Ma Multiple Choice Q and A

\ CIPFA EDUCATION AND TRAINING CENTRE
Management Accounting
Multiple choice question

bank and solutions
(Copyright)
June 2015
First published 2015

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Page 2
Multiple choice question bank and solutions
June 2015
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
Page 3
June 2015
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
Page 4
June 2015
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 qualitative
information 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)
(ii)
(iii)
(iv)
Previous periods
Different sections of the same organisation
Other organisations
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
Page 5
June 2015
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
Page 6
June 2015
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
Page 7
June 2015
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 across
wide 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 accurately
ascertained. 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
Page 8
June 2015
Question 12.
Which of the following is not a common basis for the apportionment of
costs?
(a)
Relative number
personnel costs.
of
employees
for
supervision,
welfare
and
(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 organisations

objectives and budgets do not follow the organisations
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.
Page 9
June 2015
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
Page 10
June 2015
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 makes
arrangements 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
Page 11
June 2015
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
Page 12
June 2015
Question 21.
A company has decided to use the repeated distribution method to reapportion service department costs. What does this decision suggests?
(a)
There are more service departments (overhead cost centres) than

production 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
Page 13
June 2015
Question 23.
Bobs 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.
Freds 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
Page 14
June 2015
Question 25.
Bills 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
Page 15
June 2015
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 on
absorption costing:
Sales 100 000 (50 000 of product A, 30 000 of product B, 20 000 of
product C)
Total Direct costs 50 000
Overheads 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)
(d)
Page 16
June 2015
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 the

requirements 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 a
companys 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.
Page 17
June 2015
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.
Page 18
June 2015
Question 35.
Which method of apportioning the costs of service departments is described
below?
This method involves the appropriate proportion of the first department
being 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.
Page 19
June 2015
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 of

an 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)
(d)
Page 20
June 2015
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 based
costing 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 of

overhead 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 nonvolume related overheads and direct labour and materials costs
predominate.
(b)
Significant proportions of the organisations 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.
Page 21
June 2015
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
th
16
Issue to production
150 units
nd
22
Purchase
250 units @ 50
th
27
Issue to production
325 units
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
Page 22
June 2015
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:
5th
9th
15th
24th
28th
Issue to production
Purchase
Purchase
Issue to production
Purchase
150
250
150
260
240
units
units @ 11.1
units @ 11.2
units
units @ 11.5
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
th
16
Issue to production
150 units
18th
Purchase
130 units @ 26
nd
22
Issue to production
90 units
rd
23
Purchase
300 units @ 24
th
27
Issue to production
100 units
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
Page 23
June 2015
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 is
correct?
(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 as

deliveries 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
Page 24
June 2015
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:
Product Zappa
Product Invention
No of units
produced
12
8
Standard piecework
hours per unit
0.5
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 has
worked for 35 hours and has completed tasks with a total standard time of
32 hours. What is the cost of the workers labour for the week?
(a)
256
(b)
280
(c)
270.40
(d)
294.40
Page 25
June 2015
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 total
standard time of 35 hours. What is the cost of the workers 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
Page 26
June 2015
Question 51.
A company carries out a chemical process and in the month of June the
following costs were incurred:
Materials 10 000 kgs

Labour and overheads costs
24 000
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 companys
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
Page 27
June 2015
Question 53.
In May the information for a manufacturing process was as follows:
Material input in month
(9 000 kg)
Labour and overhead
18 774
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.
Product
Production
units
Sales
units
Selling price per

unit
5 000
4 000
30
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%
Page 28
June 2015
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 completed
goods (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
Page 29
June 2015
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 years 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.
Page 30
June 2015
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 themselves
some 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.
Page 31
June 2015
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 15 000
includes 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.
Page 32
June 2015
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 countrys public financial management
performance.
(d)
The Medium Term Expenditure Framework helps to improve budget

processes through clarity of policy objectives, improved
predictability of budget allocations, comprehensive coverage over
public services and improved transparency in the use of resources
Page 33
June 2015
Question 66.
A Councils 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
Page 34
June 2015
Question 69.
The following is an excerpt from an organisations management accounts at
the mid-point of the financial year:
Annual Budget
Salaries
Electricity
Sales
Profiled Budget
120 000
10 000
-20 000
Actual
60 000
3 000
-12 000
65 000
2 900
-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 organisations departmental structure.
Page 35
June 2015
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
Page 36
June 2015
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 years 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
Page 37
June 2015
Question 76.
Which of the following statements about Zero Based Budgeting is not true?
(a)
Zero Based Budgeting starts each periods 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 organisations

