CIMA BA2 Costing: practice questions with answers

Question 1

Timbercraft Ltd makes wooden dining tables in a single factory. Which of the following is a direct cost of a table?

1. A The salary of the supervisor who oversees all production in the factory
2. B The oak boards cut and fitted into each table
3. C Depreciation of the sawing machines used for all products
4. D Rent of the factory building

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Answer: B. A direct cost can be identified with, and measured for, a specific cost unit (here, one table): direct materials, direct labour and direct expenses. Indirect costs (overheads) are incurred for several cost units together and must be shared out (absorbed) using an overhead absorption rate. The oak in each table is direct material; supervision, depreciation and rent are production overheads.

Question 2

Delmont Ltd started the year with no inventory. It produced 18,000 units and sold 16,500 units, exactly as budgeted. The variable production cost is $22 per unit and budgeted (and actual) fixed production overhead was $270,000, absorbed on budgeted production. Profit for the year under marginal costing was $64,000. What was the profit under absorption costing?

1. A $41,500
2. B $86,500
3. C $119,500
4. D $88,545

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Answer: B. The difference between the two profits is the fixed production overhead carried forward in the change in inventory.

- Fixed overhead per unit = 270,000 / 18,000 = $15
- Increase in inventory = 18,000 − 16,500 = 1,500 units
- Difference = 1,500 × $15 = $22,500

When inventory rises, absorption costing profit is higher: 64,000 + 22,500 = $86,500.

Question 3

Pentrich Ltd's monthly output rises from 10,000 units to 12,000 units, which is within the relevant range. What happens to (i) the fixed cost per unit and (ii) the variable cost per unit?

1. A (i) Stays the same; (ii) falls
2. B (i) Falls; (ii) stays the same
3. C (i) Falls; (ii) rises
4. D (i) Stays the same; (ii) stays the same

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Answer: B. Within the relevant range:

| | Total | Per unit |
|---|---|---|
| Fixed cost | Constant | Falls as output rises |
| Variable cost | Rises in proportion to output | Constant |

For example, fixed costs of $60,000 are $6.00 per unit at 10,000 units but $5.00 per unit at 12,000 units, while a variable cost of $4 per unit stays at $4.

Question 4

Garside Ltd's human resources (HR) department recruits, trains and runs the payroll for the staff in all of the company's production and service departments. Which basis is most appropriate for apportioning the HR department's costs to the other departments?

1. A The number of employees in each department
2. B The floor area occupied by each department
3. C The machine hours worked in each department
4. D The value of materials issued to each department

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Answer: A. Overheads that cannot be allocated to one cost centre should be apportioned on a fair basis that reflects the benefit each cost centre receives, ideally the factor that drives the cost.

| Cost | Usual basis |
|---|---|
| Rent, rates, heating | Floor area or volume |
| Machine insurance and depreciation | Value of machinery |
| Power for machines | Machine hours |
| Stores | Number or value of requisitions |
| HR, canteen, payroll | Number of employees |

Question 5

Thornley Ltd sets the price of product P7 at full cost plus a mark-up of 20%. The full cost of P7 is $50, made up of variable cost of $35 and fixed overhead absorbed of $15. Thornley is considering switching to marginal cost-plus pricing. What percentage mark-up on marginal cost would give the same selling price as the current method (to one decimal place)?

1. A 41.7%
2. B 62.9%
3. C 71.4%
4. D 28.6%

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Answer: C. - Current price = full cost × 1.20 = 50 × 1.20 = $60
- Marginal (variable) cost = $35
- Required mark-up on marginal cost = (60 − 35) / 35 = 25 / 35 = 71.4%

The marginal cost mark-up must be larger because it has to cover the fixed overhead ($15) as well as the profit ($10).

Question 6

Ashby Tools Ltd sets selling prices at marginal cost plus a mark-up of 45%, where marginal cost includes all variable costs. The costs per unit of its product T7 are: direct materials $18, direct labour (variable) $14, variable production overhead $6, variable selling cost $4 and fixed overhead absorbed $11. What is the selling price of product T7?

1. A $55.10
2. B $76.36
3. C $60.90
4. D $76.85

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Answer: C. Marginal cost per unit (all variable costs):

| | $ |
|---|---|
| Direct materials | 18.00 |
| Direct labour | 14.00 |
| Variable production overhead | 6.00 |
| Variable selling cost | 4.00 |
| Marginal cost | 42.00 |

Selling price = 42.00 × (1 + 0.45) = $60.90

Fixed overhead is ignored in marginal cost-plus pricing: the mark-up must be large enough to cover fixed costs and give a profit.