PM: Specialist costing

Answer: D. Calculate the cost per cost driver, then charge Premium with its driver usage. Setups: £120,000 ÷ 600 = £200 per setup → 450 × £200 = £90,000. Inspections: £80,000 ÷ 800 = £100 per inspection → 600 × £100 = £60,000. Despatch: £60,000 ÷ 500 = £120 per despatch → 100 × £120 = £12,000. Total Premium overhead = £90,000 + £60,000 + £12,000 = £162,000, and ÷ 2,000 units = £81.00 per unit. Option B (£130.00) charges the entire £260,000 of overhead to Premium alone (£260,000 ÷ 2,000). Option A (£65.00) is half of that error. Option C (£97.50) results from using Premium's share of total driver volumes rather than its actual driver usage. ABC charges each product only with the activities it actually consumes.

Answer: A. Traditional absorption using machine hours assigns costs in proportion to machine hours. Product A (high machine hours) absorbs large overhead; Product B (low machine hours) absorbs little — regardless of how many inspections each requires. ABC would assign inspection costs based on actual inspection usage: Product B (many inspections) would absorb more inspection overhead. So traditional costing over-costs A (too much overhead assigned) and under-costs B (too little assigned). This cross-subsidisation is the core problem ABC solves. Option B reverses the direction. Options C and D are incorrect.

Answer: B. Target cost = Selling price × (1 − profit margin %) = £95 × (1 − 0.20) = £95 × 0.80 = £76. Cost gap = Current cost − Target cost = £82 − £76 = £6. Required reduction = £6. The company must reduce costs by £6 per unit through value engineering, supplier negotiation, or process improvement. Option A uses a 17% margin (£79). Option C has the right target cost but wrong cost gap (£3 instead of £6). Option D adds the margin instead of deducting it.

Answer: C. Feed-forward control acts in advance of an event — it uses forecasts and plans to prevent problems before they occur. Target costing sets a maximum allowable cost before production begins and requires the design team to engineer the product to meet that cost. It is proactive, not reactive. The examiner (SD25, Question 1) specifically identified feed-forward as the correct classification of target costing, with candidates commonly selecting 'negative feedback control' as the wrong answer. Options A, B and D all describe reactive (feedback) mechanisms.

Answer: D. The examiner (SD25, Question 5) explicitly identified heterogeneity as the key service characteristic making target costing difficult: services vary depending on the customer and situation, making it hard to define a standard specification and set precise costs in advance. Intangibility (defining the service itself is difficult), simultaneity (produced and consumed at the same time — no pre-production design phase), and perishability (unused capacity cannot be stored) are the other service characteristics creating difficulty. Option A is factually wrong. Option B is irrelevant — target costing doesn't require physical inventory. Option C is an unsupported generalisation.

Answer: A. Life-cycle costing totals every cost from development to disposal and divides by lifetime volume. Total life-cycle costs = development £500,000 + production (200,000 × £12) £2,400,000 + marketing £800,000 + after-sales support (200,000 × £3) £600,000 + disposal £100,000 = £4,400,000. Life-cycle cost per unit = £4,400,000 ÷ 200,000 = £22.00. Option B (£15.00) includes only the per-unit costs (£12 + £3), ignoring all the one-off and period costs. Option C (£20.50) omits the £300,000 of development-plus-disposal one-off costs. Option D (£18.50) leaves out the £500,000 development cost and the £100,000 disposal cost. The whole point of life-cycle costing is that these upfront and end-of-life costs must be spread across the units, not ignored.

Answer: B. Life-cycle costing recognises all costs from development through disposal and matches them against lifetime revenues, giving a true picture of total profitability. Conventional period accounting distorts this: a product shows heavy losses in R&D years and high profits in mature years, making period-by-period assessment misleading. Life-cycle costing reveals the genuine economic case. It does not reduce total costs (A) — it just presents them differently. It complements, not replaces, budgeting (C). It does not force annual profit targets (D) — it takes a lifetime view.

Answer: C. TPAR = throughput per bottleneck hour ÷ operating cost per bottleneck hour. Throughput per unit = selling price − direct material cost = £120 − £45 = £75 (only material is treated as variable in throughput accounting). Throughput per bottleneck hour = £75 ÷ 3 = £25. Operating cost per bottleneck hour = £18,000 ÷ 900 = £20. TPAR = £25 ÷ £20 = 1.25. A TPAR above 1 means the product earns more throughput per bottleneck hour than it costs to run the bottleneck, so it is worth producing. Option A (0.80) inverts the ratio (£20 ÷ £25). Option D (0.05) divides operating cost per hour by throughput per unit. Option B (1.50) does not follow from the figures.

