Extra practice questions:

Q1.

The cost incurred for the production of one extra unit is know as marginal cost; similarly, the
revenue gained from the sale of one extra unit is know as the marginal revenue.

Maximum profit is achieved when MC= MR.

Q2.

Opportunity cost is referred to the benefit, or value of something that must be given
up in order to acquire or achieve something else.

Q3.

As the demand increases, and more units are sold, the total contribution increases. This
increase means that the mark-up does not need to be high to recover the total fixed costs.
Similarly as the demand decreases, the sale price needs to be adjusted. Increasing the mark-
up would mean increasing the sales price, which is not the right decision in a market that
already has a lowering demand. In fact, reducing sale prices, lower mark u is more often
used to stimulate the sales and increase the demand.

Q4.

Relevant cost is used to describe avoidable costs that are incurred when making
business decisions. In other words, relevant cost is the cost that incurs because of a
management decision, ie if that decision was not taken, the cost would not have
incurred, eg incremental cost of material purchased to produce a new unit of product.

Irrelevant costs eg sunk (past) costs, committed costs

Q5.

Activity based costing is method used to assess and allocate the costs based on the activities
that are taking place in the organisation. This is particularly with regard to the overhead
costs. This is, done by considering the cost driver for each cost pool as identified

For the activity based management system is a method that relies on moving away from the
traditional management by function. The emphasis here is on processes and activities ie
horizontally across the organisation. For ABM to be implemented, the organisation can
make use of the ABC, by taking into account the rate of each cost driver for its relevant cost
pool.

Q6.
Year Cashflow
0 (5000) (5000)
1 1000 (4000)
2 2000 (2000)
3 3000 1000
4 2000

Pay Back period: 2 years and 8 months

Year Cashflow Discount factor PV

0 (5000) 1.000 (5000)
3 1000 0.909 909
4 2000 0.826 1672
5 3000 0.751 2253
6 2000 0.683 1366
NPV 1182

Year Cashflow PV
0 (5000) (5000)
1 1000 909 (4091)
2 2000 1672 (2419)
7 3000 2253 ( 166)
4 2000 1366 1200

Therefore just under 3 years and 2 months

Refer to your lecture notes and discuss the advantages and disadvantages of each method

Q7.

Total sales = 1000 units @ £15 per unit = £15,000

The target cost = Target sales – target profits
Total Target cost = £15,000 - £5,000 = £10,000

Therefore the target cost for each unit = £10,000/1000 = 10 per unit

Q8.

a)
Actual Price = 35660/5500 = £6.48
Material Price Variance =
(SP – AP) x AQ = (£6.10 – £6.48) x 5,500 = (–£0.38)x5,500 = £2,090 (A)

b)
Material Usage Variance =
(SQ – AQ) x SP = (6,500 – 5,500) x £6.10 = (1,000) x £6.10 = £6,100(F)

c)
Total Material Cost Variance = -2,090 + 6,100 = 4,010 F