Management Information Flashcards
Define a cost object.(1)
Anything for which we are trying to ascertain the cost eg machine y, painting division
Define a cost centre.(1)
A department, process or function where costs can be accumulated (e.g. goods inwards department, milling machines, production department canteen)
Define a cost unit.(1)
A product or service for which costs are determined (eg the cost of making a widget, a batch of marmalade)
Define a composite cost unit.(1)
Cost unit made up of two parts, mostly a service provided where a unit of production is hard to calcualte and compare eg cost per patient day in a hospital
What is a direct cost (prime cost).(2)
Costs that can be traced directly in full to a cost unit.
There are 3 elements:
Direct material, direct labour and direct expenses
What are production overheads?(3)
P overheads are costs incurred which cannot be traced directly and in full to a cost unit eg glue for tables are incurred in producing a cost unit
Can also be called manufacturing or factory overheads
ONLY type of overhead that can be included in the value of inventories
What are non production overheads.(3)
None of these can be inc in valuation of inventories:
Admin-costs incurred in directing, controlling and administering the business eg FD salary, rent/rates of general offices, bad debt expense
Selling-include costs incurred in raising sales and customer retention eg sales rep commission, advertising, lighting costs of showroom
Distribution-costs incurred in packaging and delivering goods
What is responsibility accounting?(1)
In responsibility accounting, a specific manager is given the responsibility for a particular aspect of the budget, and within the budgetary control system, he/she/they are then made accountable for actual performance.
Managers are, therefore, made accountable for their area of responsibility.
What is the responsibility centre?(1)
The area of operations for which a manager is responsible is called a responsibility centre.
Within an organisation, there could be a hierarchy of responsibility centres.
There could be several cost centres within a profit centre, with the cost centre managers responsible for the costs of their particular area of operations, and the profit centre manager responsible for the profitability of the entire operation.
Each cost centre, profit centre and investment centre should have its own budget, and its manager should receive regular budgetary control information relating to the centre, for control and performance measurement purposes.
What are controllable costs?(1)
If the principle of controllability is applied, a manager should be made responsible and accountable for the costs and revenues that he/she/they are in a position to control.
A controllable cost is a cost ‘which can be influenced by its budget holder.’ Controllable costs are generally assumed to be variable costs, and directly attributable fixed costs.
These are fixed costs that can be allocated in full as a cost of the centre.
It’s important to make managers responsible and accountable for costs they can control. Without accountability, managers do not have the incentive to control costs and manage their resources efficiently and effectively.
What are uncontrollable costs?(1)
Uncontrollable costs are costs that cannot be influenced up or down by management action.
In responsibility accounting, it’s important to identify areas of responsibility.
Examples include allocations of costs from head office, or marketing costs if marketing campaigns are created and controlled centrally.
Uncontrollable costs may be included in the performance report of a responsibility centre so that the report shows the final profit of that centre.
This is sometimes done to make the manager aware of the other costs involved in running the business.
What is marginal costing?
Marginak cost is the extra cost writing from producing one more unit or one more services.
It is prime cost plus variable production overheads.
Marginal costing treats all fixed costs as period costs, and deducts them from sales values as expenses during a particular period.
What is absorption costing?
Fixed production overheads are treated as product costs and are absorbed into the cost of units of output that go into that inventory.
An ICAEW member’s advice and work must be uncorrupted by self-interest and not be influenced by the interests of other parties. A member should not be associated with information that is false or misleading or supplied recklessly
Integrity
Which of the following statements about cost behaviour is conventionally deemed to be correct?
As activity increases, unit variable cost increases and unit fixed cost remains the same.
As activity increases, total fixed cost remains the same and unit variable cost declines.
As activity increases, unit variable cost remains constant and unit fixed cost declines.
As activity increases, unit variable cost increases and unit fixed cost increases.
Feedback:
Conventionally unit variable costs are assumed to remain constant irrespective of production volumes. This assumption lies at the heart of marginal costing.
Available Answers
As activity increases, unit variable cost remains constant and unit fixed cost declines. (1 Mark)
A company currently uses LIFO and the price of new purchases is falling due to market conditions.
