Foundations level

Managing Costs and

Finance
(MA2)

Mock Exam 1
Answers

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Item Answer/Justification
1 B Customer feedback
A Marketing manager needs information relevant to their job – information about customer
satisfaction is vital to the decisions made by the marketing team.
Raw materials and plant and machinery information are essential for production team
managers, and cash flow management is crucial to the Treasury and Finance teams.
2 D Sales staff have targets for customer discounts
Competing products can affect demand for the product.
More efficient production will result in a favourable variance – but this is still an inaccuracy
in the budget.
Tighter regulations will result in higher costs.
If they are part of an agreed target, customer discounts will be included in the budget.
3 D User-targeted
Information specifically designed for management must be targeted at the user.
There is no need for information to be wide-ranging, consistent or complex if those are not
what the user requires.
4 18
Machine operators’ wages $1,500
Materials $300
Total $1,800 for 100 units $18 each
5 C Change suddenly then remain stable over a range of activity levels
A stepped cost is fixed for a specific range of activity, then jumps when the activity level
increases to a particular value – for example, an additional operator will be needed every
time the calls in a call centre go up by 1,000 a week.
6 $250
We can use the high-low method to estimate the fixed and variable elements.
37 units – 10 units= 27 units
$2,100 – $750=$1,350/27 = $50 variable cost
10 units × $50 = $500 variable costs
The total cost for 10 units is $750
Fixed cost = $750 – $500 = $250
7 Budgeted vs actual results Bar chart
Sales by region Pie chart
A bar chart is used to show comparative data and is suitable for showing budgeted vs actual
results.
A pie chart shows data proportionally and is therefore appropriate for showing sales by
region.
A flow chart shows a process from input to output.

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8 $16,175
FIFO assumes that we issue the earliest inventory first
Issue value:
First 150 units for $7,900
Next 100 units for $5,700
Remainder 50 units
= $10,300 / 200 × 50
= $2,575
Total issue value is $16,175
9 D Materials are issued at the current market price
LIFO (Last In First Out) means that the most recent inventory purchase price is used in the
cost of sales.
10 A 43,700 kg
Re-order level
= max usage × max lead time
= 3,100 × 7
= 21,700kg
Max level
= reorder level + reorder quantity – (minimum usage × minimum lead time)
= 21,700 + 30,000 – (2000 × 4)
= 43,700kg
11 C Returns from production
Units
Opening balance 4,982
Receipts 2,197
Issues 2,040
Closing balance 5,139

The count of 5,431 is higher than the book quantity, so only unrecorded returns from
production seem likely.
12 A (Fixed costs + target profit) / contribution per unit
B calculates target sales revenue.
C calculates the selling price.
D calculates the target selling price.
13 C 106%
Capacity utilisation ratio
= actual hours worked/hours budgeted × 100
= 530/500
= 106%
14

Factory rent

Factory cleaner’s wages

An indirect cost cannot be traced back to a cost unit. Therefore, factory rent and the
cleaner’s wages are indirect costs. The clothing and the stuffing are direct materials used
to produce bears and dolls.
15 $17,000
Annual depreciation $
= (cost – residual value) / useful life
= (100,000-15,000) / 5
= 17,000

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16 A Photocopier lease
The costs of cleaning the factory, factory maintenance and depreciation of machinery are
all directly attributable to production. Photocopier lease is not a production cost.
17 A 26.58%
Selling price
= cost × (100 + mark-up)%
Cost = $2,765
Mark-up $
= 3,500 – 2,765 = 735
Mark-up %
= 735 / 2,765
= 26.58%
18 D $0.90
Costs
= 100+40+20+ (100 × (40/20))
= 360
Unit costs
= 360/ (100/0.25)
= $0.90
19 A The product is unique to each customer
A business will use job costing if the output is unique for each customer.
If large numbers of standard items are being produced, then batch costing might be more
appropriate.
Process costing might be more appropriate if there is no clearly defined unit.
20 A $2.50
Cost per service unit
= total costs per period / number of service units.
Total cost
= 5,625 + 1,300 + 1,550 + 525 + 375
= $9,375.
Mark-up 100% so the total selling price of 7,500 sandwiches = 9,375 +9,375 = $18,750.
One sandwich costs 18,750/7,500 = $2.50
21

Perishability

Inconsistency

Tangibility: No, services are not physical

Perishability: Services cannot be stored for future use
Separability: No, the service provider cannot be separated from the service
Inconsistency: Each instance of the service is unique
22 B Machine hours for cost centre A and labour hours for cost centre B
Cost centre A is machine intensive, so the absorption rate should be based on machine
hours. Cost centre B is labour-intensive, so the absorption rate should be based on labour
hours.

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23 Charging whole cost items to a cost centre or cost unit Allocation
Spreading costs over cost centres on a fair basis Apportionment
Allocation: Whole cost items are overheads (indirect costs) that can be entirely related to
a single cost centre.
Apportionment: Common costs need to be shared among different cost centres.
24 $443,750
In the direct method, we only reapportion overheads to the production departments; we
ignore the time spent on the other service cost centres.
Service department A
Total number of employees in the production departments = 90 + 110 = 200
Reapportioned to Production 1 = 90 / 200 × $125,000 = $56,250
Service department B
Total number of machine hours in the production departments = 56 + 104 = 160
Reapportioned to Production 1 = 56 / 160 × $250,000 = $87,500
Total overhead cost to Production 1 = $300,000 + $56,250 + $87,500 = $443,750
25 A $1,375 under absorption
Overheads absorbed = $5.50 × 11,250 = $61,875
Actual overheads = $63,250.
Therefore overheads have been under-absorbed by $63,250 – $61,875 = $1,375
26 B
The break-even point is where contribution equals fixed costs, so the answer is B.
27 B Absorption costing includes all the costs of production
All production costs are included in absorption costing inventory valuation.
28