Answer: D. TPAR = Throughput per bottleneck hour ÷ Operating cost per bottleneck hour. Throughput = Selling price − Direct material cost. Reducing direct material cost increases throughput per unit, which increases throughput per bottleneck hour, directly improving TPAR. Improving non-bottleneck machines (A) does not increase system output — the bottleneck is the constraint. Reducing selling price (B) reduces throughput, worsening TPAR. Increasing operating expenses (C) increases the denominator, reducing TPAR. The Theory of Constraints focuses effort exclusively on the bottleneck.

Answer: A. Goldratt's five focusing steps are: (1) Identify the system's constraint. (2) Exploit the constraint — get maximum throughput from it without major investment. (3) Subordinate all other processes to support the constraint. (4) Elevate the constraint — if still binding, invest to increase its capacity. (5) Repeat — once the constraint is resolved, a new one will emerge. Options B, C, and D describe general management or process improvement approaches, not the Theory of Constraints framework. The key insight is that improving non-constraints is wasted effort until the binding constraint is addressed.

Answer: B. A major challenge in environmental cost accounting is that environmental costs are often buried in overhead pools (energy waste, disposal costs, permit fees) rather than explicitly identified as environmental costs. This makes it impossible to assess the environmental cost of specific products or decisions, or to identify where reductions could be made. Environmental costs can be very significant (A is wrong). Environmental regulations vary enormously across jurisdictions (C is wrong). Management accountants have a central role in identifying, quantifying, and reporting environmental costs (D is wrong).

Answer: C. Environmental costs follow a prevention-appraisal-failure framework similar to quality costs: Prevention costs — incurred to prevent environmental harm (installing prevention equipment ✓). Appraisal costs — monitoring and detecting environmental performance (monitoring/testing). Internal failure costs — addressing environmental failures discovered before they cause external harm (cleaning up an internal spill). External failure costs — costs from environmental failures that affect the external environment (fines, remediation, litigation). Fines (A) are external failure costs. Monitoring (B) is an appraisal cost. Customer complaints (D) are external failure costs.

Answer: D. The cost driver should be the factor that most causes the activity cost to be incurred. Quality control inspections are triggered by production runs — each run requires an inspection regardless of run size or the number of machine hours or labour hours within it. Machine hours (A) and labour hours (B) measure production intensity but do not drive inspection activity, which depends on run frequency. Units produced (C) might be appropriate if every unit is individually inspected, but batch inspection costs are driven by number of runs, not units.

Answer: A. The target cost is derived from the market price — increasing selling price (B) ignores competitive market dynamics and is explicitly invalid if the price is market-determined (examiner SD25 specifically flagged this). Accepting the gap and relying on volume (C) does not close the gap — variable cost per unit remains above target. Reducing quality significantly (D) is highlighted by the examiner as invalid where quality is a product USP or brand characteristic. Value engineering — redesigning the product to reduce cost without compromising customer value — is the standard, legitimate approach.

Answer: C. Rank by throughput per bottleneck hour, then satisfy demand in that order. Z = £40 ÷ 1 = £40/hr; X = £60 ÷ 2 = £30/hr; Y = £90 ÷ 4 = £22.50/hr. So the priority is Z, then X, then Y. Make Z to maximum demand: 400 units × 1 hr = 400 hours (600 left). Make X to maximum demand: 200 units × 2 hrs = 400 hours (200 left). Use the remaining 200 hours on Y: 200 ÷ 4 = 50 units. Optimal plan: Z 400, X 200, Y 50 (option C), using all 1,000 hours. Options A, B and D each require 1,100 hours, so they are infeasible, and they also fail to follow the £40 > £30 > £22.50 ranking. The product with the highest throughput per unit (Y, at £90) is made last because it is the least efficient user of the scarce bottleneck.

Answer: C. The management accountant's role in sustainability is proactive and internal: identifying environmental costs currently hidden in overheads, developing metrics for resource consumption (energy, water, waste), building sustainability considerations into investment appraisals, and providing information to enable decisions that balance financial and environmental outcomes. Simply meeting minimum legal requirements (A) is reactive. Delegating to an environmental committee (B) abandons the finance function's responsibility for cost identification and reporting. External-only reporting (D) ignores the internal management accounting role.

Answer: D. A key insight from life-cycle costing is that 70-90% of a product's costs are committed (locked in) at the design stage — the choice of materials, components, manufacturing processes, and product features determines the cost structure before a single unit is made. This is why target costing at the design stage is so powerful: by the time production begins, there is little scope to reduce costs without redesigning the product. The production stage (A) incurs costs but they are largely committed at design. Disposal (B) and maturity (C) are later stages — cost reduction opportunities are greatly limited by this point.

