Practice & Question

Cost classification
Question 1:
A company rents a factory that will allow production of up to 10,000 units per month.
If the company is considering a new order that would push production to 15,000 units, rental costs will
be:
A. Fixed
B. Variable
C. Semi-variable
D. Stepped fixed

Question 2:
A company pays its staff a basis wage plus a bonus based on production.
Wage costs are likely to be:
A. Fixed
B. Variable
C. Semi-variable
D. Stepped fixed

Question 3:
A company has obtained the following results from a year of trading:
Quarter Volume of production Total cost $
1 10,000 220,000
2 20,000 340.000
3 25,000 370,000
4 18,000 320,000
How can you tell that these costs are not purely variable?
Using the high-low (range) method, estimate the fixed cost and the variable cost per unit

Question 4:
A company has obtained the following results from four years of trading:
Year Volume of production Total cost $
2009 10,000 220,000
2010 20,000 340,000
2011 40,000 430,000
2012 18,000 320,000
When production volumes are above 30,000 units fixed costs rise by 50%.
What will predicted costs be at output of (a) 25,000 units (b) 35,000 units?
Question 5:
A company has measured production volume and costs over three periods. Results are:
Period Volume Cost
1 4,000 9,700
2 3,000 7,000
3 1,000 3,400
Because overtime rates have to be paid, variable costs increase by 50% for each unit made in excess
of 3,000 units.
Using the high-low method, what will total costs be on a day where production is 3,500 units?
Accounting for Material costs and Inventory management
Question 1:
Which of the following sets out the sequence of steps in a purchases transaction?
A. Purchase order; purchase requisition; goods received note; purchase invoice
B. Purchase order; purchase requisition; purchase invoice; goods received note
C. Purchase requisition; purchase order; goods received note; purchase invoice
D. Purchase requisition; purchase order; purchase invoice; goods received note

Question 2:
When goods are needed for production from stores, what document is used?
A. Materials requisition note
B. Purchase requisition
C. Purchase order
D. Materials order

Question 3:
There are currently 120 units of an item in inventory. There are material requisitions amounting to 40
units that have not yet been acted on and there are 90 units on order.
What is the free inventory? 120 - 40 + 70 = 170 units

Question 4:
Inventory statistics are:
Maximum usage/day 20
Minimum usage/day 12
Average usage per day 15
Maximum lead time 11 days
Minimum lead time 4 days
Average lead time 6 days
Reorder quantity 1,000 units

Calculate the:
- Reorder level 11 x 20 = 220
- Minimum stock 220 - (15 x 6) = 130
- Maximum stock 220 + 1000 - (12 x 4) = 1172

Question 5:
Monthly demand = 3,000 units
Annual ordering costs = $600
Order quantity = 6,000
Holding cost = $6 per unit per year.
What is the economic order quantity?

Question 6:
 2𝐶0 𝐷
A company uses the formula: 𝐸𝑂𝑄 = √ 𝐶𝐻
to determine its economic order quantity.
If the cost of placing an order increases what will happen the EOQ and the annual stock- holding cost?
A. EOQ: Higher; Stockholding cost: No effect
B. EOQ: Higher; Stockholding cost: Higher
C. EOQ: Lower; Stockholding cost: Lower
D. EOQ: Lower; Stockholding cost: No effect
Accounting for labour
Question 1:
Does an efficiency percentage of 110% indicate efficient or inefficient production?

Question 2:
Does a capacity ratio of 90% indicate that better than expected or worse than expected use has been
made of the factory facilities?

Question 3:
What does a production volume ratio of 120% say about the efficiency of workers?
A. Better than expected
B. Worse than expected
C. No conclusion can be drawn about worker efficiency

Question 4:
A company had 1,000 employees at the beginning of the accounting period. It wanted to down size to
800, but when offered voluntary redundancy 300 staff left. The resultant shortfall in employee
numbers was immediately made good by recruitment. What is the labour turnover ratio?
Accounting for Overheads – Marginal Costing and total absorption costing
Question 1:
A factory has two production departments: preparation and assembly, and one canteen for the labour
force.
Statistics about the departments are:
Preparation Assembly Canteen
Floor area 400 m2 500 m2 100m2 4:5:1
Machine value $94,000 $80,000 $6,000 98 : 40 : 6
Employees 8 6 2 8:6:2
Power consumption 75% 20% 5%
Fixed overhead costs are: rent $45,000, insurance $5,400, canteen costs $12,000, electricity $40,000
Show how the costs would be apportioned to each department.

