MA2: Managing Cost and finance:

Mock Exam 3:
Question#1:
$152,853

The June cash payment relates to overheads incurred in May.

May overheads = $146,200 (March overheads) x 1.0225 x 1.0225 = $152,853

Question#2:
D
1, 2, 3 and 4

Time must be considered as urgent reports must be distributed by a method which is quick.

Where confidentiality is important the method chosen must protect it.

If a record of what was sent needs to be maintained then the method chosen must achieve this.

Cost must be considered along with the other factors. The best possible result should be achieved at the
lowest possible cost.

Question#3:
B
Product C, product A, product B

In a limiting factor situation contribution will be maximised by earning the biggest possible contribution
per unit of limiting factor (machine hours).

A ($) B ($) C ($)

Product
Sales 10,000 20,000 15,000
Variable costs 4,000 15,000 6,000
Contribution 6,000 5,000 9,000

Units 500 400 300

Contribution per unit $12 $12.50 $30
Hours per unit 2 5 4
Contribution per hour $6 $2.50 $7.50
Priority 2nd 3rd 1st
Question#4:
D
Cost per passenger-kilometre

For a coach travel company the cost per passenger kilometre is an example of a composite cost unit.

A coach station is a cost centre. Fuel costs are an operating cost. A coach driver is not an output item.

Question#5:
A
Confidential information should be transmitted by fax
Using a fax offers very poor confidentiality as whatever is being faxed is printed out at its destination.
The sender cannot control who sees the material once it has been sent .

Question#6:
B
1 and 2 only

A cash budget is a detailed forecast of expected cash receipts, payments and balances over a budget
period. As such a cash budget helps identify any forecast cash shortages or surpluses in the forecast
period. However the focus is on cash flows rather than profit.

Question#7:
D
17.9%

Question#8:
A
A product that has insignificant saleable value compared with the joint products

A by-product is a product which is produced at the same time, and from the same common process, as
the main product. The distinguishing feature of a by-product is its relatively low sales value in
comparison to the main product.
Question#9:
A
Number of factory employees

The canteen will probably be used by all employees regardless of whether their hours are direct or
indirect. It is therefore fairest to use the number of employees in the factory as a basis.

Question#10:
B
Timesheets
Timesheets are usually filled in by the employee to show hours worked on each job. These would be
suitable for use as a support for overtime claims.
Employee record cards are normally kept by the human resources department and contain personal
details including employee history. Job cards are likely to contain entries relating to numerous
employees. Payslips show information about wages or salaries that have already been paid or are due to
be paid shortly.

Question#11:
C
Re-order level minus average usage in average lead time

Minimum level = Re-order level - (Average usage x Average lead time)

Question#12:
B
2 and 4

The objectives are that payments are properly authorised and that the duties of
receiving and banking cash are segregated. Cash forecasts do not involve handling
cash. Cash should be recorded and banked promptly, a limit of seven days is unlikely to
be quick enough.

Question#13:
$1.12

Units $
High 110,000 218,200
Low 100,000 207,000
10,000 11,200

Variable cost per unit = $11,200 / 10,000 = $1.12

Question#14:
A True
B False
Revenue items generally relate to the long-term functioning such as raising money from False
shareholders, or acquiring non-current assets
Exceptional items are unusual, for example the costs of closing down part of a business True
Revenue items generally relate to day-to-day trading operations as in the working capital cycle.

Capital items generally relate to the long-term functioning of the business.

Exceptional items are unusual items.

Question#15:
A
1, 2 and 3
Speed of processing. The ability to process data more quickly means that a computer can produce more
timely information when it is needed.
Accuracy of processing. If set up and programmed correctly computers are generally accurate whereas
humans are prone to human error.
Volume and complexity. Modern businesses, especially large businesses, have large and complex data
processing requirements. Managers need better quality information and more transactions have to be
processed.
Question#16:
Dr Work-in-progress account $287,000 Cr Stores ledger account $287,000
Stores ledger account
Dr Cr ($'000)
($'000)
Opening inventory 46 Overhead account 13
Payables/cash 321 Payables/cash 8
WIP (bal) X
Closing inventory 59
367 367
Direct material issues = Opening inventory + Supplier delivery - Indirect issues - Returns - Closing
inventory = 46 + 321 - 13 - 8 - 59 = 287
So we debit the work in progress account and credit the stores ledger account.
Question#17:
Dr Work-in-progress Cr Wages control

Direct labour is debited to the work in progress account and credited to the wages control
account. (If the overtime premium were treated as an indirect cost it would be debited to the
production overhead control account.)
Question#18:
B
Overhead apportionment

Arbitrary sharing of overheads among cost centres is overhead apportionment.