Answer: A. A TPAR of exactly 1 means throughput exactly covers operating costs — break-even at the bottleneck. Below 1 means the product generates less throughput per bottleneck hour than the operating cost per bottleneck hour — it destroys value at the margin. The appropriate response is to investigate: can throughput be increased (reduce material cost, increase price) or can operating costs be reduced? Saying 'close enough' (B) ignores the significance of sub-1 TPAR. Efficiency (C) is not what TPAR measures. Immediate discontinuation (D) is premature — the product may cover direct material costs and contribute to throughput even if TPAR < 1, so the analysis requires more context.

Answer: B. Work out the cost per batch of 100 units, then divide by 100. Setups: 3 × £150 = £450 per batch. Inspections: 1 × £200 = £200 per batch. Machine running: 100 units × 2 hours × £8 = £1,600 per batch. Total per batch = £450 + £200 + £1,600 = £2,250, so cost per unit = £2,250 ÷ 100 = £22.50. Option A (£16.00) includes only the machine running cost (2 hrs × £8) and ignores the batch-level setup and inspection costs. Option C (£6.50) does the reverse — the batch-level costs per unit ((£450 + £200) ÷ 100) while omitting machine running. Option D (£30.50) wrongly uses 3 machine hours per unit instead of 2. Batch-level costs must be spread over the units in the batch before adding the per-unit machine cost.

Answer: C. The examiner (SD25) identified the key service characteristics that make target costing difficult: Intangibility (hard to define exactly what the service consists of, making cost specification difficult), Heterogeneity (services vary by client and consultant, making a standard cost impossible), and Simultaneity/Inseparability (service is produced and consumed simultaneously — no pre-production design phase in which to engineer costs). High margins (A) would actually make target costing easier. Staff complexity (B) is a general management challenge, not a target costing issue. Absence of material costs (D) simplifies rather than complicates cost management.

Answer: D. Cross-subsidisation under traditional costing: Product M (high volume, low complexity) absorbs excessive overhead → appears less profitable than it is. Product N (low volume, high complexity) absorbs insufficient overhead → appears more profitable than it is. Consequences: management might discontinue the genuinely profitable M, and under-price N. ABC corrects this. Option A is incorrect — under traditional costing, N appears under-costed (too cheap), not more expensive. Option B is wrong — total overheads are the same under both methods; only allocation differs. Option C is partly true but doesn't address the question about consequences.

Answer: A. Life-cycle costing accumulates all costs — development, operating, and decommissioning — against lifetime revenues to reveal true profitability. In year 1, development costs would create an accounting loss; in years 2-3, operating profits would appear high. Life-cycle costing shows the full picture: total revenue (5,000×£50×36 months=£9m) vs total costs (£2m dev + £1.2m updates + £0.1m decommission = £3.3m) = life-cycle profit £5.7m. Option B misunderstands accounting treatment. Option C is wrong — pricing involves many factors beyond cost. Option D is wrong — life-cycle costing is analytical, not a guarantee mechanism.

Answer: B. When environmental costs (waste treatment, energy, emissions permits) are hidden in general overheads, they are spread across all products regardless of which ones actually cause them. Attributing these costs to the specific products or processes that generate them — using an approach similar to ABC — often reveals that some products are much less profitable (or even loss-making) once their true environmental footprint is costed. This changes pricing, product mix, and investment decisions. Options A and C both understate the management accounting role. Option D confuses income statement recognition with management cost attribution.

Answer: C. The binding constraint (bottleneck) is the process with the lowest capacity relative to demand. Assembly at 350 units/day cannot meet market demand of 400 units/day — it restricts the entire system's output to 350 units. Cutting (500) and Finishing (600) both have capacity exceeding demand and are therefore not the binding constraint. Option A incorrectly focuses on a high-capacity process that is not the bottleneck. Option B is wrong — improving Finishing (already above demand) would not increase output since Assembly is the bottleneck. Option D is incorrect — Assembly's capacity is below demand, so it is a genuine binding constraint.

Answer: B. Value engineering systematically reviews the product's design and components to remove cost while preserving the functionality and quality the customer values — exactly the right approach where quality is a brand differentiator. Option A reduces quality to a minimum, which the examiner (SD25) flagged as unacceptable when quality is central to positioning — it closes the cost gap by destroying value. Option C is invalid under target costing because the selling price is set by the market, not chosen to cover cost. Option D is premature: cost gaps are routinely closed through redesign, supplier negotiation and process improvement. The target-costing response to a cost gap is to attack cost without sacrificing value.

Answer: A. ABC recognises four activity levels: Unit-level (incurred for each unit — e.g. direct materials), Batch-level (incurred once per batch regardless of units — e.g. setups, inspections), Product-level (supporting the existence of a product line — e.g. product design, marketing campaigns), and Facility-level (maintaining the overall facility — e.g. building rent). Machine setups are a classic batch-level cost — whether the batch contains 50 or 500 units, one setup is required. Traditional costing treats setup costs as unit-level by spreading them per labour or machine hour, which is the source of distortion ABC corrects.