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.
Page 38
June 2015
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 of

functional 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 budgeting

system 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
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.
to
new
Page 39
June 2015
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 budget
should 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 or
funding 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 2013/14
the budgets for premises costs are:
Rent 10 000
Electricity 5 500
Insurance 2 000
The 2014/15 budget is being prepared based on the assumption that prices
generally will increase by 5% compared with 2013/14. However, rents will
increase by 10%.
What will be the 2014/15 budgets?
(a)
Rent 11 000; Electricity 5 775; Insurance 2 100.
(b)
(c)
(d)
There is insufficient information here to calculate the 2014/15

budgets.
Page 40
June 2015
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
Page 41
June 2015
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 postage
that 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 to

be 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.
Page 42
June 2015
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 any
variances 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.
(a)
(i), (ii) and (iii)
(b)
(ii) and (iii)
(c)
(iii) and (iv)
(d)
All of them
Page 43
June 2015
Question 88.
A management accountant is preparing the production budget for product X
for the coming year. The opening inventory for product X is 6 000 units and
the 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.
Page 44
June 2015
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
Page 45
June 2015
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 months figures have been
used to derive an equation and the relationship between them generated
the 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 explained

by 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%
Page 46
June 2015
Question 93.
A production department has recorded the following production costs over
the past week:
Monday
Tuesday
Wednesday
Thursday
Friday
Production units
15 000
17 000
16 500
15 500
16 800
105
118
117
104
119
500
500
600
050
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
Page 47
June 2015
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 down

completely 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.
Page 48
June 2015
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.
Page 49
June 2015
Question 99.
A highway maintenance company operates a standard marginal costing
system. Its budget is based on laying 20 000m2 of asphalt a month with
the 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 using
72 000kg of materials at a cost of 684 000.
What is the direct material price variance?
(a)
36 000 adverse
(b)
6 000 adverse
(c)
36 000 favourable
(d)
6 000 favourable
Question 100.
A company that manufactures bicycles absorbs fixed overheads on the
basis of machine hours. The fixed production overhead absorption rate is
5 per machine hour. There are 100 000 budgeted machine hours during
the 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
(a)
(b)
(c)
(d)
No under or over absorption
Page 50
June 2015
Question 101.
A company uses a standard marginal costing system. In April its budgeted
production and sales were 10 000 units and budgeted direct material cost
was 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 materials
were purchased at a cost of 342 000.
(a)
18 000 favourable
(b)
18 000 adverse
(c)
3 000 adverse
(d)
3 000 favourable
Question 102.
Joe the Jeweller repairs watches. The standard repair time is 24 minutes
per watch and the standard wage rate is 12 per hour.
During the year 31 000 repairs were carried out. The labour rate variance
was calculated as 3 720 (adverse) and the labour efficiency variance as
nil.
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
Page 51
June 2015
Question 103.
Bobs Tables uses a standard marginal costing system. Budgeted
production and sales for the year is 20 000 units and variable production
overheads 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 variable
production 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
(c)
26 000 favourable
(d)
70 000 favourable
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 will
act as a means of focusing management attention on operations.
(a)
Differential Analysis
(b)
Standard Costing
(c)
Exception Reporting
(d)
Variance Analysis
Page 52
June 2015
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
Page 53
June 2015
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
Page 54
June 2015
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 of
unit 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.
Page 55
June 2015
Question 111.
The graph below is a cost volume profit chart:
120
100
80
sales
60
costs
40
20
0
1
10
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
Page 56
June 2015
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 bicycles
at 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 an
appropriate 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 not

planned for in the original budgets.
Page 57
June 2015
Question 115.
Which of the following statements is not true about short term decisionmaking?
(a)
In short term decision making the focus is on relevant costs and

marginal 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
Page 58
June 2015
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)
Question 118.
In short term decision making, managers often take account of nonfinancial 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 a
lower price imply a lower quality?)
(iv) Whether accepting an offer from a customer would lead to future
business with the same customer.
(a)
(i), (ii) and (iii)
(b)
(i), (ii) and (iv)
(c)
(d)
All of them
Page 59
June 2015
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 year
states 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
Page 60
June 2015
Question 121.
Which of the following statements about the treatment of direct materials in
a short term decision making situation is true?
(i)
(ii)
(iii)
(iv)
The cost of direct materials is usually a relevant cost.