If the company switches to FIFO, inventory values will fall and profits will fall.
Feedback:
In tFeedback:
In this example older inventory is more expensive than newer inventory. Switching to FIFO will lead to issue of this more expensive inventory, leading to both a fall in inventory values and profits (the cost of issues will rise).
Available Answers
True (1 Mark)his example older inventory is more expensive than newer inventory. Switching to FIFO will lead to issue of this more expensive inventory, leading to both a fall in inventory values and profits (the cost of issues will rise).
Available Answers
True (1 Mark)
If inventory levels have increased during the period, the profit calculated using marginal costing would be _____ than the profit when compared with that calculated using absorption costing. The inventory value under marginal costing would be ______ than the value under absorption costing
Which pair of words correctly fills the two gaps?
Feedback:
Marginal costing values inventory at a lower amount because it does not include fixed overheads in the valuation.
As inventory levels increase the value of closing inventory deducted from cost of sale will be bigger than that of opening inventory added into cost of sale, meaning a net reduction of the cost of sale value due to inventory
As the marginal cost value of inventory is lower than that under absorption costing, this net reduction to cost of sale will be lower and profits will therefore also be lower.
Available Answers
Lower, lower (1 Mark)
In a period when the inventory of finished goods falls, profit will be higher under absorption rather than marginal costing, but absorption costing inventory values will be lower than marginal.
True
False
Feedback:
Both parts of the statement are false. Inventory, if it exists, will always be worth more under absorption rather than marginal costing, because absorption costing includes fixed production overheads in inventory values. If inventory falls, profits in a period will be lower for absorption costing than for marginal costing, since each unit sold from inventory has a higher cost under absorption than marginal costing.
Available Answers
False (1 Mark)
In a period where opening inventory was 2,000 units and closing inventory was 500 units , a firm had a profit of £56,000 Using absorption costing.
If the fixed overhead absorption rate was £6 per unit, the profit using marginal costing would be?
Feedback:
When opening inventory is higher than closing inventory the profit under MC will be higher than the profit under TAC. The difference will be the inventory value.
Difference = (2,000 – 500) x £6 = £9,000
So, the profit under MC will be £56,000 + £9,000 = £65,000
Available Answers
£65,000 (1 Mark)
A company records a profit of £45,000 under absorption costing and a profit of £50,000 under marginal costing.
If the absorption rate is £5.00 per unit, what happened to inventory of finished goods during the period?
Feedback:
Marginal costing profit + Inventory change × Absorption rate = Absorption costing profit
Marginal costing profit = £50,000
Absorption costing profit = £45,000
Absorption rate = £5.00
Inventory change x absorption rate = (5,000)
Inventory change = (Absorption costing profit − Marginal costing profit) / Absorption rate
Inventory change = (£50,000 − 45,000) / £5.00 = -1,000
Available Answers
Inventory decreased by 1,000 units. (1 Mark)
Flogit Ltd sets selling prices by adding a mark up of 25% to the variable cost per unit.
Flogit has carried out market research which indicates that if the selling price is increased by 20%, the quantity sold each period is expected to reduce by 20% but the variable cost per unit will remain unchanged.
Which one of the following statements is correct?
Feedback:
Let the current selling price be £P and the current sales volume be V units.
Since the mark up is 25% of variable costs,
Current variable cost per unit = £0.8P
Current contribution per unit = £0.2P
Current revenue = £VP
Current total contribution = £0.2VP
After the change in pricing policy, the sales volume will be 0.8V and the revised selling price will be £1.2P. The variable cost per unit remains at £0.8P.
Revised revenue = volume sold × revised selling price
= 0.8V × £1.2P
= £0.96VP
Therefore the revenue will decrease.
Revised total contribution = 0.8V (£1.2P − £0.8P)
= £0.32VP
This is greater than £0.2VP therefore the total contribution will increase.
Available Answers
The revenue will decrease and the total contribution will increase. (1 Mark)
Eggstra Inc. is in the process of preparing budgets for 20X8. The company manufactures and sells Easter eggs, and has estimated the following sales levels for boxes of its luxury white chocolate egg to confectioners:
Quarter 1 Quarter 2 Quarter 3 Quarter 4
450 boxes 600 boxes 100 boxes 80 boxes
Product details for one box of eggs are as follows:
Selling price: £60 for quarters 1 & 2.
