Chapter 1: The fundamentals of costing

1 Which two of the following are cost units?

A A unit of product in relation to which costs are ascertained
B The cost per sheet of paper used
C The cost per unit of electricity consumed
D A unit of service in relation to which costs are ascertained LO 1a

2 Fixed costs are conventionally deemed to:

A be constant in total when production volume changes
B be constant per unit of output
C be constant per unit of output as production volume changes
D vary substantially, in total, from period to period when production is constant
LO 1b

3 Which two of the following costs would be the concern of the supervisor of a
production department?
A Material costs
B Dividend payments to shareholders
C Labour costs
D Lease payments on a photocopier LO 1a

4 Delivo plc makes a numbers of deliveries per week of perishable goods to its
customers.
The cost of these deliveries each week is a:
A fixed selling overhead
B variable prime cost
C variable production overhead
D variable selling and distribution overhead LO 1b

ICAEW 2022 Chapter 1: The fundamentals of costing 1

 5 Slip Heel Ltd manufactures two types of shoe in its factory.
A typical monthly budget is as follows:
Shoe Type I Shoe Type II
Monthly output 5,040 units 10,560 units
Time per unit 24 minutes 36 minutes
Unavoidable non-productive time is 25% of productive time and is paid £9 per
hour.
Operatives are paid £8 per unit of shoe type I produced and £14 per unit of shoe
type II.
What would be the monthly cost of operatives' wages in the factory?
A £93,960
B £188,160
C £206,952
D £214,368 LO 1b

6 A cost which contains totally variable components, and so is wholly affected by

changes in the level of activity, is known as:
A a direct cost
B a variable cost
C an indirect cost
D a semi-variable cost LO 1b

7 If an assembly line supervisor is paid a salary of £250 each week regardless of

output, this wage could be described as a:
A semi-variable cost
B fixed cost
C variable cost
D step cost LO 1b

8 A factory making soft toys uses a machine on its single production line. The
machine costs £2,400 per month to hire plus £10 per hour it is used. Each week up
to 1,000 toys are produced and the line works anywhere between 30 and 40 hours
a week.
Which of the following best describes the cost of hiring the machines?
A A step cost
B A variable cost
C A fixed cost
D A semi-variable cost LO 1b

ICAEW 2022 Chapter 1: The fundamentals of costing 2

 9 A company's gas bill consists of two parts:
1 A charge of £10 per month for the meter
2 A charge of £0.01 per unit of gas used
Which of the following equations describes the total annual cost of gas (G) if the
company uses T-units of gas in a year?
A G = 120 + 0.01T
B G = 10 + 0.01T/12
C G = 120 + 0.12T
D G = 10 + 0.01T LO 1b

10 Which two of the following statements are correct?

A The use of cost accounting is restricted to manufacturing operations.
B The format of management accounts is regulated by Financial Reporting
Standards.
C Management accounts are usually prepared for internal use by an
organisation's managers.
D Financial accounts and management accounts are each prepared from the
same basic data. LO 1a

11 A hospital has total costs of £2.4 million for 20X1. During 20X1, 480,000 patients
were treated and doctors were paid £1.2 million.
What is the most appropriate cost per patient for the hospital to use?
A £0.20
B £2.50
C £5.00
D £7.50 LO 1a

12 Buildit Ltd has ascertained that its total costs (T) can be estimated for any level of
output (O) and sales (S) according to the following equation:
T = (£50 × O + £10,000) + (£20 × S + £5,000)
If the production level was 500 units and sales were 400 units, what would Buildit's
fixed costs be?
A £15,000
B £48,000
C £35,000
D £33,000 LO 1b

ICAEW 2022 Chapter 1: The fundamentals of costing 3

 13 Which of the following would be most useful for monitoring and controlling the
costs incurred by an airline?
A Cost per passenger carried
B Cost per kilometre travelled
C Cost per pilot hour
D Cost per passenger kilometre LO 1a

14 Which of the following items might be a suitable cost unit within an accounts
receivable department?
(1) Purchase invoice processed
(2) Sales invoice processed
(3) Customer account
A Item (1) only
B Item (2) only
C Item (3) only
D Items (2) and (3) only LO 1a

