MA: Cost accounting

Answer: C. When prices are rising, FIFO issues the oldest (cheaper) inventory first, so cost of sales is lower and closing inventory is valued at more recent (higher) prices. Compared to AVCO — which uses an average price — FIFO produces lower cost of sales, higher profit, and higher closing inventory value. This is a classic exam scenario: the direction of the price movement determines which method gives higher profit and inventory figures.

Answer: D. Fixed overhead absorption rate = £50,000 ÷ 10,000 = £5 per unit. Under absorption costing, 1,000 units remain in closing inventory, each carrying £5 of fixed overhead = £5,000 carried forward. Under marginal costing, all £50,000 fixed overhead is charged to the period. So absorption costing profit is £5,000 higher (less fixed cost charged this period). The reconciliation formula: Absorption profit − Marginal profit = Change in inventory × Fixed overhead absorption rate = 1,000 × £5 = £5,000.

Answer: A. Contribution per unit = Selling price − Variable cost = £40 − £24 = £16. Breakeven point = Fixed costs ÷ Contribution per unit = £48,000 ÷ £16 = 3,000 units. Option B (2,000) divides fixed costs by the variable cost per unit (£48,000 ÷ £24). Option C (1,200) divides fixed costs by the selling price. Option D (4,000) does not follow from the figures. Always calculate contribution first — it is the foundation of all marginal costing decisions.

Answer: A. Normal loss = 10% × 2,000 units input = 200 units, so expected output = 1,800 units. Actual output was 1,750 units, 50 units below expectation, so there is an abnormal loss of 50 units alongside the normal loss of 200 units. Option B calculates normal loss as 10% of output (175 units) instead of 10% of input. Option C treats the shortfall as a gain. Option D treats the whole 250-unit loss as normal. The abnormal loss is valued at the same cost per unit as good output and is debited to an abnormal loss account.

Answer: C. Traditional absorption costing uses a single overhead absorption rate — typically based on labour hours or machine hours — which may poorly reflect how overheads are actually consumed. ABC identifies cost pools and cost drivers for each major activity, so products that consume more of a particular activity bear more of that cost. This produces more accurate costs, particularly where products differ significantly in complexity or batch size. ABC does not eliminate fixed costs (A), does not always produce lower costs (B), and is generally more complex to operate (D).

Answer: D. High-low: VC/unit = (£115,000−£85,000)÷(9,000−5,000) = £30,000÷4,000 = £7.50. Fixed costs using high point: FC = £115,000 − (9,000×£7.50) = £115,000 − £67,500 = £47,500. Verify at low point: £47,500 + (5,000×£7.50) = £47,500 + £37,500 = £85,000 ✓. Option A assumes all costs are variable. Option B uses wrong FC calculation. Option C uses an incorrect VC/unit.

Answer: A. A semi-variable (or mixed) cost has both a fixed component (line rental — incurred regardless of usage) and a variable component (per-minute charge — increases with usage). The examiner's report specifically flags semi-variable costs as a source of student confusion and a common distractor territory. Stepped fixed (B) stays constant within ranges but jumps at thresholds — no variable element per unit. Pure variable (C) has no fixed element. Pure fixed (D) has no variable element.

Answer: B. Direct costs are those traceable specifically and economically to a cost unit (here, each chair). Timber is a direct material — each unit of timber can be identified with specific chairs produced. Factory supervisor wages (A) are an indirect cost (overhead) — the supervisor oversees general production, not specific units. Glue (C) is typically treated as an indirect material — it is used in production but too insignificant and difficult to trace to individual units to treat as direct. Not all production costs are direct (D).

Answer: C. OAR = £180,000 ÷ 60,000 hrs = £3.00/hr. Absorbed = 58,000 × £3.00 = £174,000. Actual overhead = £177,000. Under-absorbed = £177,000 − £174,000 = £3,000 (actual > absorbed → under-absorption). Option A: incorrect — overheads are not always fully absorbed. Option B: uses budgeted hours not actual. Option D: confuses direction of variance.

Answer: D. Under-absorption means actual overheads exceeded overheads absorbed into products. The shortfall (£8,000) must be charged to the income statement as an additional cost — reducing profit. This adjustment closes the overhead control account. It is a charge not a credit (A). It cannot be deferred as an asset (B) — it relates to period costs already incurred. It does affect profit (C).

