MA2: Managing Cost and finance:

Mock Exam 1:
Question#1:
$15
Variable cost = Sales price - Contribution
Contribution per unit = $9 (180,000 / 20,000)
Sales price per unit = $24
Variable cost = $15 (24 - 9)
Question#2:
D
1, 2 and 4
Carriage inwards is an example of an ordering cost. The other options are costs involved in storing
goods in a warehouse. Interest is a holding cost because if the inventory was not held in store it would
not be incurred.
Question#3:
$2,225
Cost of job 123:
$

Direct materials 460

Direct labour 600
Overheads 720 (600 x 1.2)
Total 1,780
As a profit margin of 20% is added to total cost the selling price of job 123 is $2,225 (1,780 / 0.8).
Question#4:
D
7,290
Total number of units produced = 10,720 (268,000 / 25)
The break-even point is where contribution = fixed costs
Contribution per unit = 128,640 / 10,720 = $12
Break-even units = 87,480 / 12 = 7,290
Question#5:
C
$2,367,000

Month Trend Trend Seasonal Estimated sales

($'000) ($'000) variation ($'000)
($'000)
February 2,135 + 17 2,152 - 162 1,990
March 2,152 + 17 2,169 + 135 2,304
April 2,169 + 17 2,186 + 181 2,367
Question#6:
D
Producing a schedule of budgeted and actual costs to calculate variances
A trainee accountant would work at a relatively low level within an organisation. Preparing schedules,
such as of variances, would come within their remit. The other options would be the responsibility of
those in more senior positions.
Question#7:
D
Letter
When contacting a customer who fails to meet payment dates it is important that the method chosen
cannot be ignored and are sufficiently formal (unlike memos and notes).
A letter is the common method of dealing with difficult customers.
Question#8:
C
Use of a higher grade of labour
A favourable materials variance can be achieved by using the same amount of lower cost materials or by
making more efficient use of standard materials. Using a higher grade of labour should result in more
efficient use of materials and is therefore the most likely reason given for a favourable materials cost
variance.
Question#9:
D
Manufacturing chemicals
Process costing is a costing method used where there are continuous processes. Process costs are
attributed to the units produced in a period.
Question#10:
1 and 2 only
Large supermarket chains which sell goods within a few days of purchase might not pay their suppliers
unit after the goods have been sold and the cash received.
In a retailing business most sales are for cash or by credit card or debit card, and the company therefore
receives most of its cash income at the time of sale.
Question#11:
C
1, 3 and 4 only
A cash budget / forecast will show how much cash is needed, when it is needed and for how long it is
needed. It will not tell the company the actual cost of borrowing any funds.
Question#12:
Cost of capital
Timing of future cash flows
Cost of capital and timing of future cash flows are relevant in capital investment decision-making as
these impact future incremental costs.
Depreciation is not a cash flow and so is not relevant.
Sunk costs are costs which have already been incurred and will therefore not occur as a consequence of
the decision. This means they too are not relevant.
Question#13:
$37,640
Only productive hours at basic rate are included in direct labour. Overtime premium, idle time and
bonuses are classified as indirect labour.
Question#14:
A
A unit of machine part MP7
A cost unit is a unit of product or service which has costs attached to it.
A machine part is assembled from components. Therefore it is the machine part which is the cost unit
rather than the component.
Question#15:
B
103.2%
Efficiency ratio = [(Standard time for units produced) / (Actual time for units produced)] x 100
Standard minutes for units produced = 39,000 (2,600 x 15)
Actual minutes for units produced = 37,800 (630 x 60)
Efficiency ratio = 103.2% (39,000 / 37,800)
Question#16:
C
1 and 3 only
As cost per unit of production = production costs / output, the cost per unit of production is affected by
losses.
As the value of completed output = cost per unit of production x output, it too is affected by losses.
The value of inputs is unrelated to losses as losses occur after the input has been introduced into the
process.
Question#17:
C
3 years
Payback is achieved when cash inflows from a project equal the cash outflows.
Cash outflows = $90,000
As cash inflows = $30,000 per year, payback is achieved after 3 years (30,000 x 3 = 90,000)
Question#18:
A
Taking more credit from suppliers
Taking more credit from suppliers will improve operational cash flows which should in turn lead to an
increased cash surplus.
Giving more credit to customers and increasing inventories will cause a reduction in operational cash
flows, while purchasing new non-current assets will involve an outflow of cash.
Question#19:
B
$2,560 Fav
The labour cost variance is calculated by comparing the budgeted cost of producing the actual units
produced with the actual cost of producing the units produced.
The budgeted cost of producing the actual units produced is calculated by multiplying the actual units
produced by the budgeted labour cost per unit.
Budgeted cost of producing the units produced = $307,200 (25,600 x 12)
Actual cost of producing the units produced = $304,640
Difference = $2,560 favourable
Question#20:
C
The reporting of variances that exceed a certain limit
Exception reporting involves reporting variances that exceed a certain limit.
Question#21:
B
The difference between budgeted sales and breakeven sales as a percentage of budgeted sales
The margin of safety is the difference between budgeted sales and breakeven sales. It is commonly
reported as a percentage of budgeted sales: the amount by which actual sales can fall below budgeted
without a loss being incurred.
Question#22:
Preparing the annual business plan
The treasury department is unlikely to be involved in preparing the annual business plan. This is the
function of the Finance and Management Accounts department.
Question#23:
A and C
Unit price and Inventory value
A bin card keeps record of receipts into and issues out of a storage bin in the stores department. It does
not keep record of unit price or inventory value.
Question#24:
$21,440
Working capital is calculated as the current assets of a business (inventory + trade receivables) less
current liabilities (bank overdraft + trade payables).
($11,460 + $18,520) - ($2,100 + $6,440) = $21,440
Question#25:
Saving per machine hour by manufacturing rather than buying-in
As machine hours are the limiting factor the company needs to ensure that they are making the best use
of this limited resource. This means that when the organisation is deciding whether to make a product
internally or buy it in from a supplier they need to consider how much they would save per machine
hour if they made the product internally rather than buying in.
Question#26:
B
Decrease by $1.60 per unit
Current cost per unit = $20 ((4,000 + 6,000 + 2,000 + 8,000) / 1,000)
If output increases by 25%:
Cost per unit = $18.4 (((4,000 + 6,000 + 2,000) x 1.25) + 8,000 / (1,000 x 1.25))
Difference = a decrease of $1.60 per unit (20 - 18.4)
Question#27:
$660,400
Reapportionment of SC1:
SC1 total overhead = $122,000
To SC2 = $24,400 (122,000 x 20%)
To PC2 = $54,900 (122,000 x 45%)
Reapportionment of SC2:
SC2 total overhead = $121,000 (96,600 + 24,400
To PC2 = $84,700 (121,000 x 70%)
PC2 total overheads:
Overheads = $520,800
Reapportionment of SC1 = $54,900
Reapportionment of SC2 = $84,700
Total = $660,400
Question#28:
B
A budget that is adjusted for control purposes according to the actual level of activity
A flexible budget recognises different cost patterns and is designed to change as the volume of activity
changes.
Question#29:
A
2 and 3
A revolving credit facility is set for an agreed period of time although it can then be renewed when the
initial facility expires.
Under a term loan the borrower either pays back the loan (with interest) over a set period of time, or
pays back the loan (plus interest) at the end of that period of time.
By contrast overdrafts are repayable on demand.
Question#30:
C
1, 3 and 4 only
Emails are a modern replacement for internal memos. They are transmitted electronically within an
organisation's computer system or between the computer systems of different organisations.
They have some limitations and so cannot be used for all external communication.
Question#31:
B
The difference between sales value and the marginal cost of sales
Contribution is the difference between sales value and the marginal cost of sales.
Question#32:
Product A Product B Product C
per unit per unit per unit
Variable manufacturing costs ($) 3.00 4.00 4.50
Bought-in cost ($) 5.50 5.75 6.50
Saving 2.50 1.75 2.00
Labour hours 1.5 4 2
Savings per labour hour 1.67 0.44 1.00