Where there are materials in stock and there is no possible
alternative use for them they may be considered to be an irrelevant
cost.
Where direct materials have already been purchased and there is no
alternative use for them, their opportunity cost is nil.
The cost of direct materials is usually an irrelevant cost.
(a)
(i) and (ii)
(b)
(i), (ii) and (iii)
(c)
(i) and (iii)
(d)
Question 122.
Which of the following statements about the treatment of direct labour
costs in a short term decision making situation is true?
(i)
(ii)
(iii)
(iv)
Where there is spare capacity, and the labour force is to be

maintained in the short term, labour cost is a non-relevant cost for
short term decisions
Where casual labour is used as and when needed its cost is relevant
for decision making.
Where a special order means that staff are diverted from originally
planned tasks but are replaced by newly recruited staff it is the cost
of the latter that is relevant to the special order.
Direct Labour is usually a non-relevant cost in short term decision
making.
(a)
(i) and (iv)
(b)
(ii) and (iii)
(c)
(i), (ii) and (iii)
(d)
All of them
Page 61
June 2015
Question 123.
A company receives a special order. One of its requirements is for 1 000kg
of sand. The company has 600kg of sand already in stock at a book value
of 2 per kg. However, the current price of sand is 4 per kg. The company
uses sand regularly so would replace any used on this job. What would be
the relevant cost of the sand for the special order?
(a)
4 000
(b)
2 000
(c)
2 800
(d)
3 250
Question 124.
A manufacturing companys job costing system shows that it is making a
loss on manufacturing sink units of 4 per unit. The management
accountant has been asked to use a marginal/relevant costing approach to
advise on whether manufacturing sinks should be discontinued. Sinks sell
for 45, 1 000 are manufactured each year and the following costs have
been established: direct labour 25 per unit; direct materials 15 per unit;
and divisible fixed costs 4 000 a year. Which of the following statements is
not true?
(a)
Sinks currently make a contribution of 1 per unit towards fixed

costs.
(b)
The job costing system charges 5 of indivisible fixed costs to each

unit
(c)
Based
on
the
marginal/relevant
manufacturing of sinks should continue.
costing
approach
the
(d)
Based
on
the
marginal/relevant
costing
manufacturing of sinks should not continue.
approach
the
Page 62
June 2015
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 wider
resource implications within the irrelevant fixed costs that should be
taken into account?
(ii)
Are there other more beneficial uses for the capacity now, or in the
future that would become impossible if the order was undertaken?
(iii) What would be the effect on the normal market price and on existing
customers of selling at below normal market price?
(iv) Are overheads being sufficiently recovered through originally planned
work?
(a)
(i) and (ii)
(b)
(i), (iii) and (iv)
(c)
(d)
All of them
Question 126.
A company that sells chairs for 34 each analyses its costs per unit as
follows: 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)
(c)
(d)
There would be no contribution to overheads.
Page 63
June 2015
Question 127.
A company is considering whether to continue to make a product in-house
or to buy it from another supplier. If it was bought from another supplier it
would be possible to save fixed costs as well as variable costs. Which of the
following matters would it not be relevant to consider?
(a)
A simple comparison between the buy-in price and the variable cost
of manufacturing in-house
(b)
The quantification of relevant fixed cost savings from outsourcing

as well as the comparison of variable costs.
(c)
Considering whether wider fixed cost rationalisations could be

possible if it is a permanent decision.
(d)
Qualitative issues including product quality and staff morale.
Question 128.
A company currently makes a component in-house at a cost of 18, made
up of 6 for direct materials, 9 for direct labour and 3 for variable
overheads. A contractor has offered to supply the component for 21. The
company calculates that it would save 1 000 a month in fixed costs if it
discontinued in-house production. The company requires 3 000 units a
year. What would be the saving or additional cost of buying the component
externally rather than making it in-house?
(a)
6 000 additional cost
(b)
(c)
3 000 saving
(d)
Page 64
June 2015
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 emerges
that 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
Page 65
June 2015
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 of
the 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 inhouse 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 of
component 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.
Page 66
June 2015
Question 134.
For relevant costing for short term decision making, which of the following
costs should be included?
(a)
Full cost
(b)
Differential costs
(c)
Direct costs
(d)
Sunk costs
Question 135.
A company manufactures 10 000 units of a product each unit of which
requires one unit of component X and component Y. Component X has a
variable cost of 3 a unit and divisible fixed costs of 6 000 a year.
Component X can be bought from a supplier for 3.66 a unit. Component Y
has a variable cost of 3 a unit and divisible fixed costs of 7 500 a year.
Component Y can be bought from a supplier for 3.60 a unit. What should
the management accountant advise the company to do to maximise its
profits?
(a)
Buy in component Y from the supplier and continue to manufacture

component X.
(b)
Buy in component X from the supplier and continue to manufacture

component Y.
(c)
Buy components X and Y from the supplier.
(d)
Continue to manufacture components X and Y.
Page 67
June 2015
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 providing

products 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.
Page 68
June 2015
Question 138.
A companys 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 distribution
costs 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 costs