Answer: A. Direct materials: £850. Direct labour: 12 × £15 = £180. Overheads absorbed: 12 × £8 = £96. Total cost = £850 + £180 + £96 = £1,126. Mark-up of 25% on cost: £1,126 × 1.25 = £1,407.50 — option A. Option B (£1,126) is the total cost before any mark-up is applied. Option C (£1,287.50) omits the overhead element: (£850 + £180) × 1.25 = £1,287.50. Option D (£1,501.33) confuses a 25% mark-up on cost with a 25% profit margin on selling price — dividing by 0.75 rather than multiplying by 1.25.

Answer: B. Total batch cost = £120 + £80 + £60 = £260. Cost per roll = £260 ÷ 500 = £0.52. Batch costing divides total batch cost by the number of units to find unit cost. Option A (£0.24) divides only materials by 500. Option C (£0.16) divides only overheads by 500. Option D (£0.38) omits overheads from the total.

Answer: C. Target cost = selling price × (1 − profit margin %) = £80 × (1 − 0.20) = £80 × 0.80 = £64. Cost gap = estimated current cost − target cost = £70 − £64 = £6. The cost gap is what must be eliminated through cost reduction techniques (value engineering, value analysis). Option A uses 25% margin (cost-plus approach). Option B has wrong cost gap. Option D adds the margin to selling price.

Answer: D. Life cycle costing recognises that a product incurs costs across its entire life — R&D, design, production, marketing, after-sales support, and disposal. Period accounting can distort this picture (e.g. showing a loss in R&D years and high profit in production years). LCC gives the true total profitability picture. It does not focus only on production (A). It does not smooth costs equally (B). It explicitly includes R&D (C).

Answer: C. Contribution per unit = £55 − £33 = £22. Units for target profit = (Fixed costs + Target profit) ÷ Contribution = (£66,000 + £22,000) ÷ £22 = £88,000 ÷ £22 = 4,000 units. Breakeven would be £66,000 ÷ £22 = 3,000 units (option A). Option B = 5,000 × £22 = £110,000 contribution — too high. Option D = 2,000 × £22 = £44,000 — insufficient to cover fixed costs.

Answer: B. Margin of safety = Budgeted sales − Breakeven sales = 8,000 − 6,000 = 2,000 units. As % of budgeted sales = 2,000 ÷ 8,000 × 100 = 25%. This means sales can fall 25% before the company makes a loss. Option A (75%) is the breakeven volume as % of budget. Option C (33%) divides by breakeven volume not budget. Option D is a miscalculation.

Answer: D. Service costing is used by service organisations (hospitals, hotels, transport companies) where the output is a service rather than a tangible product. The cost unit must be defined appropriately — for a hospital, a patient day (one patient receiving care for one day) is the standard cost unit. Job costing (A) applies where each job is unique and separately costed — possible for individual patients but 'per patient day' suggests service costing. Process and batch costing (B, C) apply to continuous production and identical batch production respectively.

Answer: A. OAR = £40,000 ÷ 10,000 units produced = £4 per unit. Full absorption cost per unit = £12 variable + £4 fixed = £16. Revenue: 8,500 × £25 = £212,500. Cost of sales: 8,500 × £16 = £136,000. Profit = £212,500 − £136,000 = £76,500 — option A. Option B (£70,500) is the marginal costing profit: (8,500 × £13 contribution) − £40,000 fixed overheads = £70,500. Absorption costing profit is £6,000 higher because 1,500 units of closing inventory each carry £4 of fixed overhead, deferring £6,000 to the next period. Option C (£110,500) is total contribution (8,500 × £13), forgetting to deduct fixed overheads. Option D (£82,500) adds the inventory adjustment rather than recognising it is embedded in the per-unit cost.

Answer: D. Step 1 — cost driver rate: £120,000 ÷ 400 setups = £300 per setup. Step 2 — cost allocated to Alpha: 15 setups × £300 = £4,500. Step 3 — cost per unit: £4,500 ÷ 3,000 units = £1.50 — option D. Option A (£0.15) skips the setups step and divides the total pool cost directly by a large unit figure. Option B (£0.60) uses an incorrect number of setups. Option C (£0.40) divides total cost by total units produced (£120,000 ÷ 300,000), ignoring the activity driver entirely — this is the traditional volume-based approach that ABC is designed to improve upon.