Product B has the lowest saving per labour hour, therefore Product B should be purchased externally.
Question#33:
A and D
Activity above budget and Expenditure below budget
If activity is above budget then the absorption rate will be applied to more units of activity than budget
causing overheads to be over absorbed (assuming actual overheads have not increased).
If overhead expenditure is below budget then assuming the absorption rate and amount of activity are
the same the amount of overhead absorbed will be more than the actual expenditure.
Question#34:
A and D
Make a concerted effort to maintain current cash balances and Offer shorter credit periods to
customers
When economic conditions are unfavourable businesses could face a fall in cash receipts. They will
therefore wish to try to maintain cash balances for safety reasons and will be reluctant to take on
further commitments.
Businesses may reduce the credit period(s) offered to customers and delay paying suppliers in an
attempt to further increase cash balance.
Question#35:
$4,330
Using the multiplicative model:
Sales in July = Trend in July x Seasonal variation in July
4,108 x 105.4% = $4,330
Question#36:
Production costs will be higher using LIFO rather than FIFO True
Raw material inventory values will be lower using LIFO rather than weighted average True
If LIFO, rather than the FIFO, method of pricing raw materials is used it is the most recent (and therefore
relatively higher) costs which are used first to cost materials. This also means that the inventory value
will be lower because the remaining materials will be valued at the older (and therefore relatively
cheaper) cost.
Question#37:
A product which is incidental to the main purpose of a process Yes
A product which has an insignificant value relative to other products from a process. Yes
A by-product is a consequence of producing one or more other products. It is incidental to the main
purpose of the process and will therefore have an insignificant value to the main products produced.
Question#38:
B
The assembly department
A cost centre is a location at which production costs can be collected. They are usually specific
departments of processes - such as an assembly department.
Question#39:
D
When the output is intangible
Service costing is used in service industries where output is intangible such as in schools and libraries.
Question#40:
C and D
Differential costs and Future costs
A decision is about the future, therefore relevant costs are future costs. If a cost is unavoidable a
decision made about the future will not affect the cost. Therefore, unavoidable costs are not relevant
costs.
Differential costs are the difference in total costs between alternatives. They are therefore affected by a
decision taken 'now' and are relevant. Sunk costs are costs that have been incurred in the past and are
not relevant for decision making.
Question#41:
$24,900
March ($) April ($)
Receipts
Credit sales 20,000 22,000
Cash sales 10,000 9,000
30,000 31,000

