Calculating unit costs (Part 2)

Question 1

Which of the following best describes a cost centre?

A - Units of a product or service for which costs are ascertained
B - Amounts of expenditure attributable to various activities
C - Functions or locations for which costs are ascertained and related to cost units for control purposes
D - A section of an organisation for which budgets are prepared and control is exercised

Answer 1

C - Functions or locations for which costs are ascertained and related to cost units for control purposes

Question 2

Which of the following is a valid reason for calculating overhead absorption rates?

A - To reduce the total overhead expenditure below a predetermined level
B - To ensure that the total overhead expenditure does not exceed budgeted levels
C - To attribute overhead costs to cost units
D - To attribute overhead costs to cost centres

Answer 2

C - To attribute overhead costs to cost units

Question 3

Which of the following is known as spreading common costs over cost centres on the basis of benefit received?
A - Overhead absorption
B - Overhead apportionment
C - Overhead allocation
D - Overhead analysis

Answer 3

B - Overhead apportionment

Question 4

The process of overhead apportionment is carried out so that
A - costs may be controlled
B - cost units gather overheads as they pass through cost centres
C - whole items of cost can be charged to cost centres
D - common costs are shared among cost centres

Answer 4

D - common costs are shared among cost centres

Question 5

The following information is available for the two production departments (machining and assembly)
and one service department (the canteen) at Wilmslow

Machining:
Budgeted overheads: £15,000
Number of staff: 30

Assembly:
Budgeted overheads: £20,000
Number of staff: 20

Canteen:
Budgeted overheads: £5,500
Number of staff: 5

After reapportionment of the service cost centre costs, what will be the overhead cost of the
machining department cost centre?

A - £3,300
B - £17,750
C - £18,000
D - £18,300

Answer 5

D - £18,300

The overheads of the canteen department are reapportioned on the basis of the number of staff
working in the production departments only.

Reapportionment of canteen overheads
To machining department = (30/50) × £5,500 = £3,300
Machining department total overheads = £15,000 + £3,300
= £18,300

Question 6

The works manager of a company is fully occupied in running the production lines in the factory. The
logistics manager spends some time on production and some time organising distribution.

How would their salaries be dealt with when calculating a fixed overhead absorption rate for the factory?

Works manager:

A - Allocated to factory
B - Apportioned to factory

Logistics manager:
C - Allocated to factory
D - Apportioned to factory

Answer 6

A - Allocated to factory
The whole of the works manager’s salary can be allocated to the factory since the manager is fully
occupied in the factory cost centre

D - Apportioned to factory
Part of the logistics manager’s salary must be apportioned to the factory since some time is spent on production tasks

Question 7

The following extract of information is available concerning the four cost centres of EG Limited.

Number of direct employees
Production cost centres:
Machinery: 7
Finishing: 6
Packing: 2

Service cost centre:
Canteen: 0

Number of indirect employees
Production cost centres:
Machinery: 3
Finishing: 2
Packing: 1

Service cost centre:
Canteen: 4

Overhead allocated and apportioned:
Machinery: £28,500
Finishing: £18,300
Packing: £8,960
Canteen: £8,400

After the re-apportionment, the total overhead cost of the packing department, to the nearest £, will be

A - £1,200
B - £9,968
C - £10,080
D - £10,160

Answer 7

D - £10,160

Number of employees in packing department = 2 direct + 1 indirect = 3
Number of employees in all production departments = 15 direct + 6 indirect
= 21

Packing department overhead:
Canteen cost apportioned to packing
department = £8,400/21 × 3 = £1,200
Original overhead allocated and apportioned = £8,960
———–
Total overhead after apportionment of canteen costs = £10,160

Question 8

Which three of the following statements on the determination of overhead absorption rates are correct?

A - Costs can be allocated where it is possible to identify which department caused them.
B - Supervisors’ salaries are likely to be apportioned rather than allocated.
C - Costs need to be apportioned where they are shared by more than one department.
D - There is no need for a single product company to allocate and apportion overheads in order to
determine overhead cost per unit.
E - Apportionment always produces the correct result.

Answer 8

A - Costs can be allocated where it is possible to identify which department caused them.
C - Costs need to be apportioned where they are shared by more than one department.
D - There is no need for a single product company to allocate and apportion overheads in order to
determine overhead cost per unit.