Answer: D. Make cost (relevant): Variable cost only = 8,000 × £18 = £144,000 (fixed costs are irrelevant if they continue regardless). Buy cost = 8,000 × £22 = £176,000. Saving from making = £176,000 − £144,000 = £32,000. The company should continue to make — it saves £32,000 per year. Note: if fixed costs could be avoided by buying, they become relevant. The question states fixed costs of £40,000 — if these are avoidable, total make cost = £144,000+£40,000=£184,000 vs buy £176,000 — buy saves £8,000 (option C). Without clarity on avoidability, we assume fixed costs continue → make saves £32,000 (option D).

Answer: C. The £15,000 development cost is a sunk cost — it has already been spent and cannot be recovered regardless of the decision. Sunk costs are irrelevant to future decisions. The relevant cost is only the future incremental cost of launching: £8,000. Decision: launch if relevant benefit (£20,000 revenue) > relevant cost (£8,000). Net benefit = £12,000. The company should launch. Option A incorrectly includes the sunk cost. Option B treats the sunk cost as the relevant cost. Option D incorrectly includes sunk costs and misapplies the logic.

Answer: D. Opportunity cost is the value of the next best alternative forgone. If the machine is diverted to the special order, Product A's contribution of £18,000 is sacrificed. This £18,000 is the opportunity cost and must be included in the minimum price for the special order. Option A confuses the machine's ownership cost (a sunk cost) with the relevant opportunity cost. Option B is a sunk cost. Option C is a non-cash accounting charge — not a relevant cash flow.

Answer: D. Environmental management accounting (EMA) applies management accounting techniques to environmental costs — identifying what environmental costs are incurred (energy, waste, remediation), allocating them accurately, and using this information to support decisions that reduce environmental impact and costs simultaneously. It is a management tool, not primarily a financial reporting exercise (A). It goes beyond regulatory compliance (B). It is unrelated to external audit (C).

Answer: C. Contribution per unit = £60 − £42 = £18. C/S ratio = £18 ÷ £60 = 0.30 = 30%. Breakeven revenue = Fixed costs ÷ C/S ratio = £63,000 ÷ 0.30 = £210,000. The C/S ratio tells us that 30p in every £1 of revenue contributes toward fixed costs and profit. Option A has the C/S ratio wrong (70% would mean contribution = £42, which is the variable cost). Option B has the correct ratio but wrong breakeven. Option D inverts the contribution and variable cost.

Answer: C. Contract costing (used in construction, engineering, and similar industries) differs from job costing primarily because contracts span multiple accounting periods. This creates the accounting problem of when to recognise profit — recognising nothing until completion understates performance; recognising profit progressively (based on stage of completion) is the standard approach under IFRS 15. Option A is wrong: a contract is a single, unique project, not multiple identical units. Option B is wrong: contract costing is used in construction and engineering, not only in service industries. Option D is wrong: each contract is different, so a single standard cost cannot simply be reapplied.

Answer: D. Total Revenue = PQ = (200−3Q)Q = 200Q−3Q². Marginal Revenue = dTR/dQ = 200−6Q. Set MR=MC: 200−6Q=20; 6Q=180; Q=30. Price: P=200−3(30)=200−90=£110. Profit-maximising rule: MR=MC. Option A: 200−6(40)=−40≠20. Option B: 200−6(60)=−160≠20. Option C: 200−6(20)=80≠20. Only Q=30 satisfies MR=MC.

Answer: A. Period costs are not included in inventory valuation — they are charged to the income statement in the period incurred. Selling and administrative costs are period costs. The sales director's salary relates to selling activities, not production. Factory supervisor wages (B), raw materials (C), and factory rent (D) are all production costs — they are product costs included in inventory under absorption costing.

Answer: D. Contribution = £80,000 − £55,000 = £25,000 positive. The £35,000 fixed overhead is allocated — if it continues regardless of the decision (i.e., it is not avoidable), it is irrelevant. Shutting down would save direct costs but not the allocated fixed overhead — the company would be £25,000 worse off per period. The net loss of £10,000 (A) is misleading because it includes unavoidable fixed costs. Option C correctly identifies that contribution must be positive but understates the analysis.

Answer: C. Factory rent is related to the physical space occupied — apportioning by floor area reflects the benefit each department receives from the rented space. Number of employees (A) is appropriate for HR-related overheads. Machine hours (B) might suit machine-related maintenance overheads. Labour hours (D) suit labour-related overheads. Selecting the appropriate apportionment basis requires matching the cost driver to the nature of the overhead.