are 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.
Page 69
June 2015
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 than

the 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 longrun 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 product
A 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)
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)
units of product A as product A has the lower variable costs.
(d)
units of product B as product B has the higher selling price.
Page 70
June 2015
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 has
offered 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
Page 71
June 2015
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
Page 72
June 2015
SOLUTIONS
Role and scope of management accounting
Question
Answer
Page 73
June 2015
Cost behaviour and cost accounting

techniques
Question
Answer
Question
Answer
Question
Answer
26
45
27
46
28
47
10
29
48
11
30
49
12
31
50
13
32
51
14
33
52
15
34
53
16
35
54
17
36
55
18
37
56
19
38
20
39
21
40
22
41
23
42
24
43
25
44
Page 74
June 2015
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 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?
(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 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?
(d)
32 880
Correct answer: 150 x 17 = 2 550. 2 550 + 5 500 + 12 500
= 20 550. 20 550 x 160% = 32 880.
Page 75
June 2015
Question 24
Freds 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?
(c)
2 200
Correct answer: (2 500 - 1 000) x (400 / 500) = 1 200. 1 200
+ 1 000 = 2 200.
Question 25
Bills 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?
(c)
1 200
Correct answer: same as in September.
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?
(c)
42 000
Correct answer: 3 x 5 000 = 15 000. 6 x 4 500 = 27 000.
15 000 + 27 000 = 42 000.
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?
(b)
Page 76
147 000
Correct answer: 85 000 x 12 000 / 10 000 = 102 000. 102 000
+ 45 000 = 147 000.
June 2015
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?
(c)
730 000
Correct answer: (750 000 - 250 000) / 50 000 = 10. 48 000 x
10 = 480 000. 480 000 + 250 000 = 730 000.
Question 29
The following data is drawn from management accounts based on
absorption costing:
Sales 100 000 (50 000 of product A, 30 000 of product B, 20 000 of
product C)
Direct costs 50 000
Overheads 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?
(c)

Workings:
Item
Product A
Product B
Product C
Sales
Direct Costs
Overheads
Profit
50
20
10
20
000
000
000
000
30 000
20 000
10 000
0
20 000
10 000
10 000
0
Contribution
30 000
10 000
10 000
Page 77
June 2015
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
(a)

Correct answer: 130 000 x 1 = 130 000. 130 000 - 110 000 =
20 000 over absorbed.
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
th
16
Issue to production
150 units
nd
22
Purchase
250 units @ 50
th
27
Issue to production
325 units
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?
(c)
23 275
Purchases
Opening
08/05
@ 47*
@ 48
22/05
@ 50
Issues
160
200
160
-150
50
-25
135
-50
0
16/05 (150
units)
27/05 (325
units)
*7
250
-250
0
520/160
Issues = (250 x 50) + (200 x 48) + (25 x 47) = 23 275
Page 78
June 2015
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:
5th
9th
15th
24th
28th
Issue to production
Purchase
Purchase
Issue to production
Purchase
150
250
150
260
240
units
units @ 11.1
units @ 11.2
units
units @ 11.5
What is the cost per unit of the closing inventory for Item XB in November?
(c)
10.95
05/11 Issue
09/11 Purchase
150 units
250 @ 11.1
15/11 Purchase
150 @ 11.2
24/11 Issue
28/11 Purchase
260 units
240 @ 11.5
Units
450
-150
250
550
150
700
-260
240
680
4
-1
2
5
1
7
-2
2
7
500
500
775
775
680
455
769
760
446
Wtd av
cost per
unit
10
10.5
10.65
10.95
Page 79
June 2015
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
16th
18th
22nd
23rd
27th
Purchase
Issue to production
Purchase
Issue to production
Purchase
Issue to production
190 units @ 20
150 units
130 units @ 26
90 units
300 units @ 24
100 units
What is the value of issues of Product LK to production in the month of

March?
(d)
7 660
10/03
@ 20
Purchases
18/03
@ 26
23/03
@ 24
190
130
300
-50
80
300
-80
0
-20
280
Issues
16/03 (150
units)
22/03 (90
units)
27/03 (100
units)
-150
40
-40
0
Issues to production = (190 x 20) + (130 x 26) + (20 x 24) =

7 660
Page 80
June 2015
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:
Product Zappa
Product Invention
No of units
produced
12
8
Standard piecework
hours per unit
0.5
1.6
What is the cost of labour for the worker
(b)
112.80
(12 x 0.5) x 6 + (8 x 1.6) x 6 = 112.80
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 has
worked for 35 hours and has completed tasks with a total standard time of
32 hours. What is the cost of the workers labour for the week?
(b)
280
8 x 35 = 280
The worker has not saved any time as the standard hours for the
tasks completed is lower than the time taken.
Page 81
June 2015
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 total
standard time of 35 hours. What is the cost of the workers labour for the
week?
(c)
409.20
Standard pay - 32 hours @ 12