Question 9

Which of the following bases of apportionment would be most appropriate for apportioning heating costs to production cost centres?

A - Floor space occupied in square metres
B - Volume of space occupied in cubic metres
C - Number of employees
D - Labour hours worked

Answer 9

B - Volume of space occupied in cubic metres

Question 10

A company makes three products in a period

Product A:
Quantity (units): 1,000
Labour hours per unit: 4

Product B:
Quantity (units): 2,000
Labour hours per unit: 6

Product C:
Quantity (units): 3,000
Labour hours per unit: 3

Total units: 6,000

Overheads for the period are £30,000 and they are absorbed on the basis of labour hours

What is the fixed overhead cost absorbed by a unit of Product B?

A - £30.00
B - £5.00
C - £7.20
D - £1.20

Answer 10

C - £7.20

Total labour hours = (1,000 × 4) + (2,000 × 6) + (3,000 × 3) = 25,000 hours

Overhead per labour hour = £30,000/25,000 = £1.20 per hour

Overhead content per unit of Product B = £1.20 × 6 = £7.20

Question 11

Budgeted information relating to two departments in JP Ltd for the next period as follows.

Department: 1
Production overhead: £27,000
Direct material cost: £67,500
Direct labour cost: £13,500
Direct labour hours: 2,700
Machine hours: 45,000

Department: 2
Production overhead: £18,000
Direct material cost: £36,000
Direct labour cost: £100,000
Direct labour hours: 25,000
Machine hours: 300

Individual direct labour employees within each department earn differing rates of pay, according to
their skills, grade and experience.

What is the most appropriate production overhead absorption rate for department 1?

A - 40% of direct material cost
B - 200% of direct labour cost
C - £10 per direct labour hour
D - £0.60 per machine hour

What is the most appropriate production overhead absorption rate for department 2?
E - 50% of direct material cost
F - 18% of direct labour cost
G - £0.72 per direct labour hour
H - £60 per machine hour

Answer 11

D - £0.60 per machine hour

Department 1 appears to undertake primarily machine-based work, therefore a machine-hour rate would be most appropriate.
£27,000/45,000 = £0.60 per machine hour

G - £0.72 per direct labour hour
Department 2 appears to be labour-intensive, therefore a direct labour-hour rate would be most
appropriate.

£18,000/25,000 = £0.72 per direct labour hour

Question 12

The following information is recorded in the machinery department relating to activity levels and overheads in period 1

Budget
Machine hours: 22,000
Overheads: £460,000

Actual
Machine hours: 27,000
Overheads: £390,000

Overheads are absorbed on the basis of machine hours

What is the overhead absorption rate for the machinery department to two decimal places?

A - £14.44
B - £17.04
C - £17.73
D - £20.91

Answer 12

D - £20.91

Overhead absorption rate = £460,000/22,000 = £20.91 per hour

Remember overhead absorption rates are based on budgeted information.

Question 13

Which of the following statements about overhead absorption rates are true?

1) They are usually determined in advance for each period.
2) They are used to charge overheads to products.
3) They are normally based on actual data for each period.
4) They are used to control overhead costs.
A - (1) and (2) only
B - (1), (2) and (4) only
C - (2), (3) and (4) only
D - (3) and (4) only

Answer 13

A - 1 and 2 only

Overhead absorption rates are usually determined in advance for each period, usually based on
budgeted data.

Overhead absorption rates are used in the final stage of overhead analysis, to absorb overheads into product costs.

Question 14

A product requires four hours of direct labour at £5.25 per hour, and requires direct expenses of £53.50. In its production, it requires 24 minutes of complex welding.

Possible overhead absorption rates have been calculated to be £7.10 per direct labour hour or £41.50 per welding machine hour.

Requirement
Using the direct labour hour basis of overhead absorption, calculate to the nearest penny the total product cost.

