Management Accounting Practice Questions

Question-1
The Gadget Co produces three products, A, B and C. All made from the same material. Until now, It has used
traditional absorption costing to allocate overheads to its products. The company is now considering an activity
based costing system in the hope that it will improve profitability. Information for the three products for the last
year is as follows:
A B C
Production and sales units 15,000 12,000 18,000
Selling Price 7.50 12 13
Raw material usage kg per unit 2 3 4
Direct Labour hours per unit 0.1 0.15 0.2
Machine hours per unit 0.5 0.7 0.9
Number of production runs per annum 16 12 8
Number of purchase orders per annum 24 28 42
Number of deliveries per annum 48 30 62
The price for raw materials remained constant throughout the year at 1.20 per kg, similarly, the direct labour cost
for the whole workforce was 14.80 per hour. The annual overhead costs were as follows:

Machine set up costs 26,550

Machine running costs 66,400
Procurement costs 48,000
Delivery costs 54,320
Required:
 Calculate the full cost per unit for products A, B and C under traditional absorption costing, using direct labour
hours as the basis for apportionment.
 Calculate the full cost per unit of each product using activity based costing.
Question-2
ABZ Company limited produces A,B and Z for which the standard cost and quantities per unit are as follows:
A B Z
Output (unit) 10,000 20,000 30,000
Direct Material per unit 50 40 32
Direct Labour per unit 30 40 48
Labour hours per unit 3 4 5
Machine hours per unit 4 4 7
Number of purchase requisitions 600 900 1000
Number of machine set-ups 120 130 150
Production overhead split by departments:
Department-X 1,200,000
Department-Y 1,500,000
Total 2,700,000
Department X is labour intensive and Y is machine intensive
Total labour hours in Department X=200,000; Total Machine hours is Department Y =500,000
Production overhead split by activity:
Receiving and Inspection 1,400,000 Number of batches receiving and inspected ----------------2,500
Production Scheduling/Set-up 1,300,000 Number of batches Production Scheduling/Set-up---------400
Total 2,700,000
Required:
Prepare cost statement under traditional absorption costing and activity based costing methods. Also compare
the result of the two methods and give your comments.

Prepared by Abdul Samad Page 1

 Management Accounting Practice Questions

Question-3
The estimated costs of producing and selling 1,000 units of a component are:

Variable Cost 15 per unit

Fixed Cost 5 per unit
Selling Price 25 per unit
The same component can be purchased from market at a price of 18 per unit. Should the component be
purchased from the market?

Question-4
The estimated costs of producing and selling 1,000 units of a component are:

Variable Cost 15 per unit

Fixed Cost 5 per unit
Selling Price 25 per unit
The same component can be purchased from market at a price of 14 per unit. Should the component be
purchased from the market?

Question-5
A manufacturer produce a product and the estimated costs of producing and selling 10,000 units of a component
are:

Variable Cost 20 per unit

Selling Price 30 per unit
Fixed Cost 25000 (Including Dep. 18,000)
The same product is available in the market for Rs.23/ per unit. What will be you suggest the company purchased
from the market or make a product in following situations

 The machine can be let out for Rs. 2,000

 Another product can be produce in same quantity resulting a contribution of Rs.12 per unit

Question-6
A manufacturer produce a product and the estimated costs of producing and selling 20,000 units of a component
are:

Variable Cost 30 per unit

Selling Price 150 per unit
Fixed Cost 50,000
The same product is available in the market at price Rs.40/ per unit. What will be you suggest the company
purchased from the market or make a product in following situations

 The machine can be let out for Rs. 30,000

 Another product can be produce 2,500 units with a contribution of Rs.8 per unit

Prepared by Abdul Samad Page 2

 Management Accounting Practice Questions

Question-7
A manufacturing company makes four components, A, B, C and D, which are incorporated into different toys. All
the components are manufactured using the same general purpose machinery. The following production cost and
machine hour data are available, together with the purchase prices from an external supplier.

A B C D
Production cost Rs. Rs. Rs. Rs.
Direct material 6 9 7 4
Direct labour 12 7 5 4
Variable overhead 4 3 2 2
General fixed overhead 5 3 2 1

External supplier’s price 20 27 20 15

Machine hours per unit 6 10 8 2

Additional Information:

 Manufacturing requirements show a need for 3,000 units of each component per week.
 The maximum number of general purpose machine hours available per week is 58,000.

Required:

What number of units should be purchased from the external supplier?

Prepared by Abdul Samad Page 3