Production is continuous

Production simultaneously produces multiple products

Products are made to individual customer specifications Process costing is appropriate

where production is continuous and more than one product or by-product may be produced.
29 C The efficiency at which an investment may be converted to cash.
An investment is deemed liquid if it can be readily converted into cash, usually with minimal
loss of value.
30 C $131,250
Cost per unit
= total inputs/total outputs
=350,000/80,000
= $4.375 per kg
Product B
= 30,000 × $4.375
= $131,250

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31 B AA & B
A Sales $
= 50,000 × 25
= 1,250,000
B Sales $
= 30,000 × 30
= 900,000
AA extra revenue $
= (48,000 × 40) – 1,250,000 – 200,000
= 470,000
BB extra revenue $
= (25,000 × 40) – 900,000 – 175,000
= (75,000)
Since further processing product A into AA results in a positive revenue flow, AA should be
produced.
Since further processing of B into BB results in a negative revenue flow, B should not be
processed further.
32 22,000
Breakeven point
= Fixed costs / contribution per unit
= 99,000 / (7.5 – 3)
= 22,000
The breakeven point is 22,000 units.
33 D
Loss occurs when total costs exceed sales revenue. The area where this happens on the
graph is D.
34 B 5,772
Number of units
= (Fixed cost + target profit) / contribution per unit
= ($17,000 + $3,200) / $3.50
= 5,771.43
This is rounded up to 5,772 units, as selling 5,771 units would give a profit of $3,198.50,
less than the target.
35 20,000
Target sales volume
= (Fixed costs + target profit) / contribution per unit
(360,000 + 140,000) / (45 – 20)
= 20,000
36 B $3,000
The relevant labour cost using available spare capacity is nil if it’s already paid. As there
are 100 hours of excess capacity, we need only calculate the cost of 200 hours.
200 hours at time and half: $15 × 200 = $3,000
200 hours at agency rate: $20 = $4,000
As it is cheaper to pay labour to do overtime than to hire agency labour, the relevant cost
is $3,000.
37 54,636
S = P(1+r)n
S = 50,000(1.03)3
S = 54,636

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38 C $23.91m
PV = $5m × 5.582 = $27.91m
NPV =27.91 – 4m = $23.91m
39 D 9.8%

IRR = r + (r − r )
= 0.05 + (8975 / (8975 – (-400)) × (0.1 – 0.05)
= 9.8%
40 A
A business would choose project A because it has the highest IRR and NPV. Note also that
the NPV method is superior to other forms of project appraisal.
41 B Current assets less current liabilities
Working capital is the net amount of all current assets, so working capital is left when all
liabilities have been paid.
42 $307,750
Of the sales made in October, 90% are credit sales; 75% of credit sales will be paid in
two months (i.e. December).
$300,000 × 90% × 75% = $202,500
Of the sales made in November, 90% are credit sales; 25% of credit sales will be paid in
one month (i.e. December).
$290,000 × 90% × 25% = $65,250
Of the sales made in December, 10% are cash sales, so receipts are immediate. $400,000
× 10% = $40,000
Total receipts in December = $202,500 + $65,250 + $40,000 = $307,750
43 B Trying to negotiate better terms with suppliers
Before seeking financing, a business should try to arrange discounts with suppliers, or
longer terms, to improve cash flow.
Postponing payment of staff wages is not a viable option. (may result in legal penalties)
If customers are given longer to pay, the business will wait longer to receive cash, which is
detrimental to cash flow.
Paying cash for purchases means making payments immediately, which would also be
detrimental to cash flow.
44 Boom Decrease cash
Slump Increase cash
Recovery Decrease cash
Recession Increase cash
In a boom or a recovery, when the economy is performing well, businesses should decrease
the amount of cash they hold and invest it profitably.
Businesses should increase their cash reserves to reduce bankruptcy risk in a slump or
recession when the economy is performing poorly,
45 D Purchase payment for non-current assets and payments received
Both the cost of non-current assets and payments received items involve the movement of
cash.

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46 C $15,663
Year Sales Trend
$
20X1 16,000
15,750
20X2 15,500 15,813
15,875
20X3 16,250 15,938
16,000
20X4 15,750 15,663
15,325
20X5 14,900 15,588
15,850
20X6 16,800

47 C 0.85
The seasonal variation = S = A / T
Year Quarter Actual Average Trend S=A/T
20X1 Q1 50
Q2 75 165 55 1.36
Q3 40 140 47 0.85
Q4 25 118 39 0.64
20X2 Q1 53

S = 40 / 47 = 0.85
48 C Sales volume has decreased
Sales volumes decreasing will give rise to lower receipts from customers.
49 C Sale value of by-products reduces costs apportioned to joint products
The sale value of by-products reduces costs apportioned to joint products.
50 B Y, Z, X
For max demand:
Labour requirement = 250 + 750 + 800 = 1,800
Material requirement = 750 + 1,000 + 600 = 2,350 kg
Material is the limiting factor.
Contribution/kg
X = 25/1.5 = 16.67 (third)
Y = 22/1 = 22 (first)
Z = 15/0.75 = 20 (second)
Products should be prioritised for production by the highest contribution per limiting factor
first.

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