A - £81.90
B - £91.10
C - £102.90
D - £119.50

Answer 14

C - £102.90

Direct labour £5.25 × 4 hours = 21.00
Direct expenses = 53.50
Total direct cost = 74.50
Overhead absorbed
£7.10 × 4 hours = 28.40
—————
Total production cost
= 102.90

Question 15

Lerna Ltd produces hydras in three production departments and needs to apportion budgeted monthly overhead costs between those departments. Budgeted costs are as follows:

Rent of factory: £2,000
Rates for factory: £1,000
Machine insurance: £1,000
Machine depreciation: £10,000
Factory manager’s salary: £7,000
——–
21,000

The following additional information is available:

Department A
Area (sqm): 3,800
Value of machinery (£’000): 210
No. employees: 34

Department B
Area (sqm): 3,500
Value of machinery (£’000): 110
No. employees: 16

Department C
Area (sqm): 700
Value of machinery (£’000): 80
No. employees: 20

The total budgeted monthly overhead cost for Department C is
A - £1,837.50
B - £4,462.50
C - £6,000.00
D - £7,000.00

Answer 15

B - £4,462.50

Apportionment of budgeted overhead costs £
Rent and rates (area) £3,000 × (700/8,000) = 262.50
Plant insurance and depreciation (value of machinery)
£11,000 × (80/400) = 2,200.00
Factory manager’s salary (employee numbers) £7,000 × (20/70) = 2,000.00
—————–
4,462.50

Question 16

A company manufactures two products, J and K, in a factory divided into two production cost centres, Primary and Finishing. In order to determine a budgeted production overhead cost per unit
of product, the following budgeted data are available.

Primary
Allocated and apportioned production overhead costs: £96,000
Direct labour minutes per unit:
Product J = 36
Product K = 48

Finishing
Allocated and apportioned production overhead costs: £82,500
Direct labour minutes per unit:
Product J = 25
Product K = 30

Budgeted production is 6,000 units of product J and 7,500 units of product K. Production overheads
are to be absorbed on a direct labour hour basis.

The budgeted production overhead cost per unit for product K is
A - £10.00
B - £13.20
C - £14.00
D - £14.60

Answer 16

D - £14.60

Primary hours:
Product J (6,000 x 36/60) = 3,600
Product K (7,500 × 48/60) = 6,000
——–
Total budgeted direct labour hours = 9,600
Budgeted production overheads = £96,000
Production absorption rate = £10 per hour

Finishing hours
Product J (6,000 x 25/60) = 2,500
Product K (7,500 x 30/60) = 3,750
——–
Total budgeted direct labour hours = 6,250
Budgeted production overheads = £82,000
Production overhead absorption rate = £13.20

Production overhead cost absorbed by product K

£ per unit
Primary cost centre (£10 × 48/60) 8.00
Finishing cost centre (£13.20 × 30/60) 6.60
Total budgeted production overhead cost 14.60

Question 17

Which of the following statements about predetermined overhead absorption rates are true?

1) Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally high or low overhead expenditure or activity levels
2) Using a predetermined absorption rate offers the administrative convenience of being able to record full production costs sooner.
3) Using a predetermined absorption rate avoids problems of under/over absorption of overheads because a constant overhead rate is available.

A - 1 and 2 only
B - 1 and 3 only
C - 2 and 3 only
D - 1, 2, and 3

Answer 17

A - 1 and 2 only

Statement (1) is correct because a constant unit absorption rate is used throughout the period.
Statement (2) is correct because ‘actual’ overhead costs, based on actual overhead expenditure and
actual activity for the period, cannot be determined until after the end of the period.

Question 18

Bumblebee Co absorbs production overhead costs on a unit basis. For the year just ended, Bumblebee Co’s production overhead expenditure was budgeted at £150,000 but was actually £148,000 while the budgeted activity level (production units) was 30,000 units and 29,000 units were actually produced

Which of the following is true?

A - Fixed overheads were under absorbed by £5,000, this being the difference between budgeted expenditure and 29,000 units at £5 per unit.
B - Fixed overheads were under absorbed by £5,000, this being the difference between budgeted and actual production at £5 per unit.
C - Fixed overheads were over absorbed by £3,000, this being partly the difference between budgeted and actual expenditure and partly the production shortfall of 1,000 units.
D - Fixed overheads were under absorbed by £3,000, this being partly the difference between budgeted and actual expenditure and partly the production shortfall of 1,000 units

Answer 18

D - Fixed overheads were under absorbed by £3,000, this being partly the difference between budgeted and actual expenditure and partly the production shortfall of 1,000 units.
Overhead absorption rate = £150,000/30,000 = £5 per unit

Absorbed overhead (29,000 units × £5) 145,000
Actual overheads (148,000)
—————
Under-absorbed overhead 3,000

The effect of the production shortfall was partly offset by the difference between budgeted and
actual expenditure.