15 Drivers Unlimited plc operates a fleet of delivery vehicles. The mobile phone bill
for the company is in excess of £15,000 per month. The mobile phone contract
sets out the charges for each mobile phone as follows:
1 5p per text message sent
2 5p per minute, off peak call
3 10p per minute, peak call
4 Itemised billing £1 per phone
5 Phone rental of £3 per month
Which of the following equations describes the total monthly mobile phone cost,
M, in pounds for the company's 50 drivers, who send T texts a month and use C
call minutes, of which 25% are off-peak?
A M = £50 + (T/20) + (C × 0.25 × 0.1) + (C × 0.75 × 0.05)
B M = £200 + (C × 0.25 × 0.1) + (C × 0.75 × 0.05)
C M = £200 + (T/20) + (C × 0.75 × 0.1) + (C × 0.25 × 0.05)
D M = £50 + (T/20) + (C × 0.75 × 0.1) + (C × 0.25 × 0.05) LO 1b

16 An engineering company has hired some specialised equipment for a particular

job.
Which of the following options is the correct classification of the hire cost?
A Variable production overhead
B Fixed production overhead
C Indirect expense
D Direct expense LO 1b

ICAEW 2022 Chapter 1: The fundamentals of costing 4

 17 Which of the following statements is true?
A Total indirect costs are always greater than total direct costs.
B An indirect cost will always be a fixed cost.
C A particular cost can be a direct cost of one cost object and an indirect cost of
a different cost object.
D Fixed costs per unit are not affected by the level of activity. LO 1b

18 Which two of the following are cost objects?

A A salesperson
B A factory warehouse
C A gas bill
D Indirect materials used for production
E The salary of the production director LO 1a

19 Which two of the following would be regarded as cost objects?

A A branch of a high street chemists
B An accounts department
C Wood used in making a chair
D Rent paid on a factory
E Labour used in cleaning hospitals LO 1a

20 Which two of the following would be regarded as elements of cost?

A A meal in a hotel
B An operation in a hospital
C Wood used in making a wardrobe
D Labour used in assembling a television
E A high street newsagents LO 1a

21 Which three of the following are classified as fundamental ethical principals in the
ICAEW Code of Ethics, which must be observed by ICAEW members?
A Acting in the public interest
B Professional competence and due care
C Expertise
D Professional behaviour
E Integrity LO 5a

22 Rebecca is responsible for preparing the management accounts of ABC. All ABC
employees receive a bonus each time monthly sales revenue exceeds forecast.

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 Rebecca is tempted to overstate monthly sales revenue in the latest set of
management accounts to ensure that employees receive a bonus.
What threat does this represent?
A Intimidation
B Self-interest
C Familiarity
D Advocacy LO 5a

ICAEW 2022 Chapter 1: The fundamentals of costing 6

Chapter 2: Calculating unit costs (Part 1)
1 Gross wages for a manufacturing company in October were £108,000 and were
analysed as follows:
Direct Indirect
labour labour
£ £
Ordinary time 50,370 23,800
Overtime – basic pay 10,880 7,000
Overtime – premium 2,720 1,750
Shift allowance 5,400 2,720
Sick pay 2,760 600
Total 72,130 35,870

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ICAEW 2022 Chapter 2: Calculating unit costs (Part 1) 8
 £
Basic pay for normal hours worked: 38 hours at £12 per hour 456
Overtime: 8 hours at time and a half 144
Gross pay 600
Good was paid for her normal hours in full, even though she had been idle for 10
hours during the week because of delays in obtaining raw materials.
The indirect labour costs that are included in her total gross pay of £600 are:
A £48
B £125
C £168
D £264 LO 1c

3 Which of the following statements is true?

A Total indirect costs are always greater than total direct costs.
B Direct costs are usually overheads.
C Variable costs per unit decrease as production levels increase.
D Fixed costs per unit decrease as production levels increase. LO 1c

4 A designer receives £2 per unit as a royalty from the manufacturer of a product

which he designed.
In the accounts of the manufacturer the royalty charge would be treated as a:
A dividend payment
B production overhead
C selling overhead
D prime cost LO 1c

5 Newton Brewert had the following entries in its materials control account:
£
Opening inventory 31,200
Closing inventory 43,200
Deliveries from suppliers 600,000
Returns to suppliers 60,000
The value of the issue of materials to production is:
A £648,000
B £552,000
C £540,000
D £528,000 LO 1c

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1) 9

 6 Which two of the following are appropriate methods of valuing inventory?
A First in, Last out (FILO)
B First in, First out (FIFO)
C Future anticipated cost
D Standard cost LO 1c

7 At the beginning of June there were 500 Widgets held in the stores. 200 of these
Widgets had been purchased for £12.50 each in May and 300 had been purchased
for £13 each in April.
On 15 June a further 150 Widgets were received into stores at a purchase cost of
£13.20 each.
The only issue of Widgets in June occurred on the 25th, when 90 units were issued
to production.
Using the FIFO valuation method, what was the value of the opening inventory of
Widgets on 1 July?
A £1,070
B £1,188
C £7,192
D £7,210 LO 1c