Price is reduced by 25% for quarters 3 & 4 due to lower demand.
Sugar 2 kgs at £0.20 per kg
Cocoa 1.1 kgs at £1.90 per kg
Direct labour 4 hrs at £5.20 per hour
What is the sales revenue budget for the year 20X8 for Eggstra Inc?
eedback:
Price per box for quarters 3 & 4 = 60 × (1 − 0.25) = £45
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Boxes 450 600 100 80
X
Price per box (£) 60 60 45 45
Revenue (£) 27,000 36,000 4,500 3,600
Total revenue = £71,100
Available Answers
£71,100 (1 Mark)
REVENUE NOT PROFIT
Which of the following is a criticism of incremental budgeting?
It is time consuming because it involves starting each budget from scratch
It does not allow any slack
It includes past inefficiencies as cost levels are not scrutinised
It is the same as zero-based budgeting
Feedback:
Incremental budgeting starts from a prior period’s budget rather than starting from scratch (a feature of zero-based budgeting). By building up a budget in this
incremental way then any past slack or inefficiency will again feature in the next period’s budget.
Available Answers
It includes past inefficiencies as cost levels are not scrutinised (1 Mark)
A company is currently evaluating a project which requires investments of £12,000 now, and £4,800 at the end of year 1. The cash inflow from the project will be £16,800 at the end of year 2 and £14,400 at the end of year 3.
The cost of capital is 15%.
Select the Discounted Payback Period (DPP) and the Net Present Value (NPV).
Feedback:
Net present value
Year Cash flow Discount
factor Present
value
£ 15% £
0 (12,000) 1.000 (12,000)
1 (4,800) 0.870 (4,176)
2 16,800 0.756 12,701
3 14,400 0.658 9,475
_______
Net present value (NPV) 6,000
_______
If you selected an NPV of £4,440 you treated the £12,000 cash flow as occurring in year 1 and discounted it. Cash flows occurring ‘now’ should not be discounted.
Year Present
value (PV) Cumulative
PV
£ £
0 (12,000) (12,000)
1 (4,176) (16,176)
2 12,701 (3,475)
3 9,475 6,000
DPP = 2 years + ((3,475/9,475) × 1 year)
= 2.36 years
If you selected 2.0 years you calculated the non-discounted payback period.
Available Answers
DPP: 2.36 years, NPV: £6,000 (1 Mark)
A company is considering investing in a two-year project. The initial investment in machinery and set-up costs will be £360,000 payable immediately. In addition, working capital of £24,000 is required at the beginning of the contract which will be released at the end of the two years. The company’s cost of capital is 15%.
In order to make the project financially viable, what is the minimum acceptable contract price to be received at the end of the contract (to the nearest thousand)?
Available Answers
£484,000 (1 Mark)
The following information is available for a project:
Discount Rate NPV
£
6% 3,500
10% (2,500)
What is the IRR of the project?
Feedback:
IRR is calculated as:
IRR ≈ L + (NL/ NL− NH) × (H − L)
L = low discount rate
H = high discount rate
NL= net present value at low rate
NH= net present value at high rate
6% + [(3,500 / 3,500 − -2,500) × (10 − 6)] = 8.33%
Available Answers
8.33% (1 Mark)
A project has an initial cash outflow followed by three annual positive cash inflows and has a payback period of two years.
What is the validity of the following statements?
(1) The project always has a unique internal rate of return.
(2) If the internal rate of return is less than the cost of capital then the project has a positive NPV at the cost of capital
Feedback:
The project is normal i.e. outflow and inflows which exceed the outflow, therefore it will have a single IRR (statement 1 is true) and if the IRR is less than the cost of capital the NPV will be negative (think about the normal NPV graph where IRR is intercept) so statement 2 is false.
Available Answers
Statement 1 - True; Statement 2 - False (1 Mark)
A company has agreed to rent a disused building to a small local company. It has been agreed that a rent of $8,000 will be paid over the agreed period of ten years. The first payment is due now.