Question 2:
Re-calculate the overhead absorption rates and amount to be charged to each product using a labour
hour basis.
The required information is below;
Costs apportioned into preparation department = $61,494
Costs apportioned into assembly department = $40,906

Preparation department Assembly department

Product Budgeted Machine hours Labour Machine hours Labour
volume per unit hours unit per unit hours unit
Product A 10,000 units 2 2.5 1 3
Product B 6,000 units 3 1 1 4
Question 3:
Production Production Maintenance Canteen
department 1 department 2 department
Overhead costs after initial allocation and 150,000 160,000 72,000 35,100
apportionment $
Percentage of maintenance department time 40 50 - 10
spent on other departments
Number of employees receiving meal 25 40 5
(a) Reapportion the two service department costs using the direct method
(b) Reapportion the two service department costs using the step-down method, starting with the
maintenance department

Question 4:
Budgeted overheads = $12,000; budgeted production = 2,000 units Actual overheads = $13,000; actual
production = 1,900 units. How much is overheads (over) under absorbed?

Question 5:
Budgeted overheads = $50,000; budgeted production = 20,000 units Actual overheads = $46,000;
actual production = 19,000 units. How much is overheads (over) under absorbed?
Job, Batch and Process Costing
Question 1:
In August 2000 kgs of a material were introduced to a process at a cost of $5/kg, and
200 hours labour were spent at a cost of $12/hour. Overheads are absorbed at the rate of $3/ labour
hour.
Normal losses are incurred at the rate of 5% of input and lost units can be sold for $0.8 per kilogram
1,900 units were produced
Calculate the total absorption cost of the good output and also show the process account.

Question 2:
In August 2000 kgs of a material were introduced to a process at a cost of $6/kg, and 200 hours labour
were spent at a cost of $15/hour. Overheads are absorbed at the rate of $4/ labour hour.
Normal losses are incurred at the rate of 5% of input and lost units can be sold for $0.9 per kilogram
1,800 kgs were produced
Calculate the total absorption cost of the good output, the treatment of any abnormally lost or gained
units, and also show the process account and loss account

Question 3:
In May 5000 kgs of a material were introduced to a process at a cost of $9/kg, and labour and
overheads amounting to $25,000 were also contributed.
Normal losses are incurred at the rate of 10% of input and lost units can be sold for $1 per kilogram
4,700 kgs were produced
Calculate the total absorption cost of the good output, the treatment of any abnormally lost or gained
units, and also show the process account and loss account
Question 4:
Input costs to a process amount to $120,000. It is expected that 1,000 units of good output will be
produced and that normal losses will be 200 units. In fact, only 900 units of good output were
produced. All losses, whether normal or abnormal can be sold for $5/unit.
What is the cost per unit of good output and what is its inventory value?

Question 5:
Which on of the following statements is true?
A. The number of units abnormally lost does not affect inventory value
B. The number of units abnormally lost or gained does not affect the cost per unit of good inventory.
C. The number of units abnormally lost or gained does affect the cost per unit of good inventory.
D. Abnormally gained production is values at scrap value.

Question 6:
Normal losses are 10% of input. 400 units are produced. There are 50 abnormally lost units
Lost units have no sales value. Input costs = $120 per unit input
What is the cost per unit produced?

Question 7:
A production process has joint costs of $12,000 for the input of 1,000 kgs of material. Two products
are produces from this:
Product A: 600 kgs. Selling price = $25/unit. Separate costs = $4,000 Product B: 400 kgs. Selling price =
$40/unit. Separate costs = $7,000
Calculate the inventory value of the production using
(a) Weigh to apportion the joint costs
(b) Net realisable value to apportion the joint costs
Question 8:
A production process has joint costs of $12,000 for the input of 1,000 kgs of material. Two products
are produces from this:
Product A: 500 kgs. Selling price = $25/unit. Separate costs = $4,000
Product B: 400 kgs. Selling price = $40/unit. Separate costs = $7,000
By product: 100 kgs. Selling price = $2/kg
Calculate the inventory value of the production of the joint products using
(a) Weigh to apportion the joint costs
(b) Net realisable value to apportion the joint costs

Question 9:
Joint costs allocated to Product A are $10,000; post-separation costs are $16,000
Sales value at split-off is $6,000. Final sales value = $23,000.
Joint costs allocated to Product B are $8,000; post-separation costs are $12,000
Final sales value = $25,000.
Which of the following statement is true?
A. All production should be closed down
B. We cannot decide on whether production should be closed until we know the joint costs allocated
to product B
C. It is worth processing Product A to completion
D. It is not worth processing product A to completion

