Ma Multiple Choice q and A

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\ CIPFA EDUCATION AND TRAINING CENTRE

Management Accounting

Multiple choice questionbank and solutions


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June 2015 Management Accounting

Page 2 Multiple choice question bank and solutions

First published 2015

Published by CIPFA Education and Training Centre

77 Mansell Street

London E1 8AN

Email: [email protected]

Website: http://www.cipfa.org.uk/cetc

Copyright © 2015 Chartered Institute of Public Finance and Accountancy

All rights reserved. No part of this publication may be reproduced, stored in a retrieval

system, or transmitted in any form or by any means, electronic, mechanical, photocopying,

recording or otherwise, without either the prior written permission of the publishers or a

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Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.

Every possible care has been taken in the preparation of this publication but no

responsibility can be accepted for loss occasioned to any person acting or refraining from

action as a result of any material contained herein.


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Management Accounting June 2015

Multiple choice question bank and solutions Page 3

Contents

QUESTIONS ...................................................................................... 4

Role and scope of management accounting ...................................... 4

Cost behaviour and cost accounting techniques ............................... 7

Budgeting ....................................................................................... 30

Financial control ............................................................................. 48

Financial decision making .............................................................. 54

SOLUTIONS .................................................................................... 73

Role and scope of management accounting .................................... 73

Cost behaviour and cost accounting techniques ............................. 74

Budgeting ....................................................................................... 88

Financial control ............................................................................. 95

Financial decision making .............................................................. 99


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QUESTIONS

Role and scope of management accounting

Question 1.

Managers need knowledge of cost behaviour for a number of reasons.

Which of the following is not usually regarded as an activity that needs

knowledge of cost behaviour?

(a) Budgeting and production planning

(b) Performance evaluation

(c) Preparation of final accounts

(d) Break even analysis and short term decision making

Question 2.

Most tactical and operational decisions are programmed decisions.

These can be described as ______________ decisions where financial and

other variables are subject to little ______________ and the outcome (s)

are ______________ to predict.

What are the missing words?

(a) Routine, uncertainty, easy

(b) Simple, cost, not important

(c) Difficult, information, difficult

(d) Routine, certainty, difficult


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Question 3.

Which of the following is not usually considered to be a focus of

management accounting?

(a) Planning

(b) Control

(c) Financial appraisals

(d) External reporting

Question 4.

Management accountants often report non-financial or qualitativeinformation alongside financial information. Which of the following would

not usually be reported?

(a) Product quality

(b) Customer satisfaction

(c) Employee morale

(d) Legal implications

Question 5.

Management accountants often calculate performance indicators. These can

be compared with which of the following?

(i) Previous periods

(ii) Different sections of the same organisation

(iii) Other organisations

(iv) Levels of performance that are considered to be good practice

(a) (i) and (ii)

(b) (i) and (iv)

(c) (i), (ii) and (iii)

(d) All of them


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Question 6.

Which words complete the following statement?

“_______________ accounts are prepared for external stakeholders.

Management accounts are prepared for _______________ stakeholders.”

(a) Financial, internal

(b) Financial, external

(c) Management, budget

(d) External, management


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Cost behaviour and cost accounting

techniques

Question 7.

How would a manufacturing company classify its external audit fees?

(a) A production overhead

(b) An administrative overhead

(c) A selling and distribution cost

(d) Research and development

Question 8.

Which of the following describes fixed costs?

(a) Constant per unit of production

(b) Outside the control of management to change

(c) Constant regardless of the volume of production

(d) Costs that are not affected by changes in the general level of prices

Question 9.

Which of the following statements are usually considered to be true for

variable costs?

(i) Cost varies as a function of the level of output.

(ii) Costs are usually assumed to be linear (directly proportional)

(iii) Unit variable cost is constant for all output levels

(iv) Rent is usually a good example of a variable cost

(a) (i) and (ii)

(b) (i), (ii) and (iii)

(c) (i) and (iii)

(d) All of them


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Question 10.

Which of the following statements are usually considered to be true for

fixed costs?

(i) Fixed costs are fixed by senior management

(ii) Fixed costs are unchanged regardless of the level of output acrosswide output ranges.

(iii) Fixed costs primarily relate to short term situations where output is

more stable and fixed costs are less able to be influenced

(iv) Rent is usually a good example of a fixed cost

(a) (i), (ii) and (iii)

(b) (i), (ii) and (iv)

(c) (ii), (iii) and (iv)

(d) All of them

Question 11.

What are the missing words in the following statement?

_______________ of overheads can take place where the amount of

overhead to be charged to a particular cost centre can be accuratelyascertained. Overheads are _______________ where an item of

expenditure benefits two or more cost centres and the amount chargeable

to each cannot be calculated with any accuracy.

(a) Allocation; apportioned

(b) Apportionment; allocated

(c) Recharging; not recharged

(d) Recharging: divided equally


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Question 12.

Which of the following is not a common basis for the apportionment of

costs?

(a) Relative number of employees for supervision, welfare andpersonnel costs.

(b) Relative floor area for rent, heating, lighting and building insurance.

(c) Book value of fixed assets for repairs and maintenance of buildings.

(d) Book value of machinery for depreciation and insurance of plant

and machinery.

Question 13.

Which of the following is the process of charging production overheads to

cost units?

(a) Overhead recharges

(b) Overhead apportionment

(c) Overhead allocation

(d) Overhead absorption

Question 14.

Which of the following statements accurately describes Activity Based

Budgeting?

(a) Budgets are set for activities instead of functional departments;

and are set for activities based on cost drivers.

(b) Programmes of work are identified for achieving the organisation’s

objectives and budgets do not follow the organisation’s

departmental structure.

(c) Budgets are continuously updated in relation to new information.

(d) Accountants plan the budget process around the activities that are

necessary to complete the budgets.


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Question 15.

Which of the following statements accurately describes cost centres?

(a) The costs of specific units of output

(b) Functions or locations for which costs are ascertained

(c) Expenditure that is attributed to a particular activity

(d) Analysing income and expenditure based on the nature of the

income and expenditure

Question 16.

The following graph shows the relationship between production (x axis) and

costs (y axis). These costs could be described as:

(a) Fixed

(b) Variable

(c) Semi-Variable

(d) Stepped


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Question 17.

Which of the following is an accurate definition of ‘cost centre’?

(a) Unit of output or service for which costs are ascertained

(b) Function or location for which costs are ascertained

(c) Amount of expenditure attributable to various activities

(d) A segment of the organisation for which budgets are prepared

Question 18.

A municipal authority has a creditor payments section that makesarrangements for the payment of bills. The budgeted direct cost for the

section for the year is £80 000 and overheads are set at 10% of direct

costs. Three members of staff are employed. It is estimated that they will

make 10 000 payments during the year and that this will be the cost driver.

It is estimated that they will process 1 400 payments for the fire and

rescue service. How much cost would be apportioned to the fire and rescue

service?

(a) £11 200

(b) £11 610

(c) £12 050

(d) £12 320


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Question 19.

This graph shows the relationship between costs and output:

How would these costs be best described?

(a) Line A – Semi-Variable Costs, Line B – Variable Costs.

(b) Line A – Variable Costs, Line B – Semi-Variable Costs.

(c) Line A – Direct Costs, Line B – Variable Costs.

(d) Line A – Variable Costs, Line B – Standard Costs.