8 In a period of rising prices, four accountants have recorded the cost of sales of a
precious metal. One accountant has used the FIFO method of inventory valuation
and one has used the LIFO method. The other two accountants have used an
average cost method, using the periodic and cumulative weighted average basis
respectively.
The gross profits recorded by the accountants were as follows:
Record
ed
gross
Accountant profit
£
Archie 2,600
Brian 3,400
Charlie 4,500
Dave 5,230
Which accountant was using the LIFO method of inventory valuation?
A Archie
B Brian
C Charlie
D Dave LO 1c

9 Bushind plc makes the following purchases and sales:

1 July Purchases 4,000 units for
£24,000
31 July Purchases 1,000 units for
£4,800

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1) 10

 15 August Sales 3,000 units for
£31,200
28 August Purchases 1,500 units for
£9,000
14 September Sales 500 units for £2,880
At 30 September which of the following closing inventory valuations using FIFO is
correct?
A £15,600
B £16,800
C £18,000
D £19,200 LO 1c

10 Bushind plc makes the following purchases and sales:

1 July Purchases 4,000 units for
£24,000
31 July Purchases 1,000 units for
£4,800
15 August Sales 3,000 units for
£31,200
28 August Purchases 1,500 units for
£9,000
14 September Sales 500 units for £2,880
At 30 September which of the following closing inventory valuations using LIFO is
correct?
A £15,600
B £16,800
C £18,000
D £19,200 LO 1c

11 With all average price systems where it is required to keep prices up to date, in
which of the following situations is it not necessary to recalculate the average
price?
A Each time an issue is made
B Each time excess material is returned from the factory floor to the stores
C Each time a purchase is made
D Each time an item is transferred into inventory from work in progress LO 1c

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1) 11

 12 Mosquito Ltd uses the Merlin to manufacture one of its products. The following
information on receipts and issues of Merlins has been recorded for June:
Receipt
s
Price
per
Date Units unit Value
£ £
1 June Opening inventory 100 12.00 1,200
3 June Receipts 300 11.52 3,456
5 June Issues (220)
12 June Receipts 170 12.48 2,122
24 June Issues (300)
Using the cumulative weighted average price method of inventory valuation, the
cost of the materials issued on 5 June was:
A £2,534
B £2,561
C £2,587
D £2,640 LO 1c

13 Mosquito Ltd uses the Merlin to manufacture one of its products. The following
information on receipts and issues of Merlins has been recorded for June:
Receipt
s
Price
per
Date Units unit Value
£ £
1 June Opening inventory 100 12.00 1,200
3 June Receipts 300 11.52 3,456
5 June Issues (220)
12 June Receipts 170 12.48 2,122
24 June Issues (300)
Using the cumulative weighted average price method of inventory valuation, the
value of closing inventory on 30 June was:
A £624
B £602
C £600
D £595 LO 1c

14 A distributor buys and resells a range of electrical items, one of which is a

Fusebox. Each Fusebox is resold for £1.50 per unit and opening inventory for April
was 400 units valued at £0.90 per unit. The distributor purchased a further 600
units on 10 April for £1.05 per unit, and sold 800 units on 25 April.
What gross profit would be recorded for the sale of Fuseboxes during April, using
the FIFO method of inventory valuation?
A £390
B £420

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1) 12

 C £480
D £780 LO 1c

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ICAEW 2022 Chapter 2: Calculating unit costs (Part 1)
Chapter 3: Calculating unit costs (Part 2)
1 The following information is available for the two production departments (machining
and assembly) and one service department (the canteen) at a manufacturing company.
Machining Assembly Canteen
Budgeted overheads £25,000 £20,000 £11,000
Number of staff 30 20 5
After reapportionment of the service cost centre costs, what will be the overhead cost of
the assembly department cost centre?
A £25,500
B £24,400
C £24,000
D £4,400 LO 1c

2 The following information is available concerning the four cost centres of Xula plc.
Service
cost
Production cost centres centre
Machine Finishing Assembl Canteen
ry y
Number of direct employees 14 12 4 –
Number of indirect employees 6 4 2 8
Overhead allocated and apportioned £68,400 £43,920 £21,504 £20,160
The management of Xula have decided that the overhead cost of the canteen is to be
re-apportioned to the production cost centres on the basis of the number of employees
in each production cost centre. After the re-apportionment, the total overhead cost of
the Finishing cost centre, to the nearest £, will be:
A £7,680
B £50,371
C £51,600
D £51,984 LO 1c

