ACCA MA Cost accounting techniques: practice questions with answers

Question 1

Pemberton Ltd uses 48,000 units of component K7 each year, at an even rate. Each order costs $150 to place. Component K7 costs $25.00 per unit, and the annual cost of holding inventory is 12% of the purchase price. What is the economic order quantity, to the nearest unit?

1. A 2,191 units
2. B 1,549 units
3. C 1,095 units
4. D 632 units

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Answer: A. EOQ = √(2CoD / Ch)

- Co (cost per order) = $150
- D (annual demand) = 48,000 units
- Ch (holding cost per unit per year) = 12% × $25.00 = $3.00

EOQ = √(2 × 150 × 48,000 / 3.00) = √4,800,000 = 2190.9, i.e. 2,191 units.

Question 2

Ashby Ltd budgeted to produce 4,000 units in May, with a standard time of 0.5 direct labour hours per unit. Actual output was 4,300 units and 2,050 direct labour hours were worked. What were the labour efficiency ratio and the production volume ratio for May?

1. A Efficiency ratio 95.3%; production volume ratio 107.5%
2. B Efficiency ratio 104.9%; production volume ratio 107.5%
3. C Efficiency ratio 104.9%; production volume ratio 102.5%
4. D Efficiency ratio 102.5%; production volume ratio 104.9%

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Answer: B. - Budgeted hours = 4,000 × 0.5 = 2,000
- Standard hours of actual output = 4,300 × 0.5 = 2,150
- Actual hours worked = 2,050

| Ratio | Formula | Result |
|---|---|---|
| Efficiency | Standard hours produced / actual hours worked | 2,150 / 2,050 = 104.9% |
| Capacity | Actual hours worked / budgeted hours | 2,050 / 2,000 = 102.5% |
| Production volume | Standard hours produced / budgeted hours | 2,150 / 2,000 = 107.5% |

Check: efficiency × capacity = 1.0488 × 1.0250 = 1.0750, the production volume ratio.

Question 3

In Process 1 at Kirkby Chemicals, 8,000 kg of material costing $4.20 per kg was input and conversion costs were $18,000. Normal loss is 10% of input and is sold as scrap for $1.50 per kg. Actual output transferred to finished goods was 7,000 kg. What is the value of the output transferred to finished goods?

1. A $49,000
2. B $50,167
3. C $50,400
4. D $45,150

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Answer: A. - Total process cost = 8,000 × $4.20 + $18,000 = $51,600
- Normal loss = 10% × 8,000 = 800 kg, scrap value 800 × $1.50 = $1,200
- Expected output = 8,000 − 800 = 7,200 kg
- Cost per kg of expected output = ($51,600 − $1,200) / 7,200 = $7.00

Output transferred = 7,000 × $7.00 = $49,000. Actual output is 200 kg below expected output, so there is an abnormal loss of 200 kg, valued at the same $7.00 per kg ($1,400) and written off to profit or loss (less its scrap value).

Question 4

Fairbourne Joinery uses job costing. Job 417 requires materials of $2,400 and 60 direct labour hours at $18 per hour. Production overhead is absorbed at $25 per direct labour hour, and non-production overhead is added at 20% of total production cost. Fairbourne prices jobs to give a profit margin of 25% of the selling price. What is the price of job 417?

1. A $7,470
2. B $6,640
3. C $7,968
4. D $7,568

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Answer: C. | | $ |
|---|---|
| Direct materials | 2,400 |
| Direct labour: 60 × $18 | 1,080 |
| Production overhead: 60 × $25 | 1,500 |
| Total production cost | 4,980 |
| Non-production overhead: 20% × 4,980 | 996 |
| Total cost | 5,976 |

A margin of 25% on selling price means cost is 75% of price: price = 5,976 / 0.75 = $7,968 (profit $1,992 = 25% of $7,968).

Question 5

Ellerby Ltd absorbs production overhead on a direct labour hour basis. Budgeted production overhead was $468,000 and budgeted direct labour hours were 36,000. Actual direct labour hours were 37,400, and overhead was over-absorbed by $8,950. What was the actual production overhead incurred?

1. A $495,150
2. B $476,950
3. C $477,250
4. D $459,050

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Answer: C. - Absorption rate = $468,000 / 36,000 = $13 per direct labour hour
- Overhead absorbed = 37,400 x $13 = $486,200
- Over-absorption means overhead absorbed exceeded actual overhead, so actual overhead = $486,200 - $8,950 = $477,250

Under- or over-absorption always compares absorbed overhead (actual activity x predetermined rate) with actual overhead; budgeted overhead is used only to set the rate.

Question 6

Wexley Appliances is developing a new food mixer using target costing. It has set a target selling price from market research, deducted its required profit to find the target cost, and found that the current estimated cost of the mixer is higher than the target cost. Which of the following is the most appropriate way for Wexley to close the target cost gap?

1. A Increase the target selling price until it covers the current estimated cost plus the required profit
2. B Absorb a smaller share of production overheads into the mixer by changing the absorption basis used
3. C Accept a lower required profit on the mixer so that the target cost rises to the estimated cost
4. D Use value engineering to redesign the mixer, removing costs that add no value that customers will pay for

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Answer: D. Target costing works backwards from the market:

1. Set a target selling price that customers will accept and that achieves the desired market share.
2. Deduct the required profit to find the target cost.
3. Estimate the current cost of the planned product.
4. The difference is the target cost gap.
5. Close the gap, mainly at the design stage, by reducing cost: value engineering, redesign, using fewer or standard components, changing suppliers or production methods.

Raising the price, lowering the required profit or reallocating overheads do not reduce the cost of the product and are contrary to the approach. If the gap cannot be closed, the product may not be launched.