Question 20.

A company that makes radios makes 10 000 in year one, has fixed costs of

£150 000 and variable costs of £100 000. In year two it expects prices to

remain the same and production to increase to 12 000 radios. What would

the budgeted total cost be?

(a) £250 000

(b) £270 000

(c) £280 000

(d) £300 000


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Question 21.

A company has decided to use the repeated distribution method to re-

apportion service department costs. What does this decision suggests?

(a) There are more service departments (overhead cost centres) thanproduction cost centres

(b) The company wants to avoid under or over absorbing overheads in

its production cost centres

(c) Overhead rates are based on actual costs and activity levels rather

than budgeted costs and activity levels.

(d) The service departments carry out work for each other.

Question 22.

A management accountant is asked to price a job. The company operates a

job costing system. The production overhead absorption rate is £17 a

machine hour. Prices are calculated to include a 60% mark up on prime

costs to recover non-production overheads and planned profits. It is

estimated that this job will require 150 machine hours, the cost of direct

labour will be £5 500 and the cost of direct materials £12 500. What would

the calculated price be?

(a) £20 550

(b) £22 080

(c) £28 800

(d) £32 880


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Question 23.

Bob’s Tables produced and sold 200 tables in April, had fixed costs of

£6 000 and variable costs of £3 000. If production and sales increased by

17.5% in May, which of the following statements would be true?

(a) Total fixed costs and total variable costs would both increase.

(b) Total fixed costs would decrease and total variable costs would

remain the same.

(c) Fixed costs per unit would increase and variable costs per unit

would remain the same.

(d) Fixed costs per unit would decrease and variable costs per unit

would remain the same.

Question 24.

Fred’s Furniture produces 500 chairs during July and the cost of direct

labour is £2 500. Direct labour is considered to be a semi-variable cost with

a fixed element of £1 000 a month. It is expected that in August 400 chairs

will be produced. What would be the expected cost of direct labour in

August?

(a) £1 800

(b) £2 000

(c) £2 200

(d) £2 500


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Question 25.

Bill’s Motors serviced 400 cars during September and rent was £3 a car.

Rent is a fixed cost and it is expected that 300 cars will be serviced during

October. What would the rent be in October?

(a) £900

(b) £1 050

(c) £1 200

(d) £1 350

Question 26.

Variable cost per unit is £6 and fixed cost per unit is £3 during September

when 5 000 units are produced. If production falls to 4 500 units in

October, what would be the total cost of the units produced?

(a) £45 000

(b) £40 500

(c) £42 000

(d) £43 500

Question 27.

In April, anticipated production is 10 000 units, budgeted variable costs are

£85 000 and budgeted fixed costs are £45 000. If 12 000 units are actually

produced, what would be the expected total cost?

(a) £130 000

(b) £147 000

(c) £156 000

(d) £139 000


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Question 28.

The Management Accountant at a bicycle factory calculates that to produce

50 000 bicycles the fixed costs would be £250 000 and the total cost

£750 000. What would he calculate the cost of producing 48 000 bicycles to

be?

(a) £750 000

(b) £740 000

(c) £730 000

(d) £720 000

Question 29.

The following data is drawn from management accounts based onabsorption costing:Sales £100 000 (£50 000 of product A, £30 000 of product B, £20 000 ofproduct C)Total Direct costs £50 000Overheads £30 000 (allocated one third to each product)Profit £20 000 ( £20 000 product A, Nil product B, Nil product C)

What contribution to overheads would be made by each product using

marginal costing?

(a) Product A £20 000, Product B Nil, Product C Nil.

(b) Product A £10 000, Product B £5 000, Product C £5 000.

(c) Product A £30 000, Product B £10 000, Product C £10 000.

(d) Product A £25 000, Product B £15 000, Product C £10 000.


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Question 30.

Which of the following statements about job and service costing is not

true?

(a) Job costing is establishing how much it will cost to deliver therequirements of a customer.

(b) Service costing is when the final output is intangible. There is not

an actual product.

(c) Service costing is most likely to involve staff costs while with job

costing most of the costs are likely to be materials.

(d) Service costing is appropriate for companies that operate in a

service industry but is not appropriate for services provided by acompany’s service departments.

Question 31.

Which of the following costing techniques is used to establish the ‘full’ cost

of products or services to include all costs, fixed and variable, within the

cost of each unit produced?

(a) Marginal costing

(b) Activity based costing

(c) Standard costing

(d) Target costing

Question 32.

Which of the following statements about cost centres is not true?

(a) It is important to divide an organisation into various cost centres.

(b) A cost centre can be a location, department, person or function.

(c) Each manager in an organisation will be responsible for a single

cost centre.

(d) For each cost centre relevant costs are collected.


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Question 33.

Which method of costing does not include the ‘full’ cost of products and

services with the cost of individual units; and only recognises those costs

that are variable in relation to the number of units produced?

(a) Variable Costing

(b) Marginal Costing

(c) Absorption Costing

(d) Activity Based Costing

Question 34.

In an absorption costing system, it is necessary to apportion overheads to

services. In what circumstances would a problem with reciprocal services

arise?

(a) Where there is a lack of robust data on which to base the

apportionment.

(b) Where it is wished to allocate overheads on the basis of the

capacity of each production department to bear them.

(c) Where there are two or more service departments that work for

each other as well as working for production departments.

(d) Where the cost of the service departments is high in relation to the

income of the production departments.


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Question 35.

Which method of apportioning the costs of service departments is described

below?

“This method involves the appropriate proportion of the first departmentbeing apportioned to the second department (and the production

departments) and then the proportion of the new total cost of the second

department is apportioned back to the first department (and the production

departments) and so on until the amounts being apportioned are

negligible.”

(a) Repeated Distribution

(b) Algebraic Method

(c) Specified Order of Closure

(d) Appropriate Proportion

Question 36.

Which of the following statements about methods of overhead absorption is

not true?

(a) The Direct Labour Hour rate is generally most appropriate to use in

a labour intensive cost centre.

(b) The Cost Unit Absorption rate is only appropriate where the product

units produced in the cost centre are significantly different in terms

of production processes and times.

(c) The Machine Hour Rate is the most appropriate in a mechanised

cost centre.

(d) Each cost centre will choose and use only one method of overhead

absorption.


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Question 37.

Which of the following is not a reason for using predetermined overhead

absorption rates?

(a) It would be unacceptable for organisations to wait until the end ofan accounting period to charge overheads to jobs.

(b) Management Accountants do not have the time to calculate

overhead absorption rates other than when the budget is set.

(c) If the overheads were absorbed at the end of each month, the rate

may fluctuate wildly.

(d) The amount of overhead itself may fluctuate seasonally causing the

rate to fluctuate between seasons.

Question 38.

A bicycle factory uses absorption costing. Its budgeted annual overheads

total £100 000 and they are apportioned on the basis of direct labour hours

at a rate of £1 an hour. During the year 130 000 hours are worked and

actual overheads are £110 000. What is the level of under or over

absorption of overheads?

(a) £20 000 over absorbed

(b) £20 000 under absorbed

(c) £10 000 under absorbed

(d) £30 000 over absorbed


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Question 39.

Which of the following statements about Activity Based Costing is not true?

(a) Changes in the business environment including wider product

ranges, low labour costs and higher fixed costs make activity basedcosting more appropriate than absorption costing.

