Quiz 5-8

Question 1

A company uses 9,000 units of a component per annum. The component has a purchase price of £40 per unit and the cost of placing an order is £160. The annual holding cost of one component is equal to 8% of its purchase price.
What is the Economic Order Quantity (to the nearest unit) of the component?
A 530
B 671
C 949
D 1,342

Answer 1

C 949

EOQ = √(2 x order cost x demand/holding cost)
		= √[2 x 160 x 9,000/(8% x £40)]
		= √(288,000/3.20)
		= √900,000
		= 948.68

Question 2

The purchase price of a stock item is £25 per unit. In each three month period the usage of the item is 20,000 units.
The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is £20.
What is the Economic Order Quantity (EOQ) for the stock item to the nearest whole unit?
A 730
B 1,894
C 1,461
D 1,633

Answer 2

C 1,461

EOQ = √(2 x order cost x demand/holding cost)
		= √[2 x 20 x 80,000/(6% x £25)]
		= √(3,200,000/1.50)
		= √2,133,333
		= 1,461

Question 3

A company determines its order quantity for a component using the Economic Order Quantity (EOQ) model.
What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of holding one unit of the component in stock?
EOQ Total annual ordering cost
A Lower Higher
B Higher Lower
C Lower No effect
D Higher No effect

Answer 3

A : EOQ lower and Total annual ordering costs higher

EOQ = √(2 x order cost x demand/holding cost)

Increase in holding costs = decrease in EOQ (A or C)
And therefore more orders as order less each time
Therefore higher ordering costs (A)

Question 4

To reduce the chances of fraud, the finance department should not pay an invoice for raw materials until:

Answer 4

a goods received note has been received, signed by an authorised person

Question 5

When prices are rising the last in first out (LIFO) method of stock valuation:

Answer 5

understates the gross profit

Question 6

Which of the following would not be classed as an overhead:
A an indirect production cost
B a direct production cost
C the rent of a manufacturing facility
D the rent of a service provision facility

Answer 6

B a direct production cost

An overhead is one that cannot be attributed to a specific item – ie is not a direct cost and so is not a direct production cost
The remaining three are all overheads as cannot be specifically associated to any individual product

Question 7

A company has two production departments and two service
departments with the following fixed overheads:
Production Service
Department W X Y Z
Overheads £400 £500 £600 £800
Service department Y divides its time equally between the other three
departments. Department Z spends 40% of its time servicing
department W and 60% servicing department X. If all service
department fixed overheads are allocated to production departments,
the total fixed overhead cost of department W is:
A £720
B £800
C £1,000
D £1,200

Answer 7

C £1,000

Overheads for service department Y are allocated as follows:
W 1/3rd x £600 = £200
X 1/3rd x £600 = £200
Z 1/3rd x £600 = £200

This makes overheads for department Z : £800 + £200 = £1,000

Department Z spends 40% of time servicing dept W and therefore £400 (£1,000 x 40%) of its costs are allocated to dept W
Total overheads for dept W are therefore £400 (own) + £200 (from Y )+ £400 (from Z )= £1,000

Question 8

The following details are available for a business:
Machining Assembly Maintenance Administration
area sq/m 5,000 6,000 2,000 1,200
no. of employees 6 13 2 3
If total canteen costs were £9,000 the amount that would be
apportioned to the assembly department (to the nearest £1) is:
A £3,803
B £4,875
C £3,169
D £2,250

Answer 8

B £4,875

Number of employees is most applicable basis to apportion canteen costs as canteen used by employees

Total employees = 24 (6+13+2+3)

Overhead apportioned to assembly is, therefore:

13/24 employees x £9,000 (assembly costs) = £4,875

Question 9

Which of the following statements is not true:
A Overhead absorption rates should be based on estimates of
future costs.
B Overhead absorption rates should be based on estimates of
output.
C Overhead absorption rates should be calculated at the start of
the relevant period.
D Overhead absorption rates should be calculated at the end of the relevant period

Answer 9

D Overhead absorption rates should be calculated at the end of the relevant period

Question 10

Overheads
A can include both direct costs and indirect costs
B can include both fixed costs and variable costs
C can include both sunk costs and opportunity costs
D can include either all or none of the above

Answer 10

B can include both fixed and variable costs

Question 11

Under recovery of overheads occurs when:

Answer 11

the actual overhead incurred is more than that charged to production

Question 12

Absorption costing will be applied to which of the following cost elements:
	A	direct labour
	B	prime cost
	C	fixed production overhead
	D	total cost

Answer 12

C fixed production overhead

Question 13

A company has the following details:
Machining Assembly
Total cost centre overhead £120,000 £180,000
Machine hours 15,000 9,000
Labour hours 2,000 8,000
The most appropriate overhead rate to use for the machining department would be:
A £60 per direct labour hour
B £8 per direct machine hour
C £20 per direct machine hour
D £22.50 per direct labour hour

Answer 13

B £8 per direct machine hour

Machine department is primarily machine hours intensive – therefore more appropriate to base on machine hours