Question 10:
Total annual cost of running a lorry fleet = $80,000
Jobs:
Weight Distance
Job
(kg) (km)
1 5,000 200
2 10,000 500
3 7,000 400
4 12,000 600
What is the cost per kg km of transport?
 Short-term Decision
Limiting factor
Question 1:
Material available = 1200 kgs limiting factors
Product A: contribution/unit = $24; uses 10 kg/unit; maximum demand = 80 units
Product B: contribution/unit = $15; uses 5 kg/unit; maximum demand = 200 units
What is the production plan that would maximise contribution and what is that contribution?
product A = 80 x 10 = 800 step 3: rank A 2nd
product B = 200 x 5 = 1000 B 1st
required materials = 1800
available = (1200) step 4
shortfall = 600kg

A B
contribution/u $24 $15
RM/u 10 5
con/kg $2.4/kg $3/kg

Question 2:
A company makes three products, X, Y and Z,
Their contributions per unit are: X $25; Y $45; Z $30
The manufacturing hours for each are: X 5; Y 10; Z 4
If manufacturing hours are a limiting resource, in what order of preference should the units be
made?
Question 3:
A company makes two products, P and Q
Their contributions per unit are: P $25; Q $45. The materials needed for each are P $5; Q $10.
A contract means that a minimum of 1,000 units of Q have to be made. Maximum demands
are P: 2,000 units and Q: 3,000.
Material available = $16,000
How many units of Q will be made if contribution is to be maximised?

Question 4:
A company makes two products, R and S. The products use the same material, which is limited
to 3,900 kgs.
Details are as follows:
Product R Product S
Selling price per unit $60 $32
Variable cost per unit $45 $20
Material used per unit 6 kgs 3 kgs
Maximum demand 500 1,200
How many units of R and S should be made to maximise contribution?
Make-buy in Decision
Question 5:
The availability of Material M is limited to 32,000 kg
Azed Byoz
Demand (units) 5,000 7,000
Variable cost to make ($ per unit) 22 30
Buy-in price ($ per unit) 38 34
Kg of X required per unit 4 2
Calculate how much of each product should be bought and how much should be bought in.

Question 6:
A company makes 10,000 units of a component for a variable cost of $25,000. This takes all of the
6,000 production hours available.
The components (essential for other production) could be bought for $55,000 and the machine
hours released could then be spent on making:
Product Unit contribution Maximum demand (units) Machine hours per unit
P 18 500 6
Q 48 250 12
How to maximise the total contribution?
Relevant costs
Question 7:
A company has spent $100,000 acquiring patent rights to manufacture a product. It hopes to sell
30,000 units at a selling price of $10 each and the variable costs of production will be $7 per unit.
Should the company proceed with production?

Question 8:
A company rents a factory for $100,000 per year. Half of the factory is already occupied by a machine.
The company is considering installing an additional machine which would produce 20,000 units for a
variable cost of $5 per unit. These units would sell for $7 each. Half of the factory rent would be
apportioned to the new machine.
Should the company purchase new machine?

Question 9:
A company is considering installing a machine which would produce 20,000 units for a variable cost of
$5 per unit. These units would sell for $7 each. Additional space would have to be rented at a cost of
$50,000.
Should the company take on this project?
Question 10:
A company has some inventory that was bought for $10,000.
It could be sold for $4,000 or used to make a product that would sell for $15,000. There is no other use
for the inventory.
Additional costs needed to convert the inventory into the product are $9,000. The material could be
bought now for 8,000.
What should the company do?

Question 11:
A company has some inventory that was bought for $10,000. The inventory is used on a day to day
basis for normal production. It could be sold for $4,000 or used to make a special product that would
sell for $15,000. Additional costs needed to convert the inventory into the product are $9,000. The
material could be bought now for $11,000.
What should the company do?

Question 12:
A company can make 1,000 units of a product for $12 material per unit and $15 per unit for labour
cost. The product sells for $20 per unit.
There is enough spare (currently idle) labour capacity to make the 1,000 units. These employees are
paid but are not working on any product.
Should the product be made?
Question 13:
A company can make 1,000 units of a product for $12 material per unit and 2 hours per unit for labour.
The product sells for $22 per unit.
Employees are paid at $15 per hour and are currently employed on the production of another product
that takes 3 hours of labour and which generates a contribution of $12/unit. Extra employees cannot
be recruited and would have to be transferred from current work.
Should the new product be made?