(b) Activity based costing needs a careful choice of activities or cost

pools, a means of distributing indirect costs and overheads to cost

pools and a choice of cost driver for each cost pool.

(c) Cost drivers that are used in activity based costing are always easy

to measure.

(d) Activity based costing is intended to give a better understanding ofoverhead behaviour and a greater understanding of the cost

complexity.

Question 40.

Which of the following situations is not considered to be one where Activity

based costing systems would be of benefit?

(a) There are small product ranges, a relatively low proportion of non-

volume related overheads and direct labour and materials costspredominate.

(b) Significant proportions of the organisation’s costs are indirect costs.

(c) Products have differences in volumes produced, processes required,

batch size or complexity and as such require significantly different

levels of support activities.

(d) Complex products appear to be very profitable and simple products

appear to be losing money.


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Question 41.

How do absorption costing and marginal costing differ?

(a) In the treatment of variable costs.

(b) In the treatment of fixed costs.

(c) In the treatment of income.

(d) In the treatment of direct costs.

Question 42.

A company uses LIFO to value inventory.

The inventory movements for Unit 56X for the month of May were as

follows:

8th Purchase 200 units @£48

16th Issue to production 150 units

22nd Purchase 250 units @ £50


If the inventory value on 1st May was 160 units valued at £7 520, what is

the value of issues to production for the month of May?

(a) £22 870

(b) £23 065

(c) £23 275

(d) £23 450


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Question 43.

A company uses a weighted average system to value inventory. At the

beginning of November it has 450 units of Item XB in inventory with a

value of £4 500.

The inventory movements during November were as follows:


9th Purchase 250 units @ £11.1




What is the cost per unit of the closing inventory for Item XB in November?

(a) £10.5

(b) £10.65

(c) £10.95

(d) £10.75

Question 44.

A company uses a FIFO system to value inventory. In March it has no

opening inventory of Product LK and the following inventory movements

took place during the month.

10th Purchase 190 units @ £20


18th Purchase 130 units @ £26

22nd Issue to production 90 units23rd Purchase 300 units @ £24


What is the value of issues of Product LK to production in the month of

March?

(a) £7 740

(b) £7 933

(c) £8 240

(d) £7 660


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Question 45.

A company is reviewing its inventory valuation system and is considering

the method used to value sheet metal. New deliveries are stacked on top

of existing inventory. The valuation system will not be used to value

inventory for the financial accounts. Which of the following statements iscorrect?

(a) LIFO would not be a suitable valuation technique since it is not

permitted for the purposes of financial accounting under IAS 2

(b) FIFO would be difficult to justify as inventory is unlikely to be used

on a first in first out basis in practice

(c) FIFO cannot be used as sheet metal is not a perishable item

(d) Weighted average is the most suitable valuation method asdeliveries are stacked on top of existing inventory.

Question 46.

A manufacturing company buys inventory twice a week and issues to

production daily. If inventory prices are rising, which method of inventory

valuation will record the highest value of closing inventory?

(a) LIFO

(b) FIFO

(c) Weighted average

(d) It will depend on the balance of purchases and issues to production


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Question 47.

A worker is paid £6 per piecework hour completed during a shift. At the

end of the shift, the worker has produced the following units:

No of unitsproduced

Standard pieceworkhours per unit

Product Zappa 12 0.5Product Invention 8 1.6

What is the cost of labour for the worker

(a) £252

(b) £112.80

(c) £76.80

(d) £120

Question 48.

A worker is paid £8 per hour, but is paid a bonus of 60% of his hourly rate

for each hour he saves during the week when compared with the standard

time required for the tasks he completes. At the end of one week he hasworked for 35 hours and has completed tasks with a total standard time of

32 hours. What is the cost of the worker’s labour for the week?

(a) £256

(b) £280

(c) £270.40

(d) £294.40


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Question 49.

A worker is paid £12 per hour. The standard time required to complete

each task he carries out has been calculated and he is paid a bonus of 70%

of his hourly rate for each hour he saves during the week. At the end of

one week he has worked for 32 hours and has completed tasks with a totalstandard time of 35 hours. What is the cost of the worker’s labour for the

week?

(a) £384

(b) £420

(c) £409.20

(d) £445.20

Question 50.

A worker is guaranteed a minimum wage per shift of £80. Pay is £1.50 for

each unit made in a shift up to 55 units. After that £1.55 per unit is paid

for each additional unit made.

The worker worked two shifts making 50 units in the first shift and 60 units

in the second.

How much will the worker be paid for the two shifts?

(a) £168

(b) £173

(c) £165.25

(d) £170.25


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Question 51.

A company carries out a chemical process and in the month of June the

following costs were incurred:

£Materials – 10 000 kgs 24 000

Labour and overheads costs 15 950

Actual output during the month was 9 700 kg.

The normal loss from the chemical process is 5% and any scrap can be sold

for £2 per kg.

What is the net value of the abnormal gain recorded in the company’s

income statement?

(a) £840

(b) £440

(c) £420

(d) £820

Question 52.

A production process requires 1 500 litres of chemical input per month at a

cost of £2 per litre and other costs of £3 555. Losses are expected to

amount to 10% of production and can be sold for 50p per litre. If the

output in a month is 1 250 litres, what is the value of the output?

(a) £6 000

(b) £6 069

(c) £6 480

(d) £5 931


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Question 53.

In May the information for a manufacturing process was as follows:

Material input in month

(9 000 kg) £18 774Labour and overhead £4 884

At the end of the month, finished production was 8 600 kg. Work in

progress was 85% with regard to material and 70% complete with regard

to labour and overhead.

• Required

What is the value of closing work in progress at the end of May?

(a) £868

(b) £863

(c) £1 051

(d) £1 060

Question 54.

A manufacturing process leads to the creation of two joint products which

are separated at the end of the process. Costs are apportioned on the

basis of sales value at the split off point.

ProductProduction

unitsSalesunits

Selling price perunit

M 5 000 4 000 £30

N 15 000 13 000 £10

What proportion of the joint costs should be apportioned to Product M?

(a) 48%

(b) 50%

(c) 40%

(d) 38.4%


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Question 55.

A company recorded the costs for a manufacturing process based on an

80% completion rate for closing work in progress. It was later found that

the completion rate used should have been 70%. What is the effect of the

error on the cost per equivalent unit (CPEU) and the costs of completedgoods (CCG) for the period?

(a) CPEU Understated CCG Overstated

(b) CPEU Overstated CCG Understated

(c) CPEU Understated CCG Understated

(d) CPEU Overstated CCG Overstated

Question 56.

A joint product from Process F can be sold at the split-off point for £9 per

litre. Alternatively it can be further processed at a cost of £5 per litre and

will then have a market price of £14 per litre.

What is the net effect of further processing the product?

(a) Gain of £5 per litre

(b) Gain of £4 per litre

(c) No gain, no loss

(d) Loss of £5 per litre


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Budgeting

Question 57.

Which form of accounting relates to the financial control procedures

reflecting the delegation of financial authority?

(a) Management accounting

(b) Procedural accounting

(c) Responsibility accounting

(d) Financial accounting

Question 58.

Which of the following statements about incremental budgeting is not true?

(a) The current year’s budget is taken as a basis for building the

budget for the next year.