Payments
Suppliers 13,000 8,400
Wages 4,600 4,600
Overheads 3,000 3,500
20,600 24,900

Opening cash 1,000 10,400

Net cash receipts 9,400 14,500
Closing cash 10,400 24,900
Question#42:
$8
Standard time per unit = 10 minutes
Actual time per unit = 8 minutes ((8 x 60) / 60)
Time saved per unit = 2 minutes (10 - 8)
Total time saved = 120 minutes (60 x 2)
Time saved paid at basic rate = $16 (120 minutes = 2 hours, 2 x $8)
Bonus = $8 (50% of $16)
Question#43:
$1.22
Tonne-kilometres = (12 x 400) + (14 x 750) = 15,300
Cost per tonne-kilometre = $18,600 / 15,300 = $1.22
Question#44:
$3,800
The purchase cost of the current inventory is a sunk cost. The only additional purchases of material Z
would be 200 units.
$
Opportunity cost of 800 units in inventory ( x $3.00) 2,400
Cost of additional purchases (200 x $7.00) 1,400
Relevant cost 3,800

Question#45:
The depreciation charge in year 1 would be higher using the machine hour method False
The depreciation charge in year 3 would be lower using the reducing balance method True
Depreciation under machine hour method
Asset value less residual value = $8,000 (10,000 x 0.8)
Charge per hour = $2 (8,000 / (1,500 + 1,000 + 1,000 + 500))
Year 1 = $3,000 (2 x 1,500)
Year 2 = $2,00(2 x 1,000)
Year 3 = $2,000 (2 x 1,000)
Depreciation under reducing balance method
Year 1 =
$3,000
(10,000 x 0.3)
Year 2 =
$2,100
((10,000 - 3,000) x 0.3)
Year 3 =
$1,470
((10,000 - 3,000 - 2,100) x 0.3)
Question#46:
Profit - Higher than MC and Inventory value - Higher than MC
The difference between absorption costing and marginal costing is in the treatment of fixed costs.
Under absorption costing fixed costs are included within unit and inventory costs (and may be carried
forward between financial periods).
Under marginal costing fixed costs are written off in their entirety within the financial period they are
incurred.
Therefore if inventory has increased more fixed costs will be included in inventory under absorption
costing. This means profit will be higher under absorption costing. Inventory will be lower under
marginal costing as the inventory does not include the fixed cost element.
Question#47:
Variable overhead costs Yes
Fixed overhead costs Yes
Fixed and variable overheads relate to non-specific units and would therefore be absorbed by sharing
them out between production lines using absorption costing.
Question#48:
$22,800
The difference in profit under absorption and marginal costing is due to the amount of fixed cost held in
inventory and the movement in inventory from one period to the next.
Fixed non-production overheads are not included in the cost per unit under either costing method.
Opening inventory = 7,000
Closing inventory = 4,000 (7,000 + 25,000 - 28,000)
Movement in inventory = 3,000 (7,000 - 4,000)
Value of inventory movement under marginal costing = $48,600 (16.2 x 3,000)
Value of inventory movement under absorption costing = $71,400 ((16.2 + 7.6) x 3,000)
Difference in profit = $22,800 (71,400 - 48,600)
Question#49:
16,000 units
Required sales = Required contribution / Contribution per unit
= $64,000 / $(15 - 11)
= 16,000 units
Question#50:
625 units
To establish the profit-maximising product mix the products must be ranked in order of their
contribution-earning ability per unit of limiting factor.
Product A Product B
Contribution per unit $7.50 $15.00
Contribution per unit of limiting factor $7.50 / 2 = $3.75 $15.00 / 3 = $5.00
Ranking 2 1

S&P Co must first meet its contractual obligation to supply 500 units of A. Material is then used to
produce units of the highest ranking product (B) up to the maximum level of demand (250 units). Any
remaining material is used to produce A for which demand is unlimited.

Raw material used

(kg)
Contracted supply of A (500 units x 2 kg) 1,000
Meet demand for B (250 units x 3 kg) 750
Remainder of resource for A (125 units x 2 kg) 250
2,000

Number of units of A = 500 + 125 = 625