Production budget, Finished goods inventory budget, then Materials usage budget
Sales budget, Finished goods inventory budget, Production budget, then Materials usage budget
Sales budget, Materials usage budget, Production budget, then Finished goods inventory budget
Production budget, Sales budget, Finished goods inventory budget, then Materials usage budget
Feedback:
Sales budget, Finished goods inventory budget, Production budget, then Materials usage budget.
Sales would be the principal budget factor (as there are no production resource limitations) and so this is the first budget to be prepared.
Inventory adjustments in the finished goods inventory budget indicate the production requirements for the production budget. Once the level of production is known, the materials usage budget can be prepared.
Available Answers
Sales budget, Finished goods inventory budget, Production budget, then Materials usage budget (1 Mark)
127
A company's actual output for the period was 52,800 units and variable overhead costs per unit were in line with budget. The budgeted output was 54,000 and the budgeted variable overhead cost per unit was £4.20 and actual total overhead expenditure of £259,200 meant that fixed overheads were £19,200 under budget.
What was the budgeted level of fixed overheads for the period?
£56,640
£51,600
£21,600
£18,240
Feedback:
Actual expenditure on overheads 259,200
Less budgeted variable overhead expenditure = actual expenditure (£4.20 × 52,800) (221,760)
Actual expenditure on fixed overheads 37,440
Plus fixed overheads under budget 19,200
= Budgeted fixed overhead expenditure 56,640
Available Answers
£56,640 (1 Mark)
128
Extracts from Mahon Ltd's records for November 20X7 are as follows
Budget Actual
Production 1,248 units 1,344 units
Variable production overhead cost £7,488 £7,677
Labour hours worked 3,744 5,376
The variable production overhead total variance for November is:
£387 (A)
£387 (F)
£189 (A)
£189 (F)
Feedback:
Standard variable overhead cost per unit = £7,488 / 1,248 units = £6 per unit
£
Standard variable overhead cost for 1,344 units (× £6)
8,064
Actual variable overhead cost
7,677
387 (F)
If you selected £387 (A) you calculated the correct value of the variance but you misinterpreted its direction.
The variance of £189 (A) is the difference between the standard cost for 1,248 units and the actual cost for 1,344 units. This is not a valid comparison for control purposes because of the different output volumes.
The variance of £189 (F) is the difference between the standard cost for 1,248 units and the actual cost for 1,344 units with you also misinterpreting the direction of the variance.
Available Answers
£387 (F) (2 Marks)
129
Citricacid plc budgets during its first year of operations to produce and sell 38,160 litres of product per annum at a selling price of £10 per litre. Citricacid's budgeted costs are as follows:
Variable production costs £3.54/unit
Fixed production costs £1.04/unit
Variable selling costs £2.50/unit
In the first year the unit selling price was £10 per litre and the variable unit cost and expenditure on fixed production costs were also as budgeted. Actual sales volume was 38,400 litres and closing inventory was 960 litres.
Using absorption costing Citricacid's profit for the year was:
£113,376
£112,378
£112,128
£110,880
Feedback:
Gross profit would be 38400 units *(10-3.54-1.04)
Less seliing costs 38400*2.5
=112128
However under absorption we over absorbed 38160 *1.04 vs (38400+960)*1.04=1248 therefore add this back to get:
Available Answers
£113,376 (1 Mark)