(b) In setting budgets using the incremental approach, accountants

would roll forward the base, amend by adding or removing known

growth and savings, adjusting for changes as a result of inflation

and aggregating budgets.

(c) The incremental system is rarely used in the public sector as it is

too simplistic and focuses only on areas of the budget that are

likely to change.

(d) Incremental budgeting can stifle innovation in terms of ways in

which service delivery can be improved or made more efficient.


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Question 59.

Which of the following statements about zero-based budgeting is not true?

(a) In Zero-Based Budgeting all the activities are justified and

prioritised before resources are allocated to each activity.

(b) With Zero-Based Budgeting the items and activities that are

included in the budget are not fully reviewed and it is assumed that

their relevance to the objectives of the organisation continue to be

the same as in the past.

(c) The four steps required in setting budgets using Zero-Based

Budgeting are: defining decision units, developing decision

packages, developing incremental decision packages and reviewing

and ranking.

(d) To go through the entire Zero-Based Budgeting process for tactical

budgeting would be extremely cumbersome administratively.

Question 60.

Which of the following would be a good reason for choosing a bottom up

approach to budgeting?

(a) It would allow senior management to set the overall direction of the

budgets to ensure that they complement the strategic direction and

objectives.

(b) Budgets would be prepared by those who have the best knowledge

of the area they are budgeting for and would therefore be more

accurate.

(c) There is a need to avoid allowing slack to be built into the budget

whereby those estimating their budgets would allow themselvessome room to manoeuvre by over-estimating their expenditure

budgets and under-estimating any income budgets.

(d) Information needs to be passed between senior management and

junior management as budgets are built up.


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Question 61.

Which of the following is not usually considered to be a necessary condition

for budgetary output controls to operate?

(a) Clear objectives and measurable outputs

(b) A predictive model

(c) Effective audit arrangements

(d) Ability to take action

Question 62.

A budget for a financial year that runs from 1 April to 31 March of £15 000includes a payment for £3 000 that will be made in July and £12 000 that is

profiled evenly through the financial year. How much would be profiled

budget be on 31 December?

(a) £3 000

(b) £9 000

(c) £11 250

(d) £12 000

Question 63.

Budgets should be designed and managed in a way that encourages

constructive behaviour from managers. Which of the following actions is

not a way to do this?

(a) Encouraging them to achieve set targets

(b) Giving a statement of the overall direction of the organisation and

what is expected of management and employees

(c) Giving managers an incentive to ensure that all budgets are fully

spent by discouraging virement and carry forwards into future

years

(d) Providing the basis for performance management and rewarding

staff and management for their achievements.


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Question 64.

Which of the following would be included in a cash budget?

(i) Salaries and wages

(ii) Depreciation

(iii) Provision for bad debts(iv) Repayment of principal on long-term loans

(a) (i), (ii), (iii) and (iv)

(b) (ii) and (iii)

(c) (i) and (iii)

(d) (i) and (iv)

Question 65.

Which of these statements about the Medium Term Expenditure Framework

is not correct?

(a) The Medium Term Expenditure Framework is a process laid down

by the World Bank for transparent planning and budget

formulation.

(b) The main objectives of the Medium Term Expenditure Framework

are to set fiscal targets and to allocate resources to strategic

priorities within these targets.

(c) The Medium Term Expenditure Framework has become

internationally recognised as a robust and comprehensive technical

tool for measuring a country’s public financial management

performance.

(d) The Medium Term Expenditure Framework helps to improve budgetprocesses through clarity of policy objectives, improved

predictability of budget allocations, comprehensive coverage over

public services and improved transparency in the use of resources


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Question 66.

A Council’s base budget for trade waste income in 2013/14 is £120 000

based on making 10 000 collections at a charge of £12 each. In 2014/15

the charge will increase by 10% and it is estimated that 9 500 collections

will be made. What should the 2014/15 budget be?

(a) £114 000

(b) £120 000

(c) £125 400

(d) £132 000

Question 67.

An organisation borrows £1 000 000 at a rate of interest of 4% a year with

monthly payments. The loan is taken out on 1 July 2013. How much

interest is payable during the financial year April 2013 to March 2014?

(a) £20 000

(b) £30 000

(c) £40 000

(d) £50 000

Question 68.

Which of the following is not a factor in determining whether a transaction

should be accounted for as capital expenditure?

(a) The nature of the expenditure – whether it involves acquiring

something that retains its value

(b) Materiality – whether the expenditure is significant in view of the

size of the organisation.

(c) Whether the expenditure provides a benefit beyond the current

accounting period

(d) Financing – whether the expenditure is financed by loan and will

therefore represent a cost beyond the current accounting period


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Question 69.

The following is an excerpt from an organisation’s management accounts at

the mid-point of the financial year:

Annual Budget Profiled Budget Actual£ £ £

Salaries 120 000 60 000 65 000

Electricity 10 000 3 000 2 900

Sales -20 000 -12 000 -13 000

Which of the following statements is necessarily not true?

(a) The salaries budget has a straight line profile and shows an adverse

variance.

(b) The electricity budget is profiled towards the end of the year while

the sales budget is profiled towards the beginning of the year.

(c) Sales have been higher than expected.

(d) All the budgets show a favourable variance.

Question 70.

Which of the following defines a master budget?

(a) A master budget brings together budgets from various areas of an

organisation to assess the budgeted income statement and

budgeted cash flow for the whole organisation.

(b) Master budgets relate to specific functions carried out within the

organisation.

(c) In a master budget, all the activities are justified and prioritised

before resources are allocated to each activity.

(d) With master budgeting, programmes of work are identified for

achieving the organisational objectives. A key feature is that it may

not follow the organisation’s departmental structure.


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Question 71.

The receivables records of a wholesale company show the following:

Invoices paid in month after sale 60%

Invoices paid in the second month after sale 20%

Invoices paid in the third month after sale 15%Bad debts 5%

Credit sales are budgeted as £50 000 in June, £75 000 in July and £65 000

in August.

Invoices are issued on the last day of the month. A 2% discount is given to

customers who pay in the month after sale.

The cash amount that should be budgeted to be received during September

in credit sales is:

(a) £60 720

(b) £57 680

(c) £61 500

(d) £58 425

Question 72.

The budget for the year April to March is £12 000 and it is profiled

according to the straight line method. Actual expenditure at the end of July

is £4 500. What is the variance between actual expenditure and the profiled

budget at the end of July?

(a) £1 000 adverse

(b) £1 000 favourable

(c) £7 000 favourable

(d) £500 adverse


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Question 73.

Which of the following is the correct definition of ‘budget slack’?

(a) An extended lead time between preparing functional budgets and

the master budget

(b) The difference between the budgeted and break-even levels of

activity

(c) Budgeting for spare capacity

(d) Deliberate over-estimation of costs and under-estimation of income

in a budget

Question 74.

Where the current year’s budget is taken as a basis for building the budget

for the next year, this is often known by which of the following terms?

(a) Incremental Budgeting

(b) Zero Based Budgeting

(c) Short Term Budgeting

(d) Operational Budgeting

Question 75.

A company bases its budgets on holding an inventory of 2 000 units, but

has opening inventory of 1 600 units at 1 April. During April it expects to

sell 3 400 units. How many units should it budget to produce during April?

(a) 3 400

(b) 3 800

(c) 3 000

(d) 2 600


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Question 76.