Bonus pay - 3 hours @ 12 x 70%
Total pay
384.00
25.20
409.20
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?
(d)
170.25
Shift 1
Earns 50 x 1.50 = 75 will be paid guaranteed minimum of 80
Shift 2
Earns (55 x 1.50) + (5 x 1.55) = 90.25
Total earned = 80 + 90.25 = 170.25
Page 82
June 2015
Question 51
A company carries out a chemical process and in the month of June the
following costs were incurred:
24 000
15 950
Materials 10 000 kgs

Labour and overheads costs
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 companys
income statement?
(c)
420
Expected output = 10 000 x 0.95 = 9 500 kg
Scrap value of the normal loss = 500 units x 2/kg = 1 000
Cost per unit = (39 950 - 1 000) / 9 500 = 4.1
Abnormal gain = 9 700 kg - 9 500 kg = 200 kg
Loss Account
Units
Normal loss
(@ 2 p/u)
500
1 000
Gain
written to
income
statement
Bal
fig
420
500
1 420
Scrap proceeds
received for
actual loss
(500 200) @
2
Abnormal gain
@ 4.1 p/u)
Units
300
600
200
820
500
1 420
Page 83
June 2015
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
Input costs = (2 x 1 500) + 3 555 = 6 555
Normal loss = 0.1 x 1 500 = 150
Scrap value of the normal loss = 150 x 50p = 75
Expected output = 1 500 150 = 1 350
Cost per unit = (6 555 - 75)/1 350 = 4.8
Actual output = 1 250 x 4.8 = 6 000
Page 84
June 2015
Question 53
In May the information for a manufacturing process was as follows:
Material input in month
(9 000 kg)
Labour and overhead
18 774
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
Actual units of WIP = 9 000 8 600 = 400 kg.
EUs of WIP:
Materials = 400 x 0.85 = 340 EU
Labour and overhead = 400 x 0.7 = 280 EU
Completed
Closing WIP
Actual units
Material costs
Labour and
overhead costs
8 600
8 600 EU
8 600 EU
400
340 EU
280 EU
8 940
8 880
18 774
4 884
2.1
0.55
Total EUs
Amount spent
Cost per EU
Cost of closing WIP = (340 x 2.1) + (280 x 0.55) = 868
Page 85
June 2015
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.
Product
Production
units
Sales
units
Selling price per

unit
5 000
4 000
30
15 000
13 000
10
What proportion of the joint costs should be apportioned to Product M?
(b)
50%
Sales value at split off point:
M 5 000 x 30 = 150 000
N 15 000 x 10 = 150 000
Total sales value = 300 000
M = 150 000 / 300 000 = 50%
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 completed
goods (CCG) for the period?
(c)
CPEU Understated CCG Understated

Simplest to look at the effect with numbers:
Say costs were 1 000
Number of EUs used was 800
Number should have been used was 700
CPEU was 1.25 but should have been 1.42 therefore
understated
Goods will have been valued using 1.25 instead of 1.42 so will be
undervalued.
Page 86
June 2015
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?
(c)
No gain, no loss
Additional revenue (14 9)

Additional costs
Net effect from processing further
5
5
0
Page 87
June 2015
Budgeting
Question
Answer
Question
Answer
Question
Answer
57
72
87
58
73
88
59
74
89
60
75
90
61
76
91
62
77
92
63
78
93
64
79
65
80
66
81
67
82
68
83
69
84
70
85
71
86
Page 88
June 2015
Numerical workings
Question 62
A budget for a financial year that runs from 1 April to 31 March of 15 000
includes 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?
(d)
12 000
Correct answer: (12 000 x 9 / 12) + 3 000 = 12 000.
Question 66
A Councils 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?
(c)
125 400
Correct answer: 12 x 110% = 13.20. 13.20 x 9 500 =
125 400.
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?
(b)
30 000
Correct answer: 1 000 000 x 4% x 9/12 = 30 000
Page 89
June 2015
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
Correct answer: 50 000 x 15% = 7 500; 75 000 x 20% =
15 000; 65 000 x 60% x 0.98 = 38 220. Total: 7 500 +
15 000 + 38 220 = 60 720.
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?
(d)
500 adverse
Correct answer: Profile 12 000 x 4 / 12 = 4 000. Expenditure
4 500. Variance 4 500 - 4 000 = 500 adverse.
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?
(b)
Page 90
3 800
Correct answer: 3 400 + (2 000 1 600) = 3 800.
June 2015
Question 81
A public authority operates an incremental budgeting system. In 2013/14
the budgets for premises costs are:
Rent 10 000
Electricity 5 500
Insurance 2 000
The 2014/15 budget is being prepared based on the assumption that prices
generally will increase by 5% compared with 2013/14. However, rents will
increase by 10%.
What will be the 2014/15 budgets?
(a)