If interest rates are 8%, then the present value of this rental income is equal to:
Feedback:
As the first rent payment is due now, the 10 payments will be made from years 0 through to year 9.
From the cumulative present value table, the 9 year, 8% annuity factor is 6.247. This gives us years 1 through to 9.
As the first payment is due now, we have to add in the discount factor for year 0, which is 1.
So the factor = (1 + 6.247) = 7.247
Present value = $8,000 × 7.247 = $57,976
Available Answers
$57,976 (1 Mark)
Division W of Stoak Limited produced the following results in the last financial year.
Profit £200,000
Gross capital employed £1,000,000
For evaluation purposes all divisional assets are valued at original cost.
A proposed project will increase the division’s profit by £22,000, but will require gross assets to increase by £100,000. Stoak Limited imposes a 20% capital charge on its divisions.
Will the evaluation criteria of return on investment (ROI) and residual income (RI) motivate division W’s managers to accept the project?
Feedback:
Option one is the correct answer because:
Current ROI 20%
Project ROI 22%
Therefore yes.
£
Increase in profit 22,000
Interest charge 20,000
______
Residual income 2,000
______
Therefore yes.
Available Answers
ROI: Yes, RI: Yes (1 Mark)
In the balanced scorecard approach to performance measurement, which of the following would not appear on the customer perspective?
Customer satisfaction measure
Pricing index
Market share measure
Revenue from new production
Feedback:
Revenue from new production is not a measurement from a customers perspective.
Available Answers
Revenue from new production (1 Mark)
Suretream is a service company that holds no inventories. Each month the following relationships hold:
Gross profit 30% of sales
Closing trade payables 40% of cost of sales
Suretream has budgeted sales of £116,400 in July and £87,600 in August.
How much cash is budgeted to be paid in August to Suretream’s suppliers?
Feedback:
July cost of sales = 70% × £116,400 = £81,480
Closing payables balance for July = £81,480 × 40% = £32,592
August cost of sales = 70% × £87,600 = £61,320
Closing payables balance for August = £61,320 × 40% = £24,528
__________
Reduction in payables balance in August = £8,064
Cost of sales for August = £61,320
__________
Supplier Payments in August = £69,384
_________________ __________
If you selected £53,256 you deducted the change in payables balance from the cost of sales. The reduction in the payables balance should have been added, since this means that higher payments were made to suppliers to reduce the balance owed.
The option of £61,320 is the cost of sales, which takes no account of the change in the payables balance.
If you selected £64,776 you took the cost of sales to be 30% of the sales value, instead of 70%.
Available Answers
£69,384 (1 Mark)
A company sells inventory for cash to a customer, at a selling price which is below the cost of the inventory items.
How will this transaction affect the current ratio and the quick (liquidity) ratio immediately after the transaction?
Feedback:
The current liabilities figures used as the denominator will stay the same in both cases. The total of the current assets will decrease because the reduction in the inventory value will be greater than the increase in cash. Therefore the current ratio will decrease.
The total of the liquid assets will increase because of the higher cash balance. Therefore the quick (liquidity) ratio will increase.
Available Answers
Current Ratio: Decrease, Quick (liquidity) ratio: Increase (1 Mark)
The board of directors of Spillane Ltd have asked the finance director to reconcile the budgeted contribution to the actual contribution in future management reports.
Which of the following should the finance director not need to account for?
Sales price variances
Fixed overhead variances
Marginal cost variances
Sales volume variances
Feedback:
Budgeted contribution is different from actual contribution because of all of the sales and marginal cost variances which have arisen. Overheads and overhead variances do not feature when calculating contribution.
Available Answers
Fixed overhead variances (1 Mark)
Which of the following would help to explain a favourable materials price variance?
A reduction in quality control checking standards.
Using a higher quality of materials than specified in the standard.
Achieving a lower output volume than budgeted.
A discount offered by a materials supplier.
Feedback:
A discount would reduce the cost of materials and create a favourable materials price variance.
Lower quality control standards should lead to fewer items being rejected but should have no impact on materials price variances.