Answer: B. Environmental ABC applies the same logic as standard ABC: instead of spreading environmental costs (waste treatment, energy, emissions) across all products in a general overhead pool, it identifies environmental cost drivers and attributes costs to the specific products or processes that cause them. This reveals the true environmental cost per product, enabling better pricing, product mix, and process improvement decisions. Option A is incremental budgeting. Option C is carbon reporting (useful but different from environmental ABC). Option D describes a budgetary control process, not environmental ABC.

Answer: C. Method (a): 20% margin on selling price = £180×20% = £36 profit/unit → target cost = £180−£36 = £144. Method (b): 15% ROI = (£600,000×15%)÷2,000 = £45 profit/unit → target cost = £180−£45 = £135. Take the HIGHER profit requirement — the examiner (SD25) specifically identified failing to select the higher as a common error. £45 > £36, so target profit = £45/unit. Target cost = £135. Option A (£144) is the result of using method (a) — wrong because it is the lower profit. Option B (£153.50) does not follow from either method; applying 15% to the £180 price would give £153.00. Option D (£126) is a calculation error.

Answer: D. Life-cycle costing accumulates ALL costs across a product's entire life — including R&D from years before launch, design costs, and end-of-life disposal. In a traditional annual P&L, R&D costs are expensed in the year incurred and are therefore not visible when evaluating the product's current-period profitability. Life-cycle costing brings these sunk costs back into the picture to reveal total profitability. Options A, B, and C are all current-period costs that appear in both the traditional P&L and the life-cycle cost — they are not the distinguishing feature.

Answer: A. With one bottleneck, rank by throughput per bottleneck hour and satisfy demand in that order. P = £50 ÷ 2 = £25/hr; Q = £36 ÷ 1 = £36/hr; R = £80 ÷ 4 = £20/hr. Priority: Q, then P, then R. Make Q to maximum demand: 400 units × 1 hr = 400 hours (200 left). Make P to maximum demand: 100 units × 2 hrs = 200 hours (0 left). No hours remain for R. Maximum throughput = Q (400 × £36 = £14,400) + P (100 × £50 = £5,000) = £19,400. Option B (£16,480) ranks by throughput per unit (R first, the highest at £80), which wastes the scarce hours. Option C (£18,400) makes Q to maximum then spends the remaining 200 hours on R (50 units) instead of the more efficient P. Option D (£25,800) is the unconstrained total if all three were made to maximum demand, which needs 920 hours — more than the 600 available.

Answer: A. Value engineering analyses each product component and asks: can this component be designed differently, made from different materials, or combined with another component to achieve the same function at lower cost, without reducing what the customer values? It is creative and systematic — questioning every design decision. Increasing price (B) is invalid when price is market-determined. Outsourcing (C) is one possible output of value engineering analysis but is not the definition of the technique. Reducing specification (D) is value destruction — value engineering specifically aims to maintain value while reducing cost.

Answer: D. The Theory of Constraints directs ALL improvement effort at the binding constraint (bottleneck). Improving non-bottleneck processes (A) does not increase total system throughput if the bottleneck remains unchanged — it only creates more work-in-progress queuing in front of the bottleneck. Reducing the bottleneck's setup time (more productive time), eliminating defects that consume bottleneck capacity (recover wasted bottleneck hours), and processing higher-throughput products through the bottleneck are all direct bottleneck-focused improvements. Reducing operating expenses (B) increases TPAR but is a secondary lever. Increasing selling price (C) may not be market-viable and is not a production management decision.

Answer: D. Traditional absorption (typically based on labour or machine hours) often over-costs high-volume simple products and under-costs low-volume complex products. The bespoke product probably consumes disproportionate overhead (setups, inspections, engineering changes) that traditional costing spreads across all products — making the standard product appear more profitable and the bespoke product appear less so. ABC would attribute costs based on actual drivers and may reveal the bespoke product is more profitable than it appears. Discontinuing without this analysis risks eliminating a genuinely profitable product. Options A, B, and C all act without proper investigation.

Answer: D. Life-cycle analysis: Total additional revenue = £12m × 5 = £60m. Total operating costs = £8m × 5 = £40m. Development costs = £15m. Life-cycle profit = £60m − £40m − £15m = £5m. The life-cycle view captures all costs including development — unlike annual accounting which would show a loss in year 1 (development) and profits in years 2-5. Option D is correct. Option A wrongly concludes a loss — development (£15m) is less than the £20m five-year net operating surplus (£60m − £40m). Option B stops at the £20m operating surplus and ignores development costs. Option C deducts development but gets the sign wrong, showing a £5m loss instead of a £5m profit.