Correct answer: Rent 10 000 x 110% = 11 000; Electricity
5 500 x 105% = 5 775; Insurance 2 000 x 105% = 2 100.
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?
(b)
24 600
Correct answer: 24 000 x 5% x 6/12 = 600. 600 + 24 000 =
24 600.
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?
(c)
222 600
Correct answer: 530 x 12 x 35 = 222 600.
Page 91
June 2015
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 postage
that is expected to be incurred evenly through the year. What would be the
profiled budget to date in July?
(c)
8 000
Correct answer: (24 000 (4 000 + 2 000) = 18 000.
18 000 * 4 / 12 = 6 000. 6 000 + 2 000 = 8 000.
Question 88
A management accountant is preparing the production budget for product X
for the coming year. The opening inventory for product X is 6 000 units and
the 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?
(b)
71 800 units
Correct answer: 6 000 x 30% = 1 800. 1 800 + 70 000 = 71 800.
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?
(d)
75%
Time taken for first 16 units = 18 + 73.2 = 91.2 minutes
Cumulative average time per unit = 91.2 / 16 = 5.7 minutes
18 x LR4 = 5.7
LR = (5.7/18) = 0.75
Page 92
June 2015
Question 91
Workers in a manufacturing plant demonstrate an 80% learning rate when
making new products. They have just completed a new product in 8 hours.
32 units of the product are required. How long will it take them to make the
last 16?
(b)
31.5 hours
First unit takes 8 hours therefore cumulative average time = 8
hours.
Average cumulative time at 32 units = 8 x 0.85 = 2.6214 hours
Total time at 32 units = 2.6214 x 32 = 83.8848 hours
Average cumulative time at 16 units = 8 x 0.84 = 3.2768 hours
Total time at 16 units = 3.2768 x 16 = 52.4288 hours
Time to make last 16 = 83.8848 - 52.4288 = 31.456 hours = 31.5
Page 93
June 2015
Question 93
A production department has recorded the following production costs over
the past week:
Monday
Tuesday
Wednesday
Thursday
Friday
Production units
15 000
17 000
16 500
15 500
16 800
105
118
117
104
119
500
500
600
050
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
Use the highest and lowest activity levels, 15 000 and 17 000
The difference of 2 000 units results in a cost difference of
118 500 - 105 500 = 13 000
This is 13 000 / 2 000 = 6.50 per unit
If variable costs are 6.50 per unit, then at a production level of
15 000 units, they will be 6.5 x 15 000 = 97 500
Fixed costs must therefore be 105 500 - 97 500 = 8 000
A production run of 16 750 units will therefore cost:
(16 750 x 6.50) + 8 000 = 116 875
Page 94
June 2015
Financial control
Question
Answer
94
95
96
97
98
99
100
101
102
103
104
105
Page 95
June 2015
Numerical workings
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
Correct answer: 56 250 - 50 000 = 6 250. 6 250 / 25 = 250.
250 x 5 = 1 250. Budget at 80% activity level: 56 250 +
1 250 = 57 500.
Question 99
A highway maintenance company operates a standard marginal costing
system. Its budget is based on laying 20 000m2 of asphalt a month with
the 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 using
72 000kg of materials at a cost of 684 000.
(c)
36 000 favourable
Correct answer: 72 000 x 10 = 720 000. 720 000 - 684 000 =
36 000 favourable.
Question 100
A company that manufactures bicycles absorbs fixed overheads on the
basis of machine hours. The fixed production overhead absorption rate is
5 per machine hour. There are 100 000 budgeted machine hours during
the 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
(b)
Page 96

Correct answer: 110 000 x 5 = 550 000. 600 000 - 550 000 =
50 000 under absorbed.
June 2015
Question 101
A company uses a standard marginal costing system. In April its budgeted
production and sales were 10 000 units and budgeted direct material cost
was 30 a unit based on using 3kg of direct materials at 10 / kg.
Actual production and sales was 11 500 units, 36 000 kg of direct materials
were purchased at a cost of 342 000.
(a)
18 000 favourable
Correct answer: 36 000 x 10 = 360 000. 360 000 - 342 000 =
18 000 favourable.
Question 102
Joe the Jeweller repairs watches. The standard repair time is 24 minutes
per watch and the standard wage rate is 12 an hour.
During the year 31 000 repairs were carried out. The labour rate variance
was calculated as 3 720 (adverse) and the labour efficiency variance as
nil.
What was the actual wage rate during the year?
(d)
12.30 per hour