Overhead rate is, therefore:

total cost centre overhead of £120,000/machine hours of 15,000
= £8 per machine hour

Question 14

A business has an overhead absorption rate of £1.50 per labour hour. Actual hours incurred were 2,150. At the end of the period actual overheads amounted to £3,500. We can say that:
A there was an over-recovery of overhead of £275;
B there was an under-recovery of overhead of £275;
C actual money spent on paying overheads was £3,225;
D actual money spent on paying overheads was £3,775

Answer 14

B there was an under-recovery of overhead of £275

Actual overhead charged to business:

2,150 actual hours x £1.50 per hour labour absorption rate = £3,225

Actual overheads incurred - £3,500

As charged to business less than incurred
Under recovery of £3,500 - £3,225 = £275

Question 15

Each unit of product P requires:
		1.5 kgs of material @£8 per kg
		3 hours of machining @£10
		2 hours of labour for assembly and inspection @£8
	Machining overheads are absorbed at £12 per hour and labour related overheads are absorbed at 75% of the labour cost. The total unit cost of P is therefore:
	A	£106
	B	£96
	C	£92
	D	£70

Answer 15

A £106

Total unit cost calculated as follows:

Raw material – 1.5 kgs x £8 per kg = 	£12	
Machining – 3 hrs x £10 per hour =	 	£30
Labour – 2hrs x £8 per hr =		£16
Machine overheads (based on mach hrs)
3 hrs x £12 per hr				£36
Labour overheads 75% of labour cost
i.e. 75% x £16 				£12

Total unit cost is therefore £106

Question 16

A manufacturing company uses a machine hour rate to absorb production overheads, which were budgeted to be £130,500 for 9,000 machine hours. Actual overheads incurred were £128,480 and 8,800 machine hours were recorded.
What was the total under absorption of production overheads?

Answer 16

£880

Absorption rate = £130,500/9,000 hrs = £14.50
Absorbed overhead = 8,800 hrs x £14.50 per hour = £127,600
Under absorption = £128,480 - £127,600 = £880

Question 17

A company produces and sells a single product whose variable cost is £6 per unit.
Fixed costs have been absorbed over the normal level of activity of 200,000 units and have been calculated as £2 per unit. The current selling price is £10 per unit.
How much profit is made under marginal costing if the company sells 250,000 units?

Answer 17

£600,000

Sales = 250,000 units x £10 per unit = £2,500,000
Variable costs = 250,000 units x £6 per unit = £1,500,000
Fixed overheads = 200,000 units x £2 per unit = £400,000

Profit = sales less variable costs less fixed costs =
£2,500,000 - £1,500,000 - £400,000 = £600,000

Question 18

A company which uses marginal costing has a profit of £37,500 for a period. Opening stock was 100 units and closing stock was 350 units.
The fixed production overhead absorption rate is £4 per unit.
What is the profit under absorption costing?

Answer 18

£38,500

Difference between marginal costing profit and absorption costing profit relates to amount of fixed overheads released from inventory and included within cost of sales or held back in closing inventory
Closing inventory (350 units) higher than opening inventory (100 units) by 250 units
250 units of fixed overhead have been held in closing inventory rather than released to cost of sales – under marginal costing these will have been written off as period costs
Costs are, therefore lower under absorption costing by 250 units x £4 per unit = £1,000
Profit under absorption costing is £1,000 higher than marginal costing, ie £37,500 + £1,000 = £38,500

Question 19

A cost centre has an overhead absorption rate of £4•25 per machine hour, based on a budgeted activity level of 12,400 machine hours.
In the period covered by the budget, actual machine hours worked were 2% more than the budgeted hours and the actual overhead expenditure incurred in the cost centre was £56,389.
What was the total over or under absorption of overheads in the cost centre for the period?

Answer 19

£2,635 under absorbed

Actual machine hrs worked = 1.02 x 12,400 = 12,648 hrs
Absorbed overhead = 12,648 hrs x £4.25 per hour = £53,754
Actual overhead = £56,389
Under absorbed by £56,389 - £53,754 = £2,635

Question 20

A company manufactures two products K1 and K2 in a factory consisting of two cost centres, Y and Z. The following budgeted data are available:
Cost centre Y Z
Allocated and apportioned fixed o/h costs £576,000 £288,000
Direct labour hours per unit: Product K1 5 2
Product K2 3 4
Budgeted output is 12,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for product K2?

Answer 20

£34

Total hours in dept Y = (5hrs + 3hrs) x 12,000 units = 96,000 hrs
Absorption rate in dept Y = £576,000/96,000 hrs = £6 per hour
Total hours in dept Z = (2hrs + 4hrs) x 12,000 units = 72,000 hrs
Absorption rate in dept Z = £288,000/72,000 hrs = £4 per hour

Product K2
Absorbed cost for dept Y = 3 hrs x £6 per hour = £18
Absorbed cost for dept Z = 4 hrs x £4 per hour = £16
Total absorbed cost = £18 + £16 = £34