Which of the following statements about Zero Based Budgeting is not true?

(a) Zero Based Budgeting starts each period’s budgeting from ‘scratch’

rather than basing it on a previous period.

(b) The items and activities that are included in a Zero Based Budget

have been fully reviewed and are justified as their relevance to the

objectives of the organisation has been re-assessed.

(c) To go through the entire Zero Based Budgeting process for tactical

budgeting would be extremely cumbersome administratively.

(d) The Zero Based Budgeting approach cannot be applied to budgets

periodically, for example every five years.

Question 77.

Which of the following statements about Planning, Programming Budgeting

Systems (PPBS) is not true?

(a) Under PPBS, programmes of work are identified for achieving the

organisational objectives.

(b) A key feature of PPBS is that it may not follow the organisation’s

departmental structure.

(c) In PPBS, budgets are set for activities instead of functional

departments and are based on cost drivers.

(d) PPBS can reduce accountability through using project managers

rather than departmental heads with specialist knowledge of their

budget area.


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Question 78.

Which of the following statements about Activity Based Budgeting is NOT

true?

(a) In Activity Based Budgeting, budgets are set for activities instead offunctional departments and are based on cost drivers.

(b) The items and values in an Activity Based Budget are adjusted for

changes expected in the next period for changes such as the

volume of activity, activities undertaken and changes in prices.

(c) Activity Based budgets should be more accurate and have a greater

focus on overhead and support costs.

(d) A costing system is needed to match the activity based budgetingsystem and this may be time consuming, costly and may require

cultural change for the organisation to focus on support services

and accept the use of time sheets.

Question 79.

When budgets are continuously being updated in relation to new

information they are known by which of the following terms?

(a) Rolling Budgets.

(b) Constantly Updated Budgets.

(c) Incremental Budgets.

(d) Planning, Programming, Budgeting Systems.


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Question 80.

Which of the following statements about top-down budgeting is not true?

(a) Top-down budgeting begins at the upper levels of management

who set an overall budget with parameters as to how the budgetshould be broken down.

(b) Top-down budgeting can result in lower level managers and

employees feeling uninvolved in the budget process and lacking the

enthusiasm to take ownership of a budget that they feel has been

dictated to them.

(c) Top-down budgeting can be seen in some public service

organisations where the overall level of resources and sometimes

the objectives for the organisation are set by central government orfunding agencies handing down grants.

(d) It is time consuming to use a top-down approach because of the

administration required in checking and amending the budgets until

a final version can be agreed upon by all involved.

Question 81.

A public authority operates an incremental budgeting system. In 2013/14the budgets for premises costs are:Rent £10 000Electricity £5 500Insurance £2 000

The 2014/15 budget is being prepared based on the assumption that pricesgenerally will increase by 5% compared with 2013/14. However, rents willincrease by 10%.

What will be the 2014/15 budgets?

(a) Rent £11 000; Electricity £5 775; Insurance £2 100.

(b) Rent £10 500; Electricity £5 775; Insurance £2 100.

(c) Rent £11 500; Electricity £6 050; Insurance £2 200.

(d) There is insufficient information here to calculate the 2014/15

budgets.


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Question 82.

A public authority has a financial year that runs from April to March. There

are annual pay increases that take effect from 1 October each year. At 1

April 2014 a manager is on an annual salary of £24 000. Her 2014 pay

increase will be 5%. There is £23 800 provided for her salary in 2013/14.What should be included in the 2014/15 budget for her salary?

(a) £24 000

(b) £24 600

(c) £25 200

(d) £24 990

Question 83.

A municipal authority has decided to prepare a Zero Based Budget for its

street cleansing contract for 2014/15. The 2013/14 budget is £200 000 and

inflation is running at 5%. The street cleansing contract is based on the

contractor charging £530 a month in 2014/15 for each mile of streets

cleaned and there are 35 miles of cleaned streets in the area. What should

be the budget for 2014/15?

(a) £200 000

(b) £210 000

(c) £222 600

(d) £233 730


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Question 84.

A public authority whose financial year runs from April to March has a

budget for postage of £24 000. This includes an annual charge of £2 000

for a franking machine that is paid in June, £4 000 for posting out the

annual report that is done in October and the balance is for general postagethat is expected to be incurred evenly through the year. What would be the

profiled budget to date in July?

(a) £1 500

(b) £6 000

(c) £8 000

(d) £10 000

Question 85.

Which of the following statements about rolling budgets is not true?

(a) When budgets are being continuously updated in relation to new

information they are called rolling budgets.

(b) Organisations use rolling budgets when they want their budgets tobe up to date and relevant to the current environment.

(c) When a budget for one year is rolled forward into the next year

with only incremental adjustments it is called a rolling budget.

(d) Where rolling budgets are prepared quarterly, the coming quarter

would be budgeted in detail while the following quarter would be a

rougher estimate that would be updated later.


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Question 86.

Which of the following statements about feedback and feed forward

controls is not true?

(a) Feedback and feed forward controls indicate the reasons for anyvariances between budgets and actual and forecast performance.

(b) Feedback control compares budgeted and actual results. It is

retrospective.

(c) Feed forward control compares objectives with forecast results. It is

forward thinking.

(d) Feedback and feed forward aspects of control may be so closely

related as to be indistinguishable.

Question 87.

Which of the following activities are usually considered to be required in

any control system?(i) Setting standards and budgets to be measured against(ii) Measuring actual results(iii) Calculating variances that compare the actual results with the

predetermined standards

(iv) Taking the necessary actions to control problem areas.


(b) (ii) and (iii)

(c) (iii) and (iv)

(d) All of them


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Question 88.

A management accountant is preparing the production budget for product Xfor the coming year. The opening inventory for product X is 6 000 units andthe company intends to have a closing inventory that is 30% higher than

the opening inventory.

It is planned to sell 70 000 units of product X. How many units of product X

will need to be produced?

(a) 68 200 units

(b) 71 800 units

(c) 77 800 units

(d) 80 000 units

Question 89.

How is an ideal standard cost calculated?

(a) By using the original specification against which later / updated

standards can be compared.

(b) By assuming 100% efficiency 100% of the time and not allowing

for aspects of the production process such as waste materials or

unavoidable delays.

(c) By basing calculations on what should happen under normal

operating conditions.

(d) By updating the standard for any changes during the period such as

price changes.


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Question 90.

A company has introduced a new product and the time workers took to

make it has been recorded. The first unit took 18 minutes and the next 15

units took 73.2 minutes. What is the learning curve rate for the new

product?(a) 67%

(b) 70%

(c) 71%

(d) 75%

Question 91.

Workers in a manufacturing plant demonstrate an 80% learning rate when

making new products. They have just completed the first unit of a new

product in 8 hours. 32 units of the product are required. How long will it

take them to make the last 16?

(a) 52.4 hours

(b) 31.5 hours

(c) 32.8 hours

(d) 19.7 hours


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Question 92.

A company uses linear regression to predict its monthly overhead costs. It

uses the equation y = a + bx where y = monthly overhead cost and x =

number of machine hours worked. The latest month’s figures have been

used to derive an equation and the relationship between them generatedthe following data:

Correlation coefficient (r) = 0.85

Coefficient of determination (r2) = 0.73

Which of the following statements is true?

