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Question 1

When must a business register for VAT?

Answer 1

When it reaches the HMRC turnover limit of £85,000.

Question 2

What must VAT-registered businesses do regarding sales?

Answer 2

Charge VAT on sales at the relevant percentage.

Question 3

What can VAT-registered businesses reclaim?

Answer 3

VAT on business-related purchases and expenses.

Question 4

What are Zero-Rated VAT items?

Answer 4

Items with a VAT rate of 0%, still recorded on VAT returns.

Question 5

Give examples of Zero-Rated goods.

Answer 5

Basic foods (e.g., bread, milk), children’s clothing, passenger transport, books, magazines, and newspapers.

Example sentence: Children’s clothing is one of the Zero-Rated goods.

Question 6

What is a VAT Return?

Answer 6

A form submitted to HMRC showing the VAT charged on sales and reclaimed on purchases.

Question 7

What are VAT Rates?

Answer 7

Different percentages of VAT applied depending on the type of goods or services.

Question 8

What are VAT Exemptions?

Answer 8

Items or services not subject to VAT, still recorded in VAT returns if the business is VAT-registered.

Question 9

What is a job quotation?

Answer 9

A job quotation is a price estimate provided to a potential customer that includes the required level of profit.

Question 10

What is included in a customer quotation?

Answer 10

Trade or volume discounts, job costing statements, and profit margin or mark-up.

Question 11

What is job costing used for?

Answer 11

Job costing is used to calculate the total cost of producing a specific job or product, including all direct and indirect costs.

Question 12

What elements of cost are included in a job cost statement?

Answer 12

Labour, materials, and expenses.

Question 13

What are trade discounts?

Answer 13

Reductions in price offered by sellers to buyers, usually based on volume purchases or long-term relationships.

Question 14

What are volume discounts?

Answer 14

Discounts given when a customer buys a large quantity of products, encouraging bulk purchases.

Question 15

Why is profit included in a job quotation?

Answer 15

To ensure the business covers its costs and achieves a desired level of profitability.

Question 16

What is a direct cost?

Answer 16

A cost that can be directly traced to a specific product or job, such as direct materials, direct wages, and direct expenses.

Question 17

Give examples of direct costs.

Answer 17

Direct materials (e.g., wood, steel), direct wages (e.g., labor costs for workers directly involved in production), and direct expenses (e.g., specialized machinery hire).

Question 18

What is the prime cost?

Answer 18

The sum of all direct costs, including direct materials, direct wages, and direct expenses.

Question 19

What is an indirect cost?

Answer 19

A cost that cannot be directly traced to a specific product or is too small to measure individually, commonly known as overheads.

Question 20

How are indirect costs categorized?

Answer 20

Indirect costs are categorized into production, selling, distribution, administration, and financial overheads.

Question 21

Give examples of production overheads.

Answer 21

Factory rent, factory rates, salary of factory foreman.

Question 22

Give examples of selling overheads.

Answer 22

Advertising costs, salespeople’s salaries.

Question 23

What are distribution overheads?

Answer 23

Costs associated with delivering a product to customers, such as depreciation of delivery vans and fuel costs.

Question 24

What are administration overheads?

Answer 24

Costs related to the general administration of the business, such as bookkeeper’s wages and stationery.

Question 25

What are financial overheads?

Answer 25

Costs related to financial management, such as loan interest and bank charges.

Question 26

What is absorption costing?

Answer 26

A method of costing that involves absorbing all overheads into the cost of a product or service to ensure full cost recovery.

Question 27

What is the main aim of absorption costing?

Answer 27

To recover overheads in a way that fairly reflects the time and effort spent on making a product or service.

Question 28

What are the stages of absorption costing?

Answer 28

Allocation and apportionment of overheads, reapportionment of service cost centre overheads, and absorption of overheads.

Question 29

What does overhead allocation mean?

Answer 29

Assigning overheads to specific cost centres based on their actual usage.

Question 30

What does overhead apportionment mean?

Answer 30

Distributing overheads to different cost centres based on a predetermined basis, such as floor area or number of employees.

Question 31

What is the purpose of reapportionment in absorption costing?

Answer 31

To reallocate service department costs to production departments.

Question 32

What is an absorption base?

Answer 32

A method used to assign overhead costs to products, such as units produced, machine hours, labour hours, or percentages of prime costs or direct wages.

Question 33

When is a machine-hour rate used as an absorption base?

Answer 33

When production is machine-intensive.

Question 34

When is a labour-hour rate used as an absorption base?

Answer 34

When production is labour-intensive.

Question 35

How does absorption costing affect pricing?

Answer 35

It ensures that the selling price covers both direct costs and overheads, helping the business achieve profitability.

Question 36

What is profit mark-up?

Answer 36

Profit mark-up is the percentage of profit added to the cost price of a product to determine its selling price.

Question 37

How is profit mark-up calculated?

Answer 37

Profit mark-up is calculated by multiplying the cost price by the mark-up percentage.

Question 38

Give an example of calculating profit mark-up.

Answer 38

If the cost price is £12 and the profit mark-up is 25%, the

Example sentence: The selling price would be £15.

Question 39

Give an example of calculating profit mark-up.

Answer 39

If the cost price is £12 and the profit mark-up is 25%, the profit is £3. The selling price is £15 (£12 + £3).

Question 40

What is profit margin?

Answer 40

Profit margin is the percentage of profit made on the selling price of a product.

Question 41

How is profit margin different from mark-up?

Answer 41

Profit margin is based on the selling price, while mark-up is based on the cost price.

Question 42

How do you calculate profit margin from cost price?

Answer 42

Profit Margin = (Profit ÷ Selling Price) x 100%.

Question 43

Provide an example of calculating profit margin from cost price.

Answer 43

If the profit margin is 20% and the cost price is £20, the profit made is £5. The selling price is £25 (£20 + £5).

Question 44

What is the formula to find profit using the margin method?

Answer 44

Profit = (Margin % ÷ (100% - Margin %)) x Cost Price.

Question 45

Why is understanding mark-up and margin important?

Answer 45

It helps businesses price their products correctly to cover costs and achieve desired profit levels.

Question 46

What is VAT?

Answer 46

VAT, or Value Added Tax, is a tax that must be paid when buying goods or services.

Question 47

How many VAT rates are there currently in the UK?

Answer 47

There are three VAT rates: standard rate, reduced rate, and zero rate.

Question 48

What is the standard rate of VAT in the UK?

Answer 48

The standard rate of VAT in the UK is 20%.

Question 49

What is the reduced rate of VAT in the UK?

Answer 49

The reduced rate of VAT in the UK is 5%.

Question 50

What types of items are typically charged at the reduced VAT rate?

Answer 50

Items such as children’s car seats and home energy (e.g., gas and electricity for domestic use).

Question 51

What does zero-rated VAT mean?

Answer 51

Zero-rated VAT means a 0% VAT rate applies, but these items are still included in VAT returns.

Question 52

Give examples of zero-rated items.

Answer 52

Children’s clothing, some food items, newspapers, and magazines.

Question 53

How do you add VAT to the net cost of a product?

Answer 53

Multiply the net cost by the VAT rate (e.g., 20% for the standard rate).

Question 54

Provide an example of adding VAT to a net price.

Answer 54

Net price £30, VAT at 20%: VAT = £6. Selling price inclusive of VAT = £36 (£30 + £6).

Question 55

Why is it important for businesses to understand VAT?

Answer 55

Understanding VAT ensures businesses comply with tax laws, accurately calculate prices, and reclaim VAT on eligible purchases.