Question 19

The budgeted overhead absorption rate for variable production overheads in department X of Lublin’s factory is £3.00 per direct labour hour and for fixed overhead is £4.50 per direct labour hour.
Actual direct labour hours worked exceeded the budget by 500 hours.

If expenditures were as expected for variable and fixed overheads, the total over-absorbed overhead
for the period would be:

A - £507.50
B - £1,500.00
C - £2,250.00
D - £3,750.00

Answer 19

C - £2,250.00

When expenditures are as budgeted, but actual and budgeted production activity levels are
different, only fixed overhead can be under or over absorbed.
Over-absorbed overhead = 500 hrs × £4.50 = £2,250
Variable overhead absorbed = (500 × £3.00) = £1,500 more than budgeted in the original budget.
However, variable overhead incurred would be £1,500 more as well, leaving neither under nor over
absorbed variable overheads

Question 20

The finishing department has budgeted labour hours of 3,250 and budgeted overhead costs of £14,950.

The actual labour hours were 3,175 and actual overheads were £14,810

The overheads for the period were:
A - under-absorbed by £140
B - Over-absorbed by £140
C - under-absorbed by £205
D - over-absorbed by £205

Answer 20

C - under-absorbed by £205

The overhead absorption rate is the budgeted
overhead cost/budgeted hours = £14,950/3,250 = £4.60 per hour
Absorbed overheads (3,175 hours × £4.60) = £14,605
Actual overheads = £14,810
Under absorbed overheads = £205

Actual overheads incurred = 480,000
Over absorbed overheads = 95,000
Overheads absorbed = 575,000

The overhead is under absorbed because the actual overhead expenditure exceeded the amount
absorbed.

Question 21

A company absorbs overheads on a machine hour basis. Actual machine hours were 20,000, actual overheads were £480,000 and there was over absorption of overheads of £95,000

What is the overhead absorption rate?
A - £19.25 per unit
B - £19.25 per hour
C - £28.75 per unit
D - £28.75 per hour

Answer 21

D - £28.75 per hour

Actual overheads incurred 480,000
Over absorbed overheads 95,000
————
Overheads absorbed 575,000

Overhead absorption rate = £575,000/20,000
= £28.75 per hour

Question 22

Budgeted and actual data for the year ended 31 December 20X1 is shown in the following table.

Budget:
Production (units): 5,000
Fixed production overheads: £10,000
Sales (units): 4,000

Actual:
Production (units): 4,600
Fixed production overheads: £9,500
Sales (units): 4,000

Fixed production overheads are absorbed on a per unit basis

Why did under/over absorption occur during the year ended 31 December 20X1?

A - The company sold fewer units than it produced
B - The company sold fewer units than it produced and spent less than expected on fixed overheads
C - The company produced fewer units than expected
D - The company produced fewer units than expected and spent less on fixed overheads

Answer 22

C - The company produced fewer units than expected

Overhead absorbed = 4,600 units × £2 = 9,200
Overhead incurred = (9,500)
———–
Under absorption 300

Question 23

Budgeted overheads for a period were £340,000. At the end of the period the actual labour hours worked were 21,050 hours and the actual overheads were £343,825

If overheads were over absorbed by £14,025, how many labour hours were budgeted to be worked?

A - 20,000
B - 20,225
C - 21,050
D - 21,700

Answer 23

A - 20,000

Actual overheads = £343,825
Over absorption = £14,025
Absorbed overheads = Actual overheads + over absorbed overheads
= £343,825 + £14,025
= £357,850

If the absorbed overheads = £357,850 then the budgeted overhead absorption rate = Absorbed
overheads/actual labour hours = £357,850/21,050 = £17 per labour hour.

Question 24

The budgeted absorption rate for variable production overhead in department X of Wiggipen Ltd’s factory is £2.50 per direct labour hour and for fixed overhead is £4 per direct labour hour. Actual
direct labour hours worked fell short of budget by 1,000 hours.