Correct answer: 31 000 x 24 / 60 = 12 400. 12 400 x 12 =
148 800. 148 800 + 3 720 = 152 520. 152 520 / 12 400 =
12.30.
Question 103
Bobs Tables uses a standard marginal costing system. Budgeted
production and sales for the year is 20 000 units and variable production
overheads 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 variable
production overheads totalled 390 000 based on 104 000 hours.
What is the variable production overhead expenditure variance?
(c)
26 000 favourable
Correct answer: 104 000 x 4 = 416 000. 416 000 - 390 000 =
26 000 favourable.
Page 97
June 2015
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?
(d)
10.3g
x
(x- x )2
x- x
566
556
10
100
545
556
-11
121
569
556
13
169
542
556
-14
196
551
556
-5
25
561
556
25
(x- x )2
636
s = (636/6)
s = 10.3g
Page 98
June 2015
Financial decision making

Question
Answer
Question
Answer
Question
Answer
106
121
136
107
122
137
108
123
138
109
124
139
110
125
140
111
126
141
112
127
142
113
128
143
114
129
144
115
130
145
116
131
117
132
118
133
119
134
120
135
Page 99
June 2015
Numerical workings
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?
(d)
1 500 000
Correct answer: 100% - 60% = 40%. 600 000 / 0.4 =
1 500 000.
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 year
states 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?
(c)
The company would be better off financially not to sell to this

supermarket and to have spare capacity.
False. Selling price exceeds variable cost. Sales income would be
(16 000 x 11) = 176 000. Fixed costs would be 90 000.
Variable costs would be 6 x 16 000 = 96 000. Loss would be
10 000.
Question 123
A company receives a special order. One of its requirements is for 1 000kg
of sand. The company has 600kg of sand already in stock at a book value
of 2 per kg. However, the current price of sand is 4 per kg. The company
uses sand regularly so would replace any used on this job. What would be
the relevant cost of the sand for the special order?
(a)
Page 100
4 000
Correct answer: 4 x 1 000 = 4 000.
June 2015
Question 126
A company that sells chairs for 34 each analyses its costs per unit as
follows: 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)
Correct answer: Variable costs 6 + 5 + 3 + 1 = 15.
Contribution 18 - 15 = 3.
Question 128
A company currently makes a component in-house at a cost of 18, made
up of 6 for direct materials, 9 for direct labour and 3 for variable
overheads. A contractor has offered to supply the component for 21. The
company calculates that it would save 1 000 a month in fixed costs if it
discontinued in-house production. The company requires 3 000 units a
year. What would be the saving or additional cost of buying the component
externally rather than making it in-house?
(c)
3 000 saving
Correct answer: Buying in additional costs are 3 / unit. 3 x 3 000
= 9 000. Saving is 1 000 x 12 = 12 000. Net saving 3 000.
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 of
the 2 000kg required for the special job?
(c)
8 400
Correct answer: (1 200 x 3) = 3 600; (800 x 6 = 4 800); 3
600 + 4 800 = 8 400
Page 101
June 2015
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 inhouse 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 of
component 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?
(d)
Buy-in component B and continue to manufacture component A.

Correct answer:
Component A can be bought in for 7 / unit. Divisible costs per
unit: (2 500 / 1 000) = 2.50 / unit. Relevant costs: 4 + 2.50
= 6.50. Cheaper to manufacture.
Component B can be bought in for 9 / unit. Divisible costs per
unit: (5 000 / 1 500 = 3.33 / unit. Relevant costs: 6 + 3.33 =
9.33. Cheaper to buy
Question 135
A company manufactures 10 000 units of a product each unit of which
requires one unit of component X and component Y. Component X has a
variable cost of 3 a unit and divisible fixed costs of 6 000 a year.
Component X can be bought from a supplier for 3.66 a unit. Component Y
has a variable cost of 3 a unit and divisible fixed costs of 7 500 a year.
Component Y can be bought from a supplier for 3.60 a unit. What should
the management accountant advise the company to do to maximise its
profits?
(a)
Page 102
Buy in component Y from the supplier and continue to manufacture