(a) The percentage of the variance in overhead costs which is

explained by the variance in machine hours is 85%

(b) The percentage of the variance in machine hours which is explainedby the variance in overhead costs is 85%

(c) The percentage of the variance in overhead costs which is

explained by the variance in machine hours is 73%

(d) The percentage of the variance in machine hours which is explained

by the variance in overhead costs is 73%


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Question 93.

A production department has recorded the following production costs over

the past week:

Production units £Monday 15 000 105 500

Tuesday 17 000 118 500Wednesday 16 500 117 600Thursday 15 500 104 050Friday 16 800 119 000

Using the high low method to predict the fixed and variable costs of the

production department, estimate the likely total production cost for a

production run of 16 750 units.

(a) £116 875

(b) £178 250

(c) £192 625

(d) £108 875


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Financial control

Question 94.

Which of the following is not a true statement about virement?

(a) Virement causes budgets to be too rigid and control too detailed. It

is not consistent with the greater delegation of budgets.

(b) Virement is the transfer of monies from one budget head to

another.

(c) Virement is the process of meeting overspending in one area with

underspending in another.

(d) Budgetary control would become chaotic and break downcompletely if there were not rules regulating when and how

virement should be used in an organisation.

Question 95.

Which of the following statements accurately describes a flexible budget?

(a) A budget that, by recognising different cost behaviour patterns, is

designed to change as the volume of activity changes.

(b) A budget for a specific period of time that includes income,

expenditure, assets, liabilities and cash flow.

(c) A budget that is reviewed monthly in the light of actual

performance and updated information with an additional period

added to the forecast and intermediate periods updated.

(d) A budget for variable costs that is updated in the light of changes in

levels of activity.


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Question 96.

A company has an overhead budget that is set at £50 000 at a 50% activity

level and £56 250 at a 75% activity level. What would its overhead budget

be at an activity level of 80%?

(a) £57 500

(b) £60 000

(c) £68 000

(d) £80 000

Question 97.

An organisation decides that in future its managers will only investigate

budget variances that appear to be significant. What is this process called?

(a) Top down Budgeting

(b) Management by Exception

(c) Incremental analysis

(d) Drilling Down

Question 98.

Which activity has the following characteristics?• Meeting overspending in one area with underspending in another.• Providing a degree of flexibility to the budget.• An important concept for budgeting and budgetary control.

(a) Management Accounts.

(b) Virement.

(c) Financial regulations.

(d) Devolved Management.


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Question 99.

A highway maintenance company operates a standard marginal costingsystem. Its budget is based on laying 20 000m2 of asphalt a month withthe budgeted cost of materials being £30 per m2. Using 3kg of materials at

£10 per kg. In October 2013 the company lays 23 000m2

of asphalt using72 000kg of materials at a cost of £684 000.

What is the direct material price variance?

(a) £36 000 adverse

(b) £6 000 adverse


(d) £6 000 favourable

Question 100.

A company that manufactures bicycles absorbs fixed overheads on thebasis of machine hours. The fixed production overhead absorption rate is£5 per machine hour. There are 100 000 budgeted machine hours duringthe period under consideration.

During that period the company worked 110 000 machine hours and fixed

production overheads were £600 000. What was the level of over or under

absorption of overheads?

(a) £50 000 over absorbed

(b) £50 000 under absorbed

(c) £100 000 under absorbed

(d) No under or over absorption


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Question 101.

A company uses a standard marginal costing system. In April its budgetedproduction and sales were 10 000 units and budgeted direct material costwas £30 per unit based on using 3kg of direct materials at £10 per kg.

Actual production and sales was 11 500 units, 36 000 kg of direct materialswere purchased at a cost of £342 000.

What is the direct material price variance?

(a) £18 000 favourable

(b) £18 000 adverse

(c) £3 000 adverse


Question 102.

Joe the Jeweller repairs watches. The standard repair time is 24 minutesper watch and the standard wage rate is £12 per hour.

During the year 31 000 repairs were carried out. The labour rate variancewas calculated as £3 720 (adverse) and the labour efficiency variance asnil.

What was the actual wage rate during the year?

(a) £11.70 per hour

(b) £12.00 per hour

(c) £12.12 per hour

(d) £12.30 per hour


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Question 103.

Bob’s Tables uses a standard marginal costing system. Budgetedproduction and sales for the year is 20 000 units and variable productionoverheads are estimated at £20 a unit on the basis of five hours at £4.

Actual production and sales during the year was 23 000 units and variableproduction overheads totalled £390 000 based on 104 000 hours.

What is the variable production overhead expenditure variance?

(a) £70 000 adverse

(b) £26 000 adverse



Question 104.

What are the missing words from the following sentence?

“_______________ looks at differences between standard and actual costs,

that is, between what it should have cost and what it actually cost. It willact as a means of focusing management attention on operations.”

(a) Differential Analysis

(b) Standard Costing

(c) Exception Reporting

(d) Variance Analysis


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Question 105.

A firm records the weight of items coming off the production line and in one

hour recorded the following six weights:

566g, 545g, 569g, 542g, 551g, 561g.

What is the standard deviation of the weights and if the long term mean

weight of 556g is used?

(a) 21.8g

(b) 4g

(c) 25.2g

(d) 10.3g


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Financial decision making

Question 106.

Which of the following describes costs that have been incurred in the past?

(a) Fixed costs

(b) Direct costs

(c) Sunk costs

(d) Opportunity costs

Question 107.

If variable costs are 60% of income and fixed costs are £500 000, what

income would be required to achieve a profit of £100 000?

(a) £600 000

(b) £800 000

(c) £1 250 000

(d) £1 500 000

Question 108.

Which words are missing from the following statement?

“_______________ is a what-if technique that allows management to

gauge the effect of changing one or more of the variables within the

cost/volume/profit model.”

(a) Cost/Volume/Profit Analysis

(b) Break-Even Analysis

(c) Sensitivity Analysis

(d) Risk Analysis


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Question 109.

Which of the following would increase the break-even point?

(a) Increased variable costs

(b) Reduced fixed costs

(c) Reduced gross profit margin

(d) Increased prices

Question 110.

A company which makes a single product has calculated that the ratio ofunit contribution to price for its product is 30%. It is operating above its

break-even point. Which of the following statements is true?

(a) The company is not making a profit.

(b) Each additional £1 in sales will contribute £0.70 towards fixed

costs.

(c) Each additional unit sold would add 30% to total variable costs.

(d) Each additional £1 in sales will contribute £0.30 towards profit.


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Question 111.

The graph below is a cost volume profit chart:

What is the significance of the point where the income and costs lines

meet?

(a) It is the break-even point

(b) It is where profit is maximised

(c) It is where the organisation is operating at full capacity

(d) It is where risks are minimised

Question 112.

Which method of costing is considered to be useful for short term decision

making scenarios and cost-volume-profit analysis?

(a) Activity based costing

(b) Absorption costing

(c) Short Term Costing

(d) Marginal Costing

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Question 113.

A company that makes bicycles has a budget based on selling 1 000

bicycles at £100 each. Variable costs are budgeted at £60 000 and fixed

costs at £20 000. The budgeted profit is £20 000. During the year a

contract to sell 200 bicycles is lost but a charity offers to buy 200 bicyclesat £65 each. The manager asks the management accountant for advice.

Which of the following advice would not be correct?

(a) Selling the bicycles to the charity at £65 would result in a profit of

£13 000 being made for the year.