Question 14:
A company will make a new product that takes 2,000 kg of material. 1,200 kg is already in inventory,
bought some time ago for $3,600 and with a sales value of £1,600.
The current purchase price of the material is $1.20/kg.
The company has no use for this material other than making the new product, which uses 2kg/unit.
Market research of $1,500 has already been carried out and this indicates that the product would sell
for $4/unit. Fixed costs of $4,000 will be apportioned to the new product.
Should production commence?
Question 15:
To make a product a business needs to use two materials, G and H. These materials are in inventory.
G is used on a day-to-day basis in the business; H has no uses other than in the new product.
Information about the two materials is as follows:
Material Quantity needed per unit of the Original cost Current purchase Sale price
new product (kg) ($/kg) price ($/kg) ($/kg)
G 6 3.00 4.00 2.00
H 9 2.00 3.50 0.60
What cost should be included for materials per unit of the new product?

Question 16:
Gizmo Incorporated needs to work out the cost of a new contract. The contract requires two sorts of
employee:
Programmers: time needed = 2,000 hours @$30/hour
Analysts: time needed = 900 hours @ $50/hour
There is currently a shortage of analysts and if this contract is accepted, analysts will have to be moved
from other work where they generate a contribution of $80/hour, after charging their salaries.
There is sufficient idle time amongst programmers to provide the time needed for this project. Because
programmers are skilled and scarce, the company has no intention of removing programmers from the
workforce.
What is the incremental and opportunity costs of labour that should be assigned to this contract?
Capital investment appraisal
Question 1:
By working out the present values of the options, indicate which of the following options is preferable.
(1) $3,000 received now or
(2) $4,000 received in 4 years
Interest rate = 7% 3051

Question 2: year annuity factor (5%)

1-9 7,708
What is the present value if $100 is to be received in years 6 – 9? 1-5 (4,329)
6-9 2,779
Discount rate = 5%
What is the present value if $100 is to be received in years 3 – 10 except year 5?
Discount rate = 4%
What is the present value if $200 is to be received in years 0 – 5?
Discount rate = 10%

Question 3:
A business has five annual cash inflows of $1,500 pa starting at time 3.
What is the present value of these flows at a discount rate of 7%?
Question 4:
A business has cash inflows of $400 pa for times 0 – 8, except time 5.
What is the present value of these flows at a discount rate of 10%?
year CFs DF at 10% PV
0 400 1 400 DF = 1/(1+r)^n
1-8 400 5.34 2136
(5) 400 (0.621) (248)
0-8 except 5 2286

Question 5:
A business will receive rent of $10,000 pa on a 500 year lease.
What is the present value of the rental receipts if the discount rate is 5%?

Question 6:
A business will receive rent of $10,000 pa on a 999 year lease, starting at year 3.
What is the present value of the rental receipts if the discount rate is 5%?

Question 7:
A business will receive rent of $10,000 pa on a 999 year lease, starting at year 0. At time 2 the business
will also receive $1,000 to cover the legal fees involved in setting up the lease.
What is the present value of the receipts if the discount rate is 7%?
Question 8:
an investment in new machinery would cost $25,000 and would produce additional cash inflows of:
Year 1 $8,000
Year 2 $15,000
Year 3 $10,000
The machinery could be sold for $2,000 at time 3. Is the project worthwhile if the discount rate is 8%?

Question 9:
An investment requires expenditure of $10,000 now and $12,000 at time 1. Income will be $5,000,
$15,000 and $7,000 in years 2, 3 and 4. There are no scrap proceeds.
Is the investment worthwhile when evaluated at a 9% discount rate?

Question 10:
An investment requires expenditure of $18,000 now will yield income of $8,000 pa for times 2 -5
Is the investment worthwhile when evaluated at a 10% discount rate?
Question 11:
An investment requires expenditure of $15,000 now will yield income of $5,000 pa after depreciation
for times 1 – 3 then $4,000 after depreciation of year 4. The machine can be sold for $3,000 in year 4.
Research expenditure of $5,000 has been incurred on the new product that would be made by the
machine. Is the investment worthwhile when evaluated at a 6% discount rate?

Question 12:
A business is considering implementing solar heating throughout its factories. This will cost $900,000
after one year and the savings are estimated to be $400,000 two years from now and $600,000 three
years from now.
Discount rate = 10%
What is the NPV of the project?

Question 13:
A business owns some land that could be sold for $1 million and which cost $800,000 two years ago.
Alternatively, the land could have apartments build on it for a present cost of $5 million. The
apartments would bring in rent of $550,000 pa in perpetuity from time 1 onwards.
Discount rate = 10%
What is the NPV of the project?
Question 14:
At 10% NPV = $1,200
At 20% NPV = $-500
What is the estimated IRR?