A higher quality material might reduce wastage or scrap levels but would normally be more expensive and therefore create an adverse materials price variance.
Variations in output volume should not affect the price of materials.
Available Answers
A discount offered by a materials supplier. (1 Mark)
Sudan plc makes a single product and incurs fixed costs of £125,000 per month. Variable cost per unit is £55 and each unit sells for £105. Monthly sales demand is 6,000 units.
The breakeven point in terms of monthly sales units is:
Feedback:
Breakeven point = Fixed costs / Contribution per unit
= £125,000 / (£105 − £55)
= 2,500 units
If you selected 1,190 units you divided the fixed cost by the selling price, but remember that the selling price also has to cover the variable cost.
The option of 3,500 units is the margin of safety, and if you selected 2,273 units you seem to have divided the fixed cost by the variable cost per unit.
Available Answers
2,500 units (1 Mark)
A company has calculated its margin of safety to be 15% of budgeted sales. Budgeted sales are 165,000 units per month and budgeted contribution is £12 per unit.
What are the budgeted fixed costs per month?
Feedback:
Margin of safety = 15% × 165,000 units
= 24,750 units
Break-even sales = budget sales − margin of safety
= (165,000 − 24,750) units
= 140,250 units
Break-even sales volume = Total fixed costs/contribution per unit
Therefore 140,250 = Total fixed costs / £12
Total fixed costs = £140,250 × £12
= £1,683,000
Available Answers
£1,683,000 (1 Mark)
Howard Ltd manufactures a product which has a selling price of £28 and a variable cost of £12 per unit. The company incurs annual fixed costs of £560,400. Annual sales demand is 38,000 units.
New production methods are under consideration, which would cause a 20% increase in fixed costs but secure a reduction of £2 in the variable cost per unit. The new production methods would result in a superior product and would enable the sales price to be increased by £2 per unit.
If Howard Ltd implements the new production methods and wishes to achieve a profit 10% higher than that under the existing method, the number of units to be produced and sold annually would be:
Feedback:
Current profit = total contribution – fixed costs
= (38,000 × [£28 − £12]) – £560,400
= £47,600
Required profit = £47,600 × 1.1
= £52,360
If the new production methods are implemented the required contribution will be:
Required contribution = revised fixed costs + required profit
Required contribution = revised fixed costs + required profit
= (£560,400 × 1.20) + £52,360
= £674,280 + £52,360
= 724,840
Required sales = Contribution required
Contribution per unit (revised)
= £724,840 / (£30 − £10)
= 36,242 units
If you selected 33,714 units you calculated the breakeven point with the revised fixed costs. The fixed costs must be added to the target profit.
If you selected 24,161 units you divided the required contribution by the selling price but this does not take account of the need to cover the variable costs.
If you selected 72,484 units you divided the required contribution by the unit variable cost rather than the unit contribution.
Available Answers
36,242 (1 Mark)
R Company currently sells a single product at a selling price of $40. The total fixed costs are $192,000 per year.
The breakeven level of sales is 12,000 units.
What is the product’s contribution to sales ratio (to the nearest whole percentage point)?
Feedback:
With fixed costs of $192,000, contribution must also be $192,000 at the breakeven point.
The breakeven point is 12,000 units, so contribution per unit must be $192,000 / 12,000 = $16
This is 40% of the $40 selling price.
Available Answers
40% (1 Mark)
Grant Leeve is an assembly worker in the main assembly plant of Gonnaway Co.
Details of his gross pay for the week are as follows.
Basic pay for normal hours worked: 38 hours at £5 per hour £190
Overtime: 8 hours at time and a half £60
Gross pay £250
Although he is paid for normal hours in full, Grant had been idle for 10 hours during the week because of the absence of any output from the machining department.
Requirement
The indirect labour costs that are included in his total gross pay of £250 are
Feedback:
C
£70
The indirect labour costs are made up of idle time costs and overtime premiums.
Idle time costs = 10 hours x £5 per hour = £50
Overtime premium = ½ x £5 = £2.50 per hour
Overtime premium for 8 hours = £2.50 x 8 hours = £20
Therefore indirect labour costs = £50 + £20 = £70
If you selected £20 you calculated the overtime premium correctly but did not add on the cost of idle time payments. Wages paid for idle time cannot be traced to a specific cost unit and are therefore a part of indirect labour cost.