(b) The bicycles should not be sold to the charity at £65. This would

increase losses as the cost of manufacturing them is £80 (£60

variable cost and £20 fixed cost)

(c) The bicycles should be sold to the charity at £65 as the income

would exceed the variable costs of £60 a bicycle.

(d) The bicycles should not be sold to the charity as an opportunity

may arise to sell them to another customer at a higher price.

Question 114.

In which of the following situations would relevant costing not be anappropriate method to use?

(a) Where it appears that actual activity will be lower than budgeted.

(b) Where it appears that extra sales are offered or are capable of

being bid for.

(c) Where it appears that income and costs are in line with budgets.

(d) Where short term opportunities or threats appear that were notplanned for in the original budgets.


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Question 115.

Which of the following statements is not true about short term decision-

making?

(a) In short term decision making the focus is on relevant costs andmarginal costs rather than on fixed costs and absorption costing.

(b) In short term decision making it is usual to accept work at a lower

price than usual as long as it covers all variable costs and makes a

contribution to overheads.

(c) In short term decision making it is usual to accept work at a lower

price than usual as long as it covers all variable costs and its

appropriate apportionment of fixed costs.

(d) In short term decision making the intention is to maximise profits

or minimise losses.

Question 116.

In which of these situations would relevant costing not be an appropriate

method to use?

(a) Make-or-buy decisions

(b) Preparing an annual budget

(c) Use of spare capacity

(d) Closure of a business segment


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Question 117.

In deciding whether a cost is relevant in short term decision making,

management accountants consider a number of factors. Which of the

following factors would be considered?

(i) Decisions that involve choice between alternative courses of action.(ii) Decisions that relate to the future(iii) Decisions that relate to agreed budgets(iv) Decisions that are taken by senior management

(a) (i) and (ii)

(b) (i) and (iii)

(c) (i), (ii) and (iv)

(d) (ii), (iii) and (iv)

Question 118.

In short term decision making, managers often take account of non-

financial considerations. Which of the following could be examples of this?(i) Whether it is better to have spare capacity or to utilise it(ii) Whether further offers may be made by other customers in the future

(iii) Market perception of the product (for example, would selling at alower price imply a lower quality?)

(iv) Whether accepting an offer from a customer would lead to futurebusiness with the same customer.


(b) (i), (ii) and (iv)


(d) All of them


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Question 119.

A company sells boxes of chocolate to supermarkets. Its annual budget is

based on working at full capacity selling 20 000 boxes of chocolate at £11

each. Its fixed costs are £90 000 and the variable costs are £6 for each box

of chocolates. One of the supermarkets, that buys 4 000 boxes a yearstates that it is now prepared to pay only £8 a box. While it is possible for

the company to cut production to 16 000 boxes it is not possible for it to

find another customer. Which of the following statements is not true?

(a) The company would be better off financially to sell the chocolates

at £8 a box rather than to have spare capacity.

(b) If the company sold the chocolates at £8 a box it would record a

loss of £2 000 for the year.

(c) The company would be better off financially not to sell to this

supermarket and to have spare capacity.

(d) If the company sold the chocolates at £8 a box the job would make

a contribution of £8 000 to fixed costs.

Question 120.

Which of the following costs should be included in relevant costs?

(a) Sunk Costs

(b) Costs and benefits that are common to mutually exclusive options

(c) Variable Costs such as Direct Labour and Direct Materials

(d) Accounting charges such as depreciation and central establishment

charges


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Question 121.

Which of the following statements about the treatment of direct materials in

a short term decision making situation is true?

(i) The cost of direct materials is usually a relevant cost.(ii) Where there are materials in stock and there is no possible

alternative use for them they may be considered to be an irrelevantcost.

(iii) Where direct materials have already been purchased and there is noalternative use for them, their opportunity cost is nil.

(iv) The cost of direct materials is usually an irrelevant cost.

(a) (i) and (ii)

(b) (i), (ii) and (iii)

(c) (i) and (iii)

(d) (ii), (iii) and (iv)

Question 122.

Which of the following statements about the treatment of direct labour

costs in a short term decision making situation is true?

(i) Where there is spare capacity, and the labour force is to bemaintained in the short term, labour cost is a non-relevant cost forshort term decisions

(ii) Where casual labour is used as and when needed its cost is relevantfor decision making.

(iii) Where a special order means that staff are diverted from originallyplanned tasks but are replaced by newly recruited staff it is the costof the latter that is relevant to the special order.

(iv) Direct Labour is usually a non-relevant cost in short term decisionmaking.

(a) (i) and (iv)

(b) (ii) and (iii)

(c) (i), (ii) and (iii)

(d) All of them


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Question 125.

A company is considering whether to accept a special order at a price that

is lower than usual. Which of the following questions would it be sensible

for the company to consider?

(i) Have all truly relevant costs been estimated and are there widerresource implications within the ‘irrelevant fixed costs’ that should betaken into account?

(ii) Are there other more beneficial uses for the capacity now, or in thefuture that would become impossible if the order was undertaken?

(iii) What would be the effect on the normal market price and on existingcustomers of selling at below normal market price?

(iv) Are overheads being sufficiently recovered through originally plannedwork?

(a) (i) and (ii)

(b) (i), (iii) and (iv)


(d) All of them

Question 126.

A company that sells chairs for £34 each analyses its costs per unit asfollows: Variable materials £6, Variable labour £5, Production overheads

(variable) £3, Production overheads (fixed) £10, Variable selling costs £1,

Fixed overheads £5 and Profit £4. The company receives a special order at

a price of £18. What would the contribution to fixed costs be per unit on the

special order?

(a) £3 contribution to overheads.

(b) £6 contribution to overheads.

(c) £7 contribution to overheads.

(d) There would be no contribution to overheads.


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Question 129.

A company has been offered a one-off contract that will involve using a

piece of machinery that is no longer used. The machine was originally

purchased for £15 000 but a new replacement would cost £25 000. It had

been intended to sell the machine for scrap for £5 000 but it now emergesthat it could be sold to another company for £10 000. What is the relevant

cost of the machine in deciding whether to enter into the one-off contract

using relevant costing methods?

(a) £5 000

(b) £10 000

(c) £15 000

(d) £25 000

Question 130.

Which of the following formulae is correct?

(a) Contribution = Gross Margin – Fixed Costs

(b) Gross Margin = Sales – Variable Costs

(c) Contribution = Sales – Variable Costs

(d) Contribution = Sales – (Variable Costs + Fixed Costs)

Question 131.

When advising whether products should be sold at a special price in a short

term decision making situation, what should a management accountant do?

(a) Compare the relevant costs with the revenues that would be earned

(b) Compare the fixed and variable costs with the revenues that would

be earned

(c) Compare the relevant costs with the gross profit

(d) Compare the variable costs with the gross profit


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Question 132.

A company requires 2 000kg of gravel for a special job. They have 1 200kg

of gravel in stock and cannot use it for any other purpose although it could

be sold for £3 per kg. The stock was originally bought for £5 per kg and

new gravel can be bought for £6 per kg. What is the total relevant cost ofthe 2 000kg required for the special job?

(a) £12 000

(b) £10 800

(c) £8 400

(d) £7 600

Question 133.