Overhead absorption is the final process of absorbing the total cost centre overheads into product costs.
Overhead allocation is the allotment of whole items of overhead costs to a particular cost centre or cost
unit. Overhead analysis is the general term used to describe all of the tasks of processing overhead cost
data.

Question#19:
D
Company A has lower break-even sales revenue than Company B

The break-even point for each company is where the line crosses the x axis. The line for
Company A crosses the x axis at a lower value than the line for Company B. Therefore
Company A has a lower break-even sales revenue than Company B.

Question#20:
B
$30,000

Present value of perpetuity = Annuity / Interest rate = $23,000 / 0.1 = $230,000

Net present value = Present value of perpetuity - Initial cost of investment

= $230,000 - $200,000
= $30,000

Question#21:
A
1, 2 and 3
The principles which a bank should establish before deciding whether or not to lend money can be
summarised as:

Character of the customer

Ability to borrow and repay (Statement 2)
Margin of profit (Statement 1)
Purpose of the borrowing (Statement 3)
Amount of the borrowing
Repayment terms
Insurance against the possibility of non-payment
Question#22:
B
Neither statement 1 nor statement 2

Feedforward control occurs when a variance is anticipated and the relevant department notified in
order to try to prevent it.

Both types of control are relevant to all types of cost, controllable and uncontrollable.

Question#23:
B
Hospital
Service costing is most appropriate for organisations operating in a service industry. Service
organisations do not make or sell tangible goods. Many not for profit organisations (hospitals, schools,
libraries) are service organisations.
Question#24:
A
Product A, product B, product C

In a limiting factor situation profit will be maximised by earning the biggest possible contribution per
unit of limiting factor. In this situation contribution per machine hour needs to be maximised.

Question#25:
A and D
Code 3020: Royalties for component used in manufactured product and Code 2160: Wages of
operatives who work on the product
Wages of operatives are direct labour so code 2160 is correct.
Supervisor wages are normally considered to be overheads so code 2430 is incorrect.
Cleaning materials are overheads as they cannot be traced in full to the product. Code 1670 is therefore
incorrect.
Royalties are a direct cost as they can be traced in full to the product so code 3020 is correct.

Question#26:
$92,900

In March the shop budgets to pay the following:

January purchases [5% paid in the second month after purchase] $90,000 x 5% = $4,500
February purchases [20% paid in the month after purchase] $82,000 x 20% = $16,400
March purchases [75% paid in the month of purchase] $96,000 x 75% = $72,000
Total $92,900
Question#27:
Absorption profit $12,000
Marginal profit $10,000

There were more units produced than sold. This means that there will be additional closing inventory of
1,200 units. If inventory levels increase the absorption costing will report the higher profit so $12,000 is
consistent with absorption costing. The lower profit is therefore the marginal costing profit.

Question#28:
B
$5.57

Receipt Issued units Balance Total value ($) Unit cost ($)
units (units)
Day 1 200 1,100 5.5
Day 3 140 (770) 5.5
60 330 5.5
Day 6 150 840 5.6
210 1,170 5.57
Day 7 140 (780) 5.57
70 390 5.57

Question#29:
B
Overtime premium at the specific request of a customer

Idle time is an overhead cost and therefore not a direct labour cost. Overtime premium is usually
treated as an indirect cost unless the overtime is worked at the specific request of a customer.

Question#30:
B
$133,000
If closing inventory is less than opening inventory then marginal costing principles will show a higher
profit than absorption costing principles.
Difference in inventory = 850 units - 300 units = 550 units
Overhead absorption rate = Budgeted overheads / budgeted output
= $360,000 / 6,000
= $60 per unit

Difference in profit between absorption costing and marginal costing

= 550 units x $60 per unit
= $33,000

Marginal costing profit is higher:

$100,000 + $33,000 = $133,000

Question#31:
D
P, Q, R, S

In a limiting factor situation profit will be maximised by earning the maximum possible contribution per
unit of limiting factor (machine hour in this case).

Question#32:
Production is carried out in accordance with the special requirements of each customer Yes
Products are mass produced for inventory No

Job costing is used when each job is separately identifiable as a cost unit. It would be suitable for a job
with special customer requirements.

Products which are mass produced are usually dealt with by using process costing.