If you selected £50 you classified the idle time payments correctly but did not add on the cost of the overtime premium. If the overtime had been worked for a specific cost unit then the premium could have been a direct labour cost of that unit, but this is not the case here.
If you selected £110 you included all of the overtime cost as an indirect labour cost. However, the basic pay for overtime hours can be traced to specific cost units and is therefore a direct labour cost.
LO1c
Available Answers
£70 (2.5 Marks)
If a 20% return on sales is required from product X, its selling price per unit should be
(not q more for q phrasing)
The option of £286.66 is the price derived using a 20% mark up on a cost, rather than a 20% margin on the selling price.
Therefore 20% return on sales is margin not mark up
A company is considering investing £46,000 in a machine that will be operated for four years, after which time it will sell for £4,000. Depreciation is charged on the straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows:
Year £
1 16,500
2 23,500
3 13,500
4 (1,500)
Requirement
What are the Payback Period (PP) and the Accounting Rate of Return (ARR), calculated as average annual profits divided by the average investment?
Feedback:
A PP = 1.56 years; ARR = 52.0%
Depreciation must be added back to the annual profit figures to derive the annual cash flows.
Annual depreciation = £(46,000 – 4,000)/4 years
= £10,500
If you selected a payback period of 2.44 years you based your calculations on the accounting profits after the deduction of depreciation. The calculation of the payback period should be based on cash flows.
Accounting rate of return (ARR)
Average profit = £(16,500 + 23,500 + 13,500 – 1,500)/4
= £13,000
Average investment = £(46,000 + 4,000)/2
= £25,000
ARR = £(13,000/25,000) × 100%
= 52.0%
If you selected an ARR of 56.5% you forgot to include the residual value of £4,000 in your calculation of the average investment.
LO 4c
Available Answers
PP = 1.56 years; ARR = 52.0% (2.5 Marks)
A leasing agreement is for five years. £10,000 must be paid at the beginning of the first year, to be followed by four equal payments at the beginning of Years 2, 3, 4 and 5. At a discount rate of 8%, the present value of the four equal payments is £26,496.
Requirement
The total amount to be paid during the lease period is
The present value of the four equal payments is £26,496.
Therefore, each payment = x = £26,496/3.312 = £8,000
The total amount to be paid during the lease period is therefore (£10,000 + (4 x £8,000)) = £10,000 + £32,000 = £42,000.
If you selected £32,480 you made the common mistake of discounting each year’s payment by the factor for the year in which the payment is made. However, the payments are made at the beginning of each year. The convention used in discounted cash flow is treated as though it occurs at the end of the previous year. Hence a cash flow at the beginning of Year 2 is discounted using the factor for Year 1 and so on.
For a project with a normal pattern of cash flows (ie, an initial outflow followed by several years of inflows) the internal rate of return is the interest rate that equates the present value of expected future cash inflows to
Feedback:
D The initial cost of the investment outlay
A project’s IRR is defined as the return at which the net present value (NPV) of the cash flows is zero. This means that for a project with a normal pattern of cash flows the internal rate of return is the interest rate that equates the present value of expected future cash inflows to the initial cost of the investment outlay.
A project’s cost of capital is the benchmark return that is used to evaluate the residual income of a project.
Zero is the present value of expected future cash inflows and the initial cash outflow discounted at a project’s IRR.
The terminal (compounded) value of future cash receipts for a project will bear no resemblance to the present value of expected future cash inflows.
LO4d
Available Answers
the initial cost of the investment outlay (2.5 Marks)
For a company with the objective of maximising net present value, what is the validity of the following statements for a conventional investment project?
(1) The accounting rate of return (ARR) method of project appraisal usually gives too little weight to cash flows which occur late in the project’s life.
(2) For a project with a (unique) IRR greater than the opportunity cost of capital, the IRR method of project appraisal usually gives too little weight to cash flows which occur late in the project’s life.