Question 15:
Mr A Chancer is thinking of investing $20,000 on 31 December 2013 to receive on repayment of
$25,000 on 1 January 2016.
What is the IRR on his investment?

Question 16:
A project with conventional cash flows (cash out now, received in the future) has an IRR of 12%. The
discount rate is 9%.
This means that;
A. The NPV will be positive, but the project should be rejected
B. The NPV will be negative, but the project should be accepted
C. The NPV will be negative and the project should be accepted
D. The NPV will be positive and the project should be accepted.
Question 17:
A company has an investment costing $20,000 and will hope to receive inflows as follows: Year 1 =
$7,000; Year 2 = $8,000, Year 3 = $10,000,
Year 4 = $8,000.
The company uses a discount rate of 8% and has looks for a payback of 4 years and a discounted
payback of 5 years.
Cash flows arise evenly throughout the year.
A. Payback = 2 years; discounted payback = 2 years
B. Payback = 3 years; discounted payback = 3 years
C. Payback = 2.5 years; discounted payback = 2.3 years
D. Payback = 2.5 years; discounted payback = 2.8 years
Cash management

Question 2:
At the start of a month, Spinoza has cash at the bank of $20,000, receivables of $42,000 and payables
of $65,000. The company will sell goods in the month for $120,000 that cost $80,000.
50% of amounts due from sales are collected in the month and 50% in the following month. Purchases
are paid for in the following month. Inventory is constant and other expenses, paid in the month are
$90,000.
What will the company’s bank balance be at the end of the month?

Question 3:
A company budgets sales as follows:
Month 1 3,000 units
Month 2 3,600 units
It also wants to increase finished goods levels by 500 units in Month 1 and 1000 units in Month 2.
Material costs $5/kg and each unit takes 2 kg. The company keeps no stocks of raw material.
50% of purchases are paid for in the month of purchase and 50% in the following month.
How much cash will be paid to suppliers in Month 2?
Question 4:
What is the working capital cycle length for the following information?
Raw material days (ie how many days’ supply of raw material there is). Sometimes known as
20
raw material turnover period.
Work-in-progress turnover period. 2
Finished goods turnover period 25
Payables days 34
Receivables collection period 45

Question 5:
A company holds raw material for 50 days and finished goods for 12 days. It takes 45 days credit from
suppliers and customers pay after 50 days. What is the length of its working capital cycle?

Question 6:
Which of the following statements is true?
A. Government stocks can be traded; certificates of deposit cannot be traded
B. Both Government stocks and certificates of deposit can be traded
C. Neither Government stocks and certificates of deposit can be traded
D. Government stocks cannot be traded; certificates of deposit can be traded

Question 7:
$12,000 is deposited at 4% simple interest for 3 years.
How much will there be on deposit at the end of that time?
Question 8:
How much will an investor end up with if $5,000 is deposited at 5% compound interest, for 6 years,
where interest is paid annually?

Question 9:
A bank quotes an interest rate of 8%. Interest is credited quarterly to the account.
If $2,000 is deposited for 3 years, how much interest will be earned?

Question 10:
Interest is credited each month to an account.
If the effective annual interest rate is 6%, what is the nominal annual interest rate?

Question 11:
A price index over a period of 3 years is 125. If goods cost $5,000 now.
What did they cost in the base year of the index?
Question 12:
The trend of sales is an increase of $1,000 per quarter. The trend figure for year 4 season 2 was
$12,000.
What is the predicted sales figure for year 5 season 4 if the seasonal adjustment is 75% for season 2
and 110% for season 4

Question 13:
The trend figure for year 3 season 2 is $14,000
The prediction for year 4 season 1 is $16,200
Trend = $500/season
What is the seasonal adjustment for season 1 using the additive model?
Information for comparison
Question 1:
A company has budgeted to produce 8,000 units in a month. Variable labour costs relating to this
production are budgeted to be $96,000. Because of a fall-off in demand the company made only 7,000
units and the actual labour cost was $89,000.
What is the labour cost variance and indicate whether it is favourable or adverse?

Question 2:
A company has budgeted to produce 10,000 units in a period. Material costs relating to this production
are budgeted to be $150,000. The company actually produced 10,500 units for a material cost of
$155,000.
What is the material cost variance and indicate whether it is favourable or adverse?

Question 3:
A company has budgeted to produce 10,000 units in a period. Fixed overheads are budgeted to be
$200,000. 11,000 units were produced and actual fixed costs were $230,000
What is the fixed overhead variance and indicate whether it is favourable or adverse?