F5-TEST#01

Name:

Time Allowed: 1 hour

Total Marks: 40

Pass Marks: 20
1. VPS is a large manufacturing business that is introducing an activity based costing system into its
business. VPS ships components via its own logistics operation to its central manufacturing
centre in Glasgow from a wide variety of locations. It is attempting to identify the correct cost
driver for the cost pool called ‘component handling’.

Which of the following would be the correct figure to use?

A. Average components per unit

B. Total number of components shipped
C. Average distance travelled by a component
D. Total components-distance travelled

2. Weaver Ltd prints two weekly newspapers: the Crystal Courier (40,000 copies in one weekly
production run) and the Palace Bugle (25,000 copies in total, split over two production runs
every week.) Production run set-up costs amount to $2,150 every week. Weaver uses Activity
Based Costing and the number of production runs as a cost driver.

What is the set-up cost for each copy of the Palace Bugle?

A. $0.018 per copy

B. $0.033 per copy
C. $0.043 per copy
D. $0.057 per copy

3. The following statements have been made in relation to activity-based costing:

(1) A cost driver is a factor which causes a change in the cost of an activity.
(2) Traditional absorption costing tends to under-estimate overhead costs for high volume
products.

Which of the above statements is/are true?

A. (1) only
B. (2) only
C. Neither (1) nor (2)
D. Both (1) and (2)

4. A company uses activity-based costing to calculate the unit cost of its products. The figures for
Period 3 are as follows: production set-up costs are $84,000. Total production is 40,000 units of
each of products A and B, and each run is 2,000 units of A or 5,000 units of B.

What is the set-up cost per unit of B?

A. $0.10
B. $0.08
C. $0.60
D. $0.29
5. A company makes products A and B. It is experimenting with Activity Based Costing. Production
set-up costs are $12,000; total production will be 20,000 units of each of products A and B. Each
run is 1,000 units of A or 5,000 units of B.

What is the set-up cost per unit of A, using ABC?

A. $0.50
B. $0.10
C. $2.00
D. $10.00

6. The following are all steps in the implementation of the target costing process for a product:

(1) Calculate the target cost

(2) Calculate the estimated current cost based on the existing product specification
(3) Set the required profit
(4) Set the selling price
(5) Calculate the target cost gap

Which of the following represents the correct sequence if target costing were to be used?

A. (1), (2), (3), (4), (5)

B. (2), (3), (4), (1), (5)
C. (4), (3), (1), (2), (5)
D. (4), (5), (3), (1), (2)

7. In target costing, which of the following would be a legitimate strategy to reduce a cost gap
for a product that existed in a competitive industry with demanding shareholders?

A. Increase the selling price

B. Reduce the expectation gap by reducing the selling price
C. Reducing the desired margin on the product
D. Mechanising production in order to reduce average production cost

8. Which of the following strategies would be immediately acceptable methods to reduce an

identified cost gap?

A. Reduce the desired margin without discussion with business owners

B. Reduce the predicted selling price
C. Source similar quality materials from another supplier at reduced cost
D. Increase the predicted selling price

9. The target cost for a product has been calculated to be $38.00, which is 5% less than the actual
cost currently achievable. The business is considering providing some internal training to
 improve efficiency of labour and hence reduce the cost gap. The current material cost is $10 per
unit and this will not change as efficiency changes. Labour rates are $8 per hour.

How much of an efficiency improvement (measured by the % reduction in labour time per
unit will be necessary to remove the cost gap completely). Accurate to 2 decimal places

A. 5.00%
B. 6.67%
C. 7.10%
D. 7.28%

10. The selling price of product Zigma is set to be $250 for each unit and sales for the coming
year are expected to be 500 units. If the company requires a return of 15% in the coming
year on its investment of $250,000 in product Zigma, the target cost for each unit for the
coming year is

A. $145
B. $155
C. $165
D. $175

11. The following statements have been made about target costing in service industries:

(1) Consistent methods of cost attribution are needed for target costing, and this is not
straightforward in service industries because of the intangibility of products.
(2) Direct charging is needed for target costing, and this is not straightforward in service
industries because of the intangibility of products.

Which of the above statements is/are true?