If expenditures for the actual level of activity were as expected for variable and fixed overheads, the
total under or over absorbed overhead for the period would be

A - £4,000 under-absorbed
B - £4,000 over- absorbed
C - £6,500 under-absorbed
D - £6,500 over-absorbed

Answer 24

A - £4,000 under-absorbed

When expenditures are as budgeted, but actual and budgeted production activity levels are
different, only fixed overhead can be under or over absorbed.
Under-absorbed overhead = 1,000 hours × £4 = £4,000.

Variable overhead absorbed would be (1,000 × £2.50) = £2,500 less than in the original budget, but
variable overhead incurred would be £2,500 less as well, leaving neither under nor over absorbed
variable overheads

Question 25

AB produces two products, A and B. Budgeted overhead expenditure for the latest period was £54,500. Overheads are absorbed on the basis of machine hours. Other data for the period are as
follows:

Product A
Actual results:
Opening inventory: 400 units
Sales: 1,800 units
Closing inventory: 500 units
Production: 1,900 units

Budgeted results:
Production: 1,700 units
Machine hours per unit: 2 units

Product B:
Actual results:
Opening inventory: 700 units
Sales: 2,400 units
Closing inventory: 500 units
Production: 2,200 units

Budgeted results:
Production: 2,500 units
Machine hours per unit: 3 units

If actual overhead expenditure for the period was £55,400, what was the under- or over-absorption of overhead for the period?

A - £900 under-absorbed
B - £900 over-absorbed
C - £3,400 under-absorbed
D - £3,400 over-absorbed

Answer 25

C - £3,400 under-absorbed

Overhead absorption rate = £54,500/((1,700 × 2) + (2,500 × 3))
= £5 per machine hour
Overhead absorbed by actual production achieved:

Product A 1,900 units produced × £5 × 2 hours 19,000
Product B 2,200 units produced × £5 × 3 hours 33,000
———
52,000
Actual overhead incurred = 55,400
Under absorbed overhead = 3,400

Question 26

In activity-based costing (ABC), what is a cost driver?
A - A mechanism for accumulating the costs of an activity
B - An overhead cost that is caused as a direct consequence of an activity
C - A factor which causes the costs of an activity
D - A cost relating to more than one product or service

Answer 26

C - A factor which causes the costs of an activity

The cost driver is the factor which causes the costs of an activity to increase or decrease. For
example, a cost driver for materials handling costs could be the number of production runs: the
higher the number of production runs, the higher will be the cost of material handling.

Question 27

Which two of the following statements are correct?
A - Just-in-time (JIT) purchasing requires the purchase of large quantities of inventory items so that they are available immediately when they are needed in the production process.
B - Activity based costing (ABC) is concerned only with production overhead costs.
C - Activity based costing (ABC) derives accurate product costs because it eliminates the need for arbitrary cost apportionment.
D - Activity based costing (ABC) involves tracing resource consumption and costing final outputs.
E - Just-in-time (JIT) systems are referred to as ‘pull’ systems because demand from a customer pulls products through the production process

Answer 27

D - Activity based costing (ABC) involves tracing resource consumption and costing final outputs
E - Just-in-time (JIT) systems are referred to as ‘pull’ systems because demand from a customer pulls products through the production process

JIT purchasing requires that materials are delivered by the supplier, in small quantities not large
quantities, just as they are needed in the production process.

ABC is concerned with all types of overhead cost, including the cost of non factory-floor activities
such as quality control and customer service. It therefore takes cost accounting beyond its traditional
factory floor boundaries.

Question 28

Which of the following is an aspect of a just-in-time (JIT) system?

1) The use of small frequent deliveries against bulk contracts
2) Flexible production planning in small batch sizes
3) A reduction in machine set-up time
4) Production driven by demand

A - (1) only
B - (1), (2), (3) and (4)
C - (1), (2) and (4) only
D - (1) and (4) only

Answer 28

B - 1, 2, 3, and 4

Question 29

Which of the following would not normally result from the adoption of a JIT purchasing system?

