Pdf question no 4...

Ask A part for 16 marks. And ask B part question as below.

b) discuss the non financial factors that a a company should consider when making a decision about
ceasing a productline (4 marks)

MCQ

1. The following statements have been made about traditional absorption costing and activity
based costing.
(1) Traditional absorption costing may be used to set prices for products, but activity based
costing cannot.
(2) Traditional absorption costing tends to allocate too many overhead costs to low-volume
products and not enough overheads to high-volume products.
(3) Implementing ABC is expensive and time consuming
Which of the above statements is/are true?
A 1 only B 2 only
C 3 only D 1 and 2 only

2. ABC Company uses throughput accounting. Machine time is the current binding constraint on
production output, and management are looking for ways to increase the throughput
accounting (TA) ratio for a product that the machine is used to manufacture. Which of the
following will have NO effect on the TA ratio?
A Increasing the selling price of the product
B Obtaining a lower purchase price for materials for the product
C Reducing factory costs
D Reducing the machine time per unit to make the product

3. Are the following statements about target costing true or false?

A) A risk with target costing is that cost reductions may affect the perceived value of the
product.
B) An effective way of reducing the projected cost of a new product is to simplify the design.
C) The value of target costing depends on having reliable estimates of sales demand.
D) Target costing may be applied to services that are provided free of charge to customers,
such as costs of call centre handling

4. Which TWO of the following statements about life cycle costing are true?
a) A product is usually most profitable during the growth phase of its life cycle.
b) Life cycle costing is useful for deciding the selling price for a product.
 c) An important use of life cycle costing is to decide whether to go ahead with the
development of a new product.
d) Life cycle costing encourages management to find a suitable balance between investment
costs and operating expenses.

5) A business produces three products, Z1, Z2 and Z3. Each of these products require different amounts
of material (material X), which is a scarce resource. The following budgeted data relates to the three
products:

Per unit: Z1 Z2 Z3

Selling price 200 150 100

Materials ($5 per kg) (35) (20) (10)

Labour ($20 per hour) (50) (25) (10)

Variable overheads (45) (45) (30)

Fixed overheads (30) (25) (20)

Profit per unit 40 35 30

In what order should the products be manufactured in order to ensure profit is maximised?

Z1 Z2 Z3

A 1st 2nd 3rd

B 1st 3rd 2nd

C 3rd 2nd 1st

D 2nd 3rd 1st

6) Gam Co operates an activity-based costing system and has forecast the following information
for next year.

Cost pool Cost Cost driver Number of drivers

Production set-ups $105,000 Set-ups 300
Product testing $300,000 Tests 1,500
Component supply and storage $25,000 Component orders 500
Customer orders and delivery $112,500 Customer orders 1,000

General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are
expected to be $900,000 and these overheads are absorbed on a direct labour hour basis. Total direct
labour hours for next year are expected to be 300,000 hours.
Gam Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders
of 50 units per order. The company holds no inventories of Product ZT3 and will need to produce the
order requirement in production runs of 900 units. One order for components is placed prior to each
production run. Four tests are made during each production run to ensure that quality standards are
maintained. The following additional cost and profit information relates to product ZT3:

Component cost : $1.00 per unit

Direct labour: 10 minutes per unit at $7.80 per hour

Profit mark up: 40% of total unit cost

Required

1) Calculate the activity-based recovery rates for production set ups and product testing.

A) Production set up $350 per set up, product testing $600 per test
B) Production set up $350 per set up, product testing $200 per test
C) Production set up $210 per set up, product testing $200 per test
D) Production set up $210 per set up, product testing $1,000 per test (2 marks)

2) Calculate the activity-based recovery rates for component supply and storage, and customer orders
and delivery.

A) Component supply and storage $50 per order, customer orders and delivery $112.50 per order.
B) Component supply and storage $50 per order, customer orders and delivery $225 per order.
C) Component supply and storage $25 per order, customer orders and delivery $225 per order.
D) Component supply and storage $25 per order, customer orders and delivery $112.50 per order.

3) Calculate the general overhead per unit and the direct labour cost per unit of Product ZT3.
A) General overhead $0.50 per unit, Direct labour cost $7.80 per unit.
B) General overhead $3 per unit, Direct labour cost $1.30 per unit.
C) General overhead $3 per unit, Direct labour cost $7.80 per unit.
D) General overhead $0.50 per unit, Direct labour cost $1.30 per unit.

4) The following statements have been made about gam co .

(1) The use of a mark up to determine the price and profit per unit of ZT3 may lead to the
incorporation of components which are not valued by the customer.
(2) A target costing approach would place an empha sis on the planning and design stage of
products in Linacre.
Which of the above statements is/are true?
 A 1 only B 2 only
C Neither 1 nor 2 D Both 1 and 2

5) The following statements have been made about gam co.

(1) Unlike traditional absorption costing, ABC identifies variable overhead costs in the production
of ZT3, for allocation to product costs.
(2) ABC can be used as an information source for budget planning based on activity rather than
incremental budgeting.

Which of the above statements is/are true?

A 1 only B 2 only
C Neither 1 nor 2 D Both 1 and 2