A. (1) only
B. (2) only
C. (Neither (1) nor (2)
D. Both (1) and (2)

12. The following costs have arisen in relation to the production of a product:

(i) Planning and concept design costs

(ii) Testing costs
(iii) Production costs
(iv) Distribution and customer service costs

In calculating the life cycle costs of a product, which of the above items would be included?

A. (iii) only
B. (i), (ii) and (iii) only
C. (i), (ii) and (iv) only
D. All of the above
13. A colleague has claimed the following to be benefits of lifecycle costing:

(i) It provides the true financial cost of a product

(ii) The length of the lifecycle can be shortened
(iii) Expensive errors can be avoided in that potentially failing products can be avoided
(iv) Lower costs can be achieved earlier by designing out costs
(v) Better selling prices can be set
(vi) Decline stages of the lifecycle can be avoided

Which of the above statements is/are correct?

A. (i), (iii), (iv) and (v)

B. (i) and (iii) only
C. (iii) and (iv) only
D. All of them

14. Company B is about to being developing a new product for launch in its existing market. They
have forecast sales of 20,000 units and the marketing department suggests a selling price of
$43/unit. The company seeks to make a mark-up of 40% product cost. It is estimated that the
lifetime costs of the product will be as follows:

1 Design and development costs $43,000

2 Manufacturing costs $15/unit
3 Plant decommissioning costs $30,000

The company estimates that if it were to spend an additional $15,000 on design, manufacturing
costs/unit could be reduced.

What is the life cycle cost?

A. $18.65
B. $22
C. $22.87
D. $24

15. Which ONE of the following would serve to increase the Throughput Accounting Ratio?

A. An increase in the speed of the fastest machine in the production process

B. An unexpected increase in the factory rent
C. A 5% wage increase linked to an 8% improvement in productivity
D. A 10% sales discount to stimulate demand by 20%

16. Huron Ltd manufactures a product called the GL1. The GL1 requires five hours of machine time.
Machine time is a bottleneck resource, as there are only four machines which are available eight
hours a day, five days a week. Each GL1 sells for $210 and has direct material costs of $26 per
 unit, labour costs of $19 per unit and factory overhead costs of $15 per unit. These costs are
based on weekly production and sales of 150 units.

What is the throughput accounting ratio (to 2 decimal places)?

A. 0.87
B. 1.15
C. 1.31
D. 2.62

17. Skye Limited has a two process and details of these processes are as follows: Process P: Each
machine produces 6 units an hour and Skye has 8 machines working at 90% capacity. Process Q:
Each machine produces 9 units per hour and Skye has 6 machines working at 85% capacity. One
of Skye products is Cloud. Cloud is not particularly popular but does sell at a selling price of $20
although discounts of 15% are usual. Material costs are $5 and direct labour costs are double
the material cost. Cloud spends 2 hours in process P but 3 hours in process Q.

What is Cloud’s TP per hour in its bottleneck process?

A. $5.50
B. $6.00
C. $12.00
D. $17.00

18. The following statements have been made about throughput accounting:

A Throughput accounting considers that the only variable costs in the short run are materials
and components.
B Throughput accounting considers that time at a bottleneck resource has value, not elsewhere.
C Throughput accounting views stock building as a non-value-adding activity, and therefore
discourages it.
D Throughput accounting was designed as a decision-making tool for situations where there is a
bottleneck in the production process.

Which ONE of the above statements is not true of throughput accounting?

A. A
B. B
C. C
D. D

19. A company manufactures a product which requires four hours per unit of machine time.
Machine time is a bottleneck resource as there are only ten machines which are available for 12
hours per day, five days per week. The product has a selling price of $130 per unit, direct
material costs of $50 per unit, labour costs of $40 per unit and factory overhead costs of $20 per
unit. These costs are based on weekly production and sales of 150 units.
 What is the throughput accounting ratio (to 2 decimal places)?

A. 1·33
B. 2·00
C. 0·75
D. 0·31

20. S Company is a manufacturer of multiple products and uses target costing. It has been noted
that Product P currently has a target cost gap and the company wishes to close this gap.

Which of the following may be used to close the target cost gap for product P?

A. Use overtime to complete work ahead of schedule

B. Substitute current raw materials with cheaper versions
C. Raise the selling price of P
D. Negotiate cheaper rent for S Company’s premises