A company uses component A and component B to produce product X and

is considering whether to continue manufacturing components A and B in-

house or to purchase them externally. Component A costs £4 a unit to

manufacture plus £2 500 per period of divisible fixed costs that would be

saved if manufacture ceased. Component B costs £6 a unit to manufacture

plus £5 000 per period of divisible fixed costs that would be saved if

manufacture ceased. Each period the company uses 1 000 units ofcomponent A and 1 500 units of component B. Component A can be bought

in at £7 a unit and component B at £9 a unit. If the decision is based solely

on cost what should the company do?

(a) Buy in components A and B.

(b) Continue to manufacture components A & B in-house.

(c) Buy-in component A and continue to manufacture component B.

(d) Buy-in component B and continue to manufacture component A.


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Question 136.

Which of the following costs is a relevant cost when making a decision

whether or not to accept a one-off contract?

(a) Salaries of full-time staff who will work on the order.

(b) Purchase cost of direct materials held in store.

(c) Depreciation on the machinery that will produce the goods.

(d) The cost of delivering the completed goods to the customer.

Question 137.

Which of the following is not a qualitative factor that a company may take

into account in short term decision-making?

(a) The attitude of staff and trade-unions towards a decision that would

reduce the number of staff required.

(b) The wish to continue to manufacture components in-house to avoid

dependence on external suppliers.

(c) The attitude that existing customers might have to providingproducts at a lower than usual price for a one-off contract.

(d) The wish to maximise profits in the light of the relevant costs of the

options available.


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Question 138.

A company’s budget (in absorption format) for the sale of shoes is as

follows:

Sales: 80 000 pairs at £10; Fixed costs £250 000; Variable costs £400 000;

selling expenses £120 000 (including £80 000 fixed costs and distributioncosts of £0.50 a pair); Profit £30 000; cost per unit £9.625. If the company

were to operate at full capacity it could produce 110 000 pairs.

A catalogue company offers to buy 20 000 pairs of shoes at £7.50 each and

to pay for the distribution costs. The offer is accepted. What would be the

expected contribution from the contract?

(a) £40 000

(b) £50 000

(c) £150 000

(d) There would not be a contribution.

Question 139.

Which of the following statements is not true?

(a) If the length of time under consideration is long enough all costsare relevant.

(b) Fixed costs become relevant costs when they are expected to be

altered by the decision under consideration.

(c) In short term decision making all variable costs are relevant and all

fixed costs are irrelevant.

(d) If fixed costs remain the same with each alternative then they are

irrelevant costs.


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Question 140.

Which of the following is not a good reason for using the contribution

approach to pricing rather than the absorption approach?

(a) The contribution approach offers more detailed information thanthe absorption costing approach because it takes account of fixed

and variable cost behaviours.

(b) A ‘normal’ or ‘target’ pricing formula can be as easily developed

under the contribution approach as under absorption costing for

‘usual’ or ‘non-incremental’ situations.

(c) The contribution approach offers insight into short-run versus long-

run effects of cutting prices on special orders.

(d) The contribution approach will usually result in lower prices being

charged that would make products more competitive.

Question 141.

A company produces product A and product B. Product A has a selling price

of £10 and variable costs of £7. Product B has a selling price of £15 and

variable costs of £9. The company has 1 000 labour hours of spare

capacity. Each labour hour could be used to produce three units of productA or one unit of product B. Which of the following statements is true in this

case?

(a) The company should use the spare capacity to produce 3 000 more

units of product A as this would create a contribution of £9 000.

(b) The company should use the spare capacity to produce 1 000 more

units of product B as product B has a contribution to price ratio of

40% while product A has a contribution to price ratio of 30%.

(c) The company should use the spare capacity to produce 3 000 more

units of product A as product A has the lower variable costs.

(d) The company should use the spare capacity to produce 1 000 more

units of product B as product B has the higher selling price.


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Question 142.

A company is considering whether to continue to make or buy component

A. The company uses 10 000 units of component A each year. Its costs are

currently: Direct Labour £80 000; Direct Materials £10 000; Divisible

overheads £60 000; and Fixed overheads £30 000. An external supplier hasoffered to supply component A at a unit price of £16. If manufacture of

component A was discontinued the spare capacity could be rented out for

£9 000 a year or could be used to manufacture 1 000 units a year of

product X that would make a contribution of £12 a unit. What should the

company do to maximise profit?

(a) Continue to manufacture component A in-house.

(b) Buy component A and leave the facilities idle.

(c) Buy component A and rent out the spare facilities.

(d) Buy component A and use the facilities to produce product X.

Question 143.

A firm is attempting to improve its throughput accounting ratio. Which of

the following measures will help?

(a) Increase selling price

(b) Decrease time available on key resource

(c) Increase material usage per unit

(d) Increase factory cost


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Question 144.

A firm which makes Product Y is experiencing a bottleneck at one of its

machines. It currently has 300 hours of machine time per week. The

factory cost is £1 200. Product Y has a selling price of £8.50 and a material

cost of £4 per unit and takes 1.5 hours in the machine.

What is the current TA ratio?

(a) 1.33

(b) 0.75

(c) 1.13

(d) 0.89

Question 145.

Which of the following statements about customer profitability analysis is

true?

(a) The aim is to identify the customer group which earns the highest

revenue for the organisation

(b) Direct costs only are allocated to each customer group and indirect

costs are ignored

(c) Customer groups which are shown to be performing poorly should

be persuaded to purchase from a competitor in future

(d) A customer group showing poor profitability may be charged an

additional fee for their use of those services which drive up costs


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SOLUTIONS

Role and scope of management accountingQuestion Answer

1 C

2 A

3 D

4 D

5 D

6 A


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Cost behaviour and cost accounting

techniques

Question Answer Question Answer Question Answer

7 B 26 C 45 B

8 C 27 B 46 B

9 B 28 C 47 B

10 C 29 C 48 B

11 A 30 D 49 C

12 C 31 B 50 D

13 D 32 C 51 C

14 A 33 B 52 A

15 B 34 C 53 A

16 B 35 A 54 B

17 B 36 B 55 C

18 D 37 B 56 C

19 A 38 A

20 B 39 C

21 D 40 A

22 D 41 B

23 D 42 C

24 C 43 C

25 C 44 D


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Numerical workings

Question 18

A municipal authority has a creditor payments section that makes

arrangements for the payment of bills. The budgeted direct cost for thesection for the year is £80 000 and overheads are set at 10% of direct

costs. Three members of staff are employed. It is estimated that they will

make 10 000 payments during the year and that this will be the cost driver.

It is estimated that they will process 1 400 payments for the fire and

rescue service. How much cost would be apportioned to the fire and rescue

service?

(d) £12 320

Correct answer: £80 000 x 110% = £88 000. £88 000 x 1 400 /

10 000 = £12 320.

Question 20

A company that makes radios makes 10 000 in year one, has fixed costs of

£150 000 and variable costs of £100 000. In year two it expects prices to

remain the same and production to increase to 12 000 radios. What would

the budgeted total cost be?

(b) £270 000

Correct answer: £100 000 x 12 000 / 10 000 = £120 000.

£120 000 + £150 000 = £270 000.

Question 22

A management accountant is asked to price a job. The company operates a

job costing system. The production overhead absorption rate is £17 a

machine hour. Prices are calculated to include a 60% mark up on primecosts to recover non-production overheads and planned profits. It is

estimated that this job will requir

Ma Multiple Choice q and A

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