A - Closer relationship with the suppliers
B - Lower levels of inventory
C - Lower levels of receivables
D - Better quality supplies obtained

Answer 29

C - Lower levels of receivables

A lower level of receivables is not the result of the adoption of a JIT system and is more to do with
credit control procedures.

Question 30

Select the costing method that would be appropriate in each of the following industries.

Requirements

Brewing:
A - Process
B - Job
C - Batch

Motorway Construction
D - Job
E - Batch
F - Contract

Plumbing repairs
G - Process
H - Job
I - Contract

Shoe Manufacture
J - Process
K - Job
L - Batch

Answer 30

A - Process: Brewing involves a continuous flow of processes
F - Contract: Each motorway would be a separately identifiable cost unit of relatively long duration. Therefore, contract costing is appropriate
H - Job: Each plumbing repair would be a separately identifiable cost unit of relatively short duration. Therefore, job costing is more appropriate
L - Batch: In shoe manufacturing a number of identical shoes would be manufactured in separately identifiable batches

Question 31

Which two of the following statements are correct?

A - In process and batch costing the cost per unit of output is found indirectly by dividing total costs by the number of units produced.
B - In process and job costing the cost per unit of output is found directly by accumulating costs for each unit.
C - Costing is irrelevant because the same level of detailed information can be extracted from the financial accounts.
D - The procedures used to calculate unit costs in manufacturing industries can equally be applied to service industries.

Answer 31

A - In process and batch costing the cost per unit of output is found indirectly by dividing total costs by the number of units produced.
D - The procedures used to calculate unit costs in manufacturing industries can equally be applied to service industries

Question 32

Which two of the following items used in costing batches are normally contained in a typical batch cost?

A - Actual material cost
B - Actual manufacturing overheads
C - Absorbed manufacturing overheads
D - Budgeted labour cost

Answer 32

A - Actual material cost
C - Absorbed manufacturing overheads

Question 33

Which of the following industries would not normally use process costing?

A - The brewing industry
B - The oil industry
C - The steel industry
D - The construction industry

Answer 33

D - The construction industry
The construction industry would be more likely to use contract costing, not process costing.
The brewing industry, the oil industry and the steel industry would all use process costing

Question 34

Which of the following statements about contract costing are correct?
1) Work is undertaken to customer’s special requirements
2) Work is usually undertaken on the contractor’s premises
3) Work is usually of a relatively long duration

A - 1 and 2 only
B - 1 and 3 only
C - 2 and 3 only
D - 1, 2 and 3 only

Answer 34

B - 1 and 3 only

Question 35

A firm makes special assemblies to customers’ orders and uses job costing, with overheads being absorbed based on direct labour cost.
The data for a period are:

Job A:
Opening work in progress: 26,800
Material added in period: 17,275
Labour for period: 14,500

Job B:
Opening work in progress: 42,790
Material added in period: 0
Labour for period: 3,500

Job C:
Opening work in progress: 0
Material added in period: 18,500
Labour for period: 24,600

Job B was completed during the period, during which actual overheads were the same as the
budgeted figure of £126,000

What was the approximate value of closing work-in progress at the end of the period?

A - £58,575
B - £101,675
C - £217,323
D - £227,675

Answer 35

C - £217,323

Job A
£(26,800 + 17,275 + 14,500) + £(14,500/42,600 × 126,000) = 101,462
Job C
£(18,500 + 24,600) + £(24,600/42,600 × 126,000) 115,861
————–
Total WIP cost 217,323

Question 36

For each of the following industries select the appropriate method to establish the cost of products.

Requirements

Oil refining
A - Process
B - Job/contract
C - Batch

Clothing
D - Process
E- Job/contract
F - Batch

Car Repairs
G - Process
H - Job/contract
I - Batch

Answer 36

Oil refining
A - Process
Oil refining involves a continuous manufacturing process of homogeneous output and therefore is
ideally suited to process costing.

Clothing
F - Batch
Clothing would be manufactured using batches of material, for example of a certain texture or
colour. Production would be halted before the next batch of items of a particular style is produced.
The most appropriate costing method would therefore be batch costing.

Car Repairs
H - Job/contract
Car repair work would be very varied and each repair would be bespoke. Therefore, neither process
nor batch costing would be appropriate but job/contract costing would be a suitable costing
method.