Answer: A. EOQ = √(2 × annual demand × ordering cost ÷ holding cost per unit) = √(2 × 18,000 × £25 ÷ £2) = √(900,000 ÷ 2) = √450,000 = 670.8 ≈ 671 units. Option B (450) and option C (300) come from misapplying the formula — for example dividing by the wrong figure or omitting the doubling. Option D (900) squares-roots the numerator before dividing, or uses the total annual demand-related figure incorrectly. The EOQ minimises the sum of ordering and holding costs, balancing fewer large orders against higher average inventory.

Answer: A. Kaizen (Japanese for 'continuous improvement') costing is applied during production — unlike target costing which is applied at the design stage. It involves setting monthly cost reduction targets and achieving them through incremental process improvements and waste elimination. Target costing (B) works backward from selling price — a different but complementary technique. ABC (C) is an overhead allocation system. Life cycle costing (D) spans the product's full life. All four are distinct cost management tools.

Answer: B. TPAR = Return per bottleneck hour ÷ Cost per bottleneck hour. Return per bottleneck hour = £200,000 ÷ 800 = £250. Cost per bottleneck hour = £160,000 ÷ 800 = £200. TPAR = £250 ÷ £200 = 1.25 — option B. Equivalently: TPAR = Throughput ÷ Operating expenses = £200,000 ÷ £160,000 = 1.25. A TPAR greater than 1 means the factory is generating more throughput than its operating costs — a profitable position. Option A (1.5625) divides the per-hour throughput (£250) by total operating expenses (£160,000), mixing units incorrectly. Option C (0.80) inverts the ratio. Option D (£250) is the return per bottleneck hour, not the TPAR itself.

Answer: C. With spare capacity, fixed costs are irrelevant to the special order decision (they continue regardless). Minimum price = variable cost = £18/unit. Any price above £18 generates a positive contribution. The normal selling price (£35) is irrelevant for minimum pricing purposes — it may be the actual price charged, but the minimum is variable cost. Option B (£28) might include some fixed cost allocation. Option D (£23) is an arbitrary mark-up. This tests the key principle: in spare capacity situations, relevant cost = variable cost only.

Answer: D. Maintenance reapportioned to dept A = £40,000 × 60% = £24,000. This £24,000 is added to dept A's other overheads before calculating the OAR. Dept B receives £16,000. The OAR per machine hour for dept A would then include the maintenance element: £24,000 ÷ 8,000 = £3.00/hr maintenance component. Option A is dept B's share. Option B divides equally (50/50). Option C does not reapportion at all.

Answer: A. OAR = £45,000 ÷ 15,000 units produced = £3 per unit. Full absorption cost = £8 + £3 = £11 per unit. Revenue: 14,000 × £20 = £280,000. Cost of sales: 14,000 × £11 = £154,000. Profit = £280,000 − £154,000 = £126,000 — option A. Option B (£123,000) is the marginal costing profit: (14,000 × £12 contribution) − £45,000 fixed overheads = £123,000. Absorption profit is £3,000 higher because closing inventory (3,000 units) exceeds opening inventory (2,000 units) by 1,000 units — deferring 1,000 × £3 = £3,000 of fixed overhead into closing inventory. Option C (£168,000) is total contribution, forgetting to deduct fixed overheads. Option D (£129,000) adds the inventory adjustment rather than recognising it is already included in the per-unit absorption cost.

Answer: A. Functional cost classification divides costs by the business function that incurs them: production costs (factory wages, production depreciation, raw materials), selling costs (advertising, sales commissions, delivery costs), distribution costs, and administrative costs. Advertising promotes products to customers — it is a selling cost. Options B, C, and D are all production costs — they relate to manufacturing the product, not selling it.

Answer: B. If fixed overheads continue regardless: contribution of Z = Net loss + Fixed overhead share = −£15,000 + £25,000 = £10,000 positive. Dropping Z removes £10,000 of contribution without saving the fixed costs → profit worsens by £10,000. Option A mistakenly treats the net loss as the relevant figure. Option C is wrong — dropping Z does affect profit (by removing its contribution). Option D wrongly assumes fixed costs are saved.

Answer: B. To increase throughput, focus exclusively on the bottleneck — the constraint limits the rate of the entire system. Reducing setup time on machine X creates more productive capacity at the constraint, directly increasing throughput. Improving upstream machines (A) feeds work into the bottleneck faster — but since X is already the constraint, this creates more work-in-progress queue without increasing output. Reducing non-bottleneck inventory (C) or improving non-bottleneck staff (D) has no effect on the bottleneck constraint.