Feedback:
D Statement (1) = False; Statement (2) = True
ARR places equal value on all cash flows throughout a project’s life. NPV places less value on later cash flows. Therefore, Statement (1) is false.
The IRR is the rate that equates PV of inflows with the PV of the initial outflow(s). If the IRR is greater than the cost of capital, later cash flows have been discounted too much. Therefore, Statement (2) is true.
LO 4d
Available Answers
Statement (1) = False; Statement (2) = True (2.5 Marks)
A two-year project has the following annual cash flows:
£
Initial cost (400,000)
12 months later 300,000
24 months later 200,000
The cost of capital is estimated at 15% per annum during the first year and 17% per annum during the second year.
Requirement
What is the net present value of the project (to the nearest £500)?
Feedback:
B £9,500
NPV = –£400,000 + (£300,000)/1.15 + (£200,000)/(1.15 x 1.17)
= £9,500
If you selected £2,500 or £12,000 you discounted both years’ cash flows at 17% and 15% respectively.
If you selected £32,000 you used a discount factor of (1/1.17) for the year 2 cash flow instead of (1/(1.17 x 1.15)).
The Year 2 cash flow has to be discounted twice: one year at 17% and one year at 15%.
LO 4c
Available Answers
£9,500 (2.5 Marks)
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
Feedback:
B
(1) and (3) only
Statement (2) is not correct. Contract costing often applies to projects which are based on sites away from the contractor’s premises.
LO 1d
Available Answers
(1) and (3) only (2.5 Marks)
A hospital has total costs of £1 million for 20X1. During 20X1, 200,000 patients were treated and doctors were paid £500,000.
Requirement
What is the most appropriate cost per patient for the hospital to use?
Feedback:
C
£5.00
Cost per unit = Total cost/Number of patients treated
= £1m/200,000 patients
= £5.00 per patient
If you answered £0.20 your calculation was upside down. The figure of £7.50 double counts the payments to doctors, which are already included in total costs. The answer of £2.50 was only the doctors’ costs, which is understating the total cost.
LO1b
Available Answers
£5.00 (2.5 Marks)
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
Feedback:
B (1), (2), (3) and (4)
(1) JIT requires close integration of suppliers with the company’s manufacturing
(2) To respond immediately to customer requirements, production must be flexible and in small batch
(3) JIT systems attempt to reduce set-up times in order to achieve fast
(4) Each component on a production line is produced only when needed for the next
LO 2h
Available Answers
(1), (2), (3) and (4) (2.5 Marks)
RI=
Profit-cost*cpaital charge
if negatvie reject
Which of the following statements is/are correct?
(1) Fixed budgets are not useful for control purposes.
(2) A prerequisite of flexible budgeting is a knowledge of cost behaviour patterns.
(3) Budgetary control procedures are useful only to maintain control over an organisation’s expenditure.
Feedback:
D (2) only
Statement (1) is not correct. A fixed budget may be useful for control purposes where activity levels are not prone to change, or where a significant proportion of costs is fixed, so that alterations in activity levels do not affect the costs incurred.
Statement (2) is correct. Fixed and variable costs must be separately identified so that the allowance for variable costs may be flexed according to the actual activity level.
Statement (3) is not correct. Budgetary control procedures can be used to monitor and control income as well as expenditure.
LO 3c
Available Answers
(2) only (2.5 Marks)
Extracts from Verona Ltd’s records for June are as follows.
Budget Actual
Production 520 units 560 units
Variable production overhead cost £3,120 £4,032
Labour hours worked 1,560 2,240
Requirement
The variable production overhead expenditure variance for June is
Feedback:
A £448 favourable
Standard variable production overhead cost per hour = £3,120/1,560 = £2 per hour
£
2,240 hours of variable production overhead should cost (x £2) 4,480
But did cost 4,032
448(F)
If you selected £448 adverse you calculated the correct money value of the variance but you misinterpreted its direction.
£672 adverse is the variable production overhead total variance. The variance of £912 adverse is the difference between the standard cost for 520 units and the actual cost for 560 units. This is not a valid comparison for control purposes because of the different output volumes.
LO 3c
Available Answers
£448 favourable (2.5 Marks)