component X.
Correct answer:
Component X can be bought in for 3.66 / unit. Divisible costs per
unit: (6 000 / 10 000) = 0.60 / unit. Relevant costs: 3 + 0.60
= 3.60. Cheaper to manufacture.
Component Y can be bought in for 3.60 / unit. Divisible costs per
unit: (7 500 / 10 000 = 0.75 / unit. Relevant costs: 3 + 0.75
= 3.75. Cheaper to buy.
June 2015
Question 138
A companys 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 distribution
costs 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?
(b)
50 000
Correct answer:
Variable costs: 400 000/80 000 = 5 per unit
Costs: 5 x 20 000 = 100 000
Income: 7.50 x 20 000 = 150 000
Contribution: 150 000 - 100 000 = 50 000.
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 product
A or one unit of product B. Which of the following statements is true in this
case?
(a)
units of product A as this would create a contribution of 9 000.
True.
3 000 units of product A would produce income of 10 x 3 000 =
30 000 with variable costs of 7 x 3 000 = 21 000, giving a
contribution of 9 000.
1 000 units of product B would produce income of 15 x 1 000 =
15 000 with variable costs of 9 x 1 000 = 9 000, giving a
contribution of 6 000
Page 103
June 2015
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 has
offered 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?
(d)
Buy component A and use the facilities to produce product X.

Correct answer:
Component A can be bought at 16 per unit.
In-house cost is: (80 000 + 10 000 + 60 000)/10 000 = 15
per unit
Savings from buying in would be 30 000 fixed costs less (1 x
1 000) = 1 000.
So cheaper to buy in.
Product X would make a contribution of 12 x 1 000 = 12 000.
This is more than the rent that could be earned.
Question 143
A firm is attempting to improve its throughput accounting ratio. Which of
the following measures will help?
(a)
Increase selling price

The TA ratio = return per factory hour/cost per factory hour
Return per factory hour =
(Sales price p/u material cost p/u) hours unit spends in the
bottleneck resource
Cost per factory hour = Total factory cost / total time available on
key resource
Increase in selling price will improve the return per factory hour
and therefore the TA ratio.
Page 104
June 2015
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?
(b)
0.75
Return per factory hour =
(Sales price p/u material cost p/u) hours unit spends in the
bottleneck resource
=(8.5 - 4)/1.5 = 3
Cost per factory hour = Total factory cost / total time available on
key resource
= 1 200/300 = 4
TA ratio = return per factory hour/cost per factory hour
=3/4 = 0.75
Page 105
CIPFA Education and Training Centre

77 Mansell Street
London E1 8AN
0207 403 4300

cetc@cipfa.org
www.cipfa.org/cetc

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\ CIPFA EDUCATION AND TRAINING CENTRE

Multiple choice question

First published 2015

Multiple choice question bank and solutions

Multiple choice question bank and solutions

Budgeting and production planning

Preparation of final accounts

Break even analysis and short term decision making

Routine, uncertainty, easy

Simple, cost, not important

Difficult, information, difficult

Routine, certainty, difficult

Multiple choice question bank and solutions

(i) and (ii)

(i) and (iv)

(i), (ii) and (iii)

Multiple choice question bank and solutions

Multiple choice question bank and solutions

Cost behaviour and cost accounting

A selling and distribution cost

Research and development

Constant per unit of production

Outside the control of management to change

Constant regardless of the volume of production

(i) and (ii)

(i), (ii) and (iii)

(i) and (iii)

Multiple choice question bank and solutions

(i), (ii) and (iii)

(i), (ii) and (iv)

(ii), (iii) and (iv)

Recharging; not recharged

Recharging: divided equally

Multiple choice question bank and solutions

Book value of fixed assets for repairs and maintenance of buildings.

Book value of machinery for depreciation and insurance of plant

Budgets are set for activities instead of functional departments;

Programmes of work are identified for achieving the organisations

Budgets are continuously updated in relation to new information.

Multiple choice question bank and solutions

The costs of specific units of output

Functions or locations for which costs are ascertained

Expenditure that is attributed to a particular activity

Analysing income and expenditure based on the nature of the

Multiple choice question bank and solutions

Unit of output or service for which costs are ascertained

Function or location for which costs are ascertained

Amount of expenditure attributable to various activities

A segment of the organisation for which budgets are prepared

Multiple choice question bank and solutions

How would these costs be best described?

Line A Semi-Variable Costs, Line B Variable Costs.

Line A Variable Costs, Line B Semi-Variable Costs.

Line A Direct Costs, Line B Variable Costs.

Line A Variable Costs, Line B Standard Costs.

Multiple choice question bank and solutions

There are more service departments (overhead cost centres) than

The company wants to avoid under or over absorbing overheads in

The service departments carry out work for each other.

Multiple choice question bank and solutions

Multiple choice question bank and solutions

Multiple choice question bank and solutions

Product A 20 000, Product B Nil, Product C Nil.