Question#33:

$15,400
Capital expenditure relates to the purchase of non-current assets and the improvement in their capacity
to earn.
Revenue expenditure arises for the purpose of the trade or to maintain the earning capacity
of existing assets.

Question#34:
B
A budget that is changed to reflect the actual level of activity

A flexed budget recognises different cost behaviour patterns and is designed to change as volume of
activity changes.

Question#35:
C
A report of variances of a certain magnitude
An exception report identifies variances that exceed a pre-determined amount.

Question#36:
C
$113,700
Since inventory levels have reduced the absorption costing profit will be lower than the marginal costing
profit.

Difference in profit = (17,000 - 13,500) x $3 = $10,500

Absorption costing profit = $124,200 - $10,500 = $113,700

Question#37:
B
A cost which is irrelevant in decision-making

Sunk costs are costs that have been incurred in the past and are totally irrelevant to any decision that is
being made 'now'.

Question#38:
C
1, 2 and 3

For management accounting purposes cash includes petty cash, bank account balances and marketable
securities.

Question#39:
A and D
Activity above budget
Expenditure below budget

The overhead absorption rate is predetermined from budget estimates of overhead cost and the
expected volume of activity.

If fixed overheads are over absorbed this means that the amount of overhead absorbed was more than
the actual amount spent on overheads. So either the actual overhead was less than the budgeted
amount or the actual activity level was more than the budgeted amount.

Question#40:
2,250

Break-even point = Total fixed costs / Contribution per unit

= $9,000 / $(7 - 3)
= 2,250 units

Question#41:
$22.96

There was an abnormal gain of 300 kg and this means that the expected output was 8,100 - 300 = 7,800
kg

Cost per kg output

= Cost incurred / Expected output
= $179,070 / 7,800
= $22.96 per kg

Question#42:
Normal losses are credited to the process account at the cost per unit incurred on normal False
production
Abnormal gains are debited to the process account at the cost per unit incurred on normal True
production

Normal losses are credited to the process account but they are given no share of the cost.
Abnormal gains are debited to the process account and are valued at the same value per unit as the
actual output.
Question#43:
A and B both false
Public sector organisations are free to invest surplus funds in any investment. False
Legislation requires public sector organisations to earn a minimum rate of interest on False
all investments.

Legislation such as the Approved Investment Regulations ensures that public sector organisations
choose investments that give safe and easy access to cash rather than high interest.
Public sector regulations are usually restricted to investing surplus funds in government securities and
high-street bank accounts. However recent rule changes have also allowed access to a deposit facility
run by the treasury and commercially run money market funds with the highest level of
creditworthiness.
Question#44:
B
Shortening the working capital cycle by obtaining money from customers as soon as possible, and
taking as much credit from suppliers as possible

The technique of leading and lagging effectively means shortening the working capital cycle by reducing
the collection period and delaying payment to suppliers to improve cash flow.

Question#45:
$9
If overheads were under absorbed the actual overheads were greater than absorbed overheads.
Overheads absorbed = Actual overheads - Under absorbed overheads
= $21,720 - $345
= $21,375

Overheads absorbed = Absorption rate x Actual client hours worked

Absorption rate = Overheads absorbed / Actual client hours worked
= $21,375 / 2,375
= $9 per hour
Question#46:
$9.50

Revenue - Variable costs - Fixed costs = Net profit

Variable costs = Revenue - Fixed costs - Net profit
= $140,400 - $39,420 - $11,880
= $89,100

Contribution = Revenue - Variable costs

= $140,400 - $89,100
= $51,300

Contribution per unit = $51,300 / 5,400

= $9.50 per unit

Question#47:
D
Save a soft copy on the company's computer system in accordance with company IT policy and protect
the file with a password

Given the options the most appropriate solution is to save the file on the company's IT system in
accordance with company IT policy and protect the file with a password.

The other options do not protect the confidential information from being read by those who are not
allowed to see it.

Question#48:
$50,000
Relevant costs are future cash flows arising as a direct consequence of a decision. Costs of $28,000
(development) and $22,000 (marketing) are expected to be incurred in the future.
Development costs of $35,000 and marketing costs of $16,000 have already been incurred. They are
both sunk costs and are not relevant to the decision.

Question#49:
A
1 and 2

Certificates of deposit and government stock can be traded, meaning that there will be a
market price which may be different to the original capital value. There is no risk of
fluctuation in the capital value of a bank deposit.
Question#50:
C
Use of untrained labour

An adverse labour efficiency variance occurs where more labour time was required than was budgeted.

This is often the consequence of using lower grade labour than was budgeted (often where labour has
not been trained).