SECTION A: ANSWER ALL QUESTIONS- Each question is worth 2.5 marks

1. A colleague has been discussing Activity Based Costing (ABC) and states the following:

1 ABC effectively treats overheads as variable costs, varying with some activity called a “cost driver”.

2 Unlike traditional absorption costing systems, ABC assumes that products incur overheads in proportion to their production volumes.

Which statements are true?

(a) Both the statements

(b) Only statement 1

(c) Only statement 2

(d) Neither of the statements

2. A company sells three products as follows:

	P	Q	R
Budget
Sales (units)	2,000	4,000	2,000
Selling price	£30	£18	£10
Unit variable cost	£16	£6	£4
Actual
Sales (units)	1,800	5,200	1,400
Selling price	£32	£16	£9
Unit variable cost	£16	£6	£4

What was the sales quantity variance?

(a) £3,600

(b) £4,100

(c) £4,400

(d) £8,000

3. In April a company finds that it has incurred an adverse material usage variance.

What might have caused this?

(a) A delay in production

(b) A rise in the price of material

(c) Employing cheaper but less skilled workers

(d) A shortage of material

4. A company has a standard cost card which includes:

3 litres of Material Q at £2 per litre = £6

The original budget was to make 8,000 but the company actually made 10,000, buying and using 32,000 litres of Q at a total cost of £68,000.

In hindsight, the average market price was more like £2.20 per litre and it was felt this would have been a fair standard.

What is the material price planning variance for material Q?

(a) £2,000 A

(b) £2,400 F

(c) £4,000 A

(d) £6,400 A

5. Division A makes items which it supplies to Division B. Its variable costs of production are £10 per item and it has fixed costs of £4 per item, based on full production. There is a perfect market for the item being transferred and the market price is £20.

What should the transfer price be to ensure goal congruence?

(a) £10

(b) £14

(c) £16

(d) £20

6. Which of the following is not normally an objective of a transfer pricing system?

(a) Goal congruent behaviour

(b) Autonomy of divisions

(c) Maximisation of group profits

(d) Maximisation of divisional manager remuneration

7. A company makes and sells 3 products as follows:

	X	Y	Z
Contribution margin	20%	40%	25%
Selling price	£100	£85	£60
Budgeted sales	6,000	3,000	9,000

Fixed costs total £297,500 in the period.

Assuming the products are sold in a constant mix, what is the number of product X sold at the break-even point?

(a) 2,500

(b) 5,000

(c) 10,000

(d) 14,875

8. A company is considering a new product. It will have a selling price of £15, variable cost per unit of £10 and fixed costs of £80,000. It is budgeting to make a profit of £20,000.

What is the expected margin of safety on this product (to the nearest 5%)?

(a) 20%

(b) 25%

(c) 30%

(d) 35%

9. A senior manager wishes to encourage her subordinates to have a relatively high involvement with the costs incurred in their areas of responsibility, but not to be tempted to manipulate the accounting information.

What style of evaluating budget information should she aim for?

(a) Budget constrained

(b) Profit conscious

(c) Cost conscious

(d) Non-accounting

10. A company rewards its sales staff each month by giving a reward to the person with the highest monetary value of sales made in that month. This has been criticised as not fair because:

1  it does not allow for uncontrollable factors in the economy

2 those with large companies amongst their regular customers have an advantage

Which of the criticisms might be valid?

(a) Both criticisms

(b) Only criticism 1

(c) Only criticism 2

(d) Neither of the criticisms

11. A company has only 12,000 kg of raw materials for the coming month and two products, G and H, details of which are as follows:

	G	H
	£	£
Selling price	70	80
Raw material (£4 per kg)	12	16
Labour (£10 per hour)	40	50

What is the correct statement of the material constraint (where g is number produced of G and h = number produced of H)?

(a) 4g + 5h ≤ 12,000

(b) 3g + 4h ≤ 12,000

(c) 4g + 3h ≤ 12,000

(d) 12g + 16h ≤ 12,000

12. When undertaking linear programming using the graphical method, which of the following statements is correct?

(a) A non-zero shadow price means we are not using all of that resource in the optimal solution

(b) The feasible region will always contain the origin

(c) Any point in the feasible region is a possible production plan

(d) The optimal point will never be on one of the axes

13. A short term project requires 10,000 kg of Material P and 8,000 kg of Material Q; Material P is used regularly for other work but Material Q has no longer any other use. Details are as follows:

	Amount in inventory	Original cost	Current price	Resale value
Material P	12,000 kg	£5	£8	£3
Material Q	6,000 kg	£12	£10	£4

What is the relevant cost of material for the project?

(a) £62,000

(b) £112,000

(c) £124,000

(d) £142,000

14. A ten week project requires 100 hours of skilled labour and 250 hours of unskilled labour.

The skilled labour is paid a full wage of £20 per hour, regardless of whether they are fully employed and there are 150 hours of spare capacity over the ten weeks. Unskilled labour is paid £10 per hour and is fully occupied but would work up to 400 hours overtime at time and a half; alternatively, additional short term unskilled labour could be recruited at £14 per hour but would need some introductory training at a total cost of £500.

What is the total relevant cost of labour for the project?

(a) £3,750

(b) £4,000

(c) £5,750

(d) £6,000

15. A company is assessing a possible project using NPV but it is concerned that it is more risky than its normal business. One of the directors has suggested:

1  increasing the discount rate to allow for the extra risk

2  using sensitivity analysis to identify the key estimates

Which might be valid approaches?

(a) Both approaches

(b) Only approach 1

(c) Only approach 2

(d) Neither of the approaches

16. A company has £2.8 million to invest at time 0 in three possible projects: F, G and H. Each project is infinitely divisible but cannot be undertaken more than once. Details are as follows:

	F	G	H
	£000	£000	£000
Investment needed at time 0	980	1,400	2,100
Net present value	314	504	714

How much should be invested in project H?

(a) £0

(b) £1,400,000

(c) £1,890,000

(d) £2,100,000