3 Which of the following bases of apportionment would be most appropriate for

apportioning property rental costs to production cost centres?
A Floor space occupied in square metres
B Volume of space occupied in cubic metres
C Number of employees
D Labour hours worked LO 1c

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1)

 4 A company makes three products in a period.
Quantity Labour hours
(units) per unit
Product A 1,000 8
Product B 2,000 12
Product C 3,000 6
Total 6,000
Overheads for the period are £100,000 and they are absorbed on the basis of labour
hours. What is the fixed overhead cost absorbed by a unit of Product A?
A £16.67
B £16.00
C £12.00
D £2.00 LO 1c

5 Budgeted information relating to two departments in a company for the next period is
as follows.
Production Direct Direct Direct Machine
Department overhead material labour labour hours
cost cost hours
£ £ £
Milling 64,800 162,000 32,400 6,480 108,000
Grinding 43,200 86,400 240,000 6,000 720
Individual direct labour employees within each department earn differing rates of pay,
according to their skills, grade and experience.
What is the most appropriate production overhead absorption rate for the Grinding
department?
A 50% of direct material cost
B 18% of direct labour cost
C £7.20 per direct labour hour
D £60 per machine hour LO 1c

6 A product requires 4 hours of direct labour at £12.60 per hour, and includes direct
expenses of £128.40. In its production, it requires 24 minutes of finishing.
Possible overhead absorption rates have been calculated to be £17.04 per direct labour
hour or £99.60 per finishing machine hour.
Using the direct labour hour basis of overhead absorption, calculate to the nearest
penny the total product cost.
A £286.80
B £246.96
C £218.64

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1)

 D £196.56 LO 1c

7 A company's packing department has budgeted labour hours of 3,250 and budgeted
overhead costs of £35,880.
The actual labour hours were 3,175 and actual overheads were £35,544.
The overheads for the period were:
A under-absorbed by £336
B over-absorbed by £336
C under-absorbed by £492
D over-absorbed by £492 LO 1c

8 Cilla plc had budgeted overheads for January 20X7 of £544,000. At the end of the period
the actual labour hours worked were 2,105 hours and the actual overheads were
£550,120.
If overheads were over-absorbed by £22,440, how many labour hours were budgeted to
be worked by Cilla (to the nearest hour)?
A 2,000
B 2,023
C 2,105
D 2,170 LO 1c

9 Which of the following is typically an aspect of a just-in-time (JIT) system for operating
raw material inventory?
(1) The use of small frequent deliveries of raw materials
(2) Large production batches run on an infrequent basis
(3) Low levels of raw material inventory
(4) High levels of raw material inventory
A (1) only
B (1), (2) and (4) only
C (1) and (3) only
D (2) and (4) only LO 1d

10 Which of the following statements relating to costing is not correct?

A Life cycle costing tracks costs that are incurred once production has ceased, even
though there are no revenues against which to match the costs.
B Under target costing, the selling price of a product is established by adding a mark
up to its budgeted cost.

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1)

 C Activity-based costing makes use of volume-related cost drivers.
D Under a JIT system, inventory storage costs are reduced as materials are made
available just as they are needed in production. LO 1d

11 Which of the following would normally result from the adoption of a JIT purchasing
system?
A Lower levels of receivables
B Higher levels of receivables
C Higher levels of inventory
D Lower levels of inventory LO 1d

12 Which of the following statements concerning costing is correct?

A The procedures used to calculate unit costs in manufacturing industries are not
applicable to service industries.
B Within process costing, the cost per unit of output is found indirectly by dividing
total costs by the number of units produced.
C In process and job costing, the cost per unit of output is found directly by
accumulating costs for each unit.
D Costing is irrelevant because the same level of detailed information can be
extracted from the financial accounts. LO 1d

13 In an organisation which applies contract costing, which of the following statements is

correct?
A Work is undertaken to customers' special requirements.
B Work is usually undertaken on the contractor's premises.
C Work is usually of a relatively short duration.
D Work is planned using a Just In Time (JIT) system. LO 1d

14 Jade Limited is a pest control company which responds to customer call outs 24 hours a
day. Call out number 35 on 25 July turned out to be a major infestation and required 190
hours of active labour. However, in carrying out the job the supervisor has reported that
5% of the labour hours were spent on idle time.
Assuming Jade Limited pays its call out staff a rate of £12 per hour, calculate the labour
cost for the job.
A £2,400
B £2,394
C £2,280

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1)

 D £200 LO 1d

ICAEW 2022 Chapter 2: Calculating unit costs (Part 1)