COST AND MANAGEMENT ACCOUNTING TECHNIQUES.......................................................

2
DECISION MAKING TECHNIQUES...........................................................................................32
BUDGETING...............................................................................................................................59
STANDARD COSTING AND VARIANCE ANALYSIS.................................................................86
PERFORMANCE MEASUREMENT AND CONTROL..............................................................122

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 COST AND MANAGEMENT ACCOUNTING
TECHNIQUES
1.
Activity based cost drivers are used to do which two of the following?
A. Allocate overheads to primary and support activities.
B. Allocate overheads to cost objectives.
C. Allocate overheads to production and service cost centres.
D. Reallocate service cost centre costs to production cost centres.
E. Allocate overheads to resources.
Advice: Allocate overheads to cost objectives; Allocate overheads to primary and
support activities
Production and service cost centres are features of absorption costing not ABC.
In no costing system are overheads allocated to resources.
2.
During which stage of the product life cycle wilt marketing strategies need to concentrate
on differentiating a product from competing products, building brand loyalty and offering
incentives to entice competitors’ customers to switch?
A. Growth.
B. Introduction.
C. Maturity.
D. Decline.
Advice: Maturity stage.
During the introduction stage, brand awareness needs to be built. Advertising needs to be
stepped up during the growth stage to build brand preference. Promotional expenditure is
reduced during the decline stage and focuses on reinforcing the brand ¡mage of remaining
products in the product line.
3.
During the growth stage of the product life cycle, what is the overall aim of the marketing
strategies for a product?
A. To maintain market share and extend the product’s life cycle.
B. To find new uses for the product.
C. To establish a market and build demand.
D. To gain consumer preference and increase sales.
Advice: To gain consumer preference and increase sales
During the introduction stage, the aim is to establish a market and build demand.
During the maturity stage, the aim is to maintain market share and extend the product’s life
cycle.

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4.
The following data relate to costs, output volume and cost drivers of Heighway Rubbery Co for
June 20X1.
Product P Product Q Product R Total
1. Production and sales 3,000 units 2,000 units 1,500 units
$ per unit $ per unit $ per unit
2. Direct production costs 12 11 8 $70,000
Direct materials 3 6 2 $24,000
Direct labour 15 17 10 $94,000
3. Labour hours per unit 1/2 1 1/3
4. Machine hours per unit 2 1 2
5. Number of production runs 8 2 10 20
6. Number of deliveries to customers 3 2 10 15
7. Number of production orders 30 5 15 50
8. Number of deliveries of materials into 17 3 20 40
store
9. Production overhead costs $
Machining 71,500
Set-up costs 10,500
Materials handling (receiving) 35,000
Packing costs (despatch) 22,500
Engineering 25,500
165,000
Indirect production overheads that are not driven by production volume are:
Item Cost driver
Set-up costs Production runs
Materials handling Deliveries of materials
Packing Deliveries to customers
Engineering Production orders
There were no opening inventories at the beginning of June.
What would be the full production cost per unit of product R if overheads are absorbed
on the basis of direct labour hours?
Advice: $23.75.
Direct labour hours P 3,000 x 1/2 1,500
Q 2,000x 1 2,000
R 1,500 1/3 500
4,500
Absorption rate for overhead = $165,000 - 4,000
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 = $41.25 per direct labour hour
Unit cost of R = $(8 + 2 + 1/3 of 41.25) = $23.75
5.
An accountant sets up in private practice. She anticipates working a 35-hour week, and taking
four weeks holiday per year.
General expenses of the practice are expected to be $20,000 per year, and she has set herself
a target salary of $30,000 a year.
Assuming that only 75% of her time is chargeable to clients, what should she quote (to
the nearest S) for a job anticipated to take 50 hours?
A. $1,190
B. $1,984
C. $1,832
D. $1,488
Advice: $1,984.
You should have worked this out by calculating the total number of chargeable hours worked
per annum and then used this to calculate the rate per chargeable hour, and then multiplied this
by 50 hours to calculate the cost of the job.
$1,832 is incorrect. You have not deducted the four weeks holiday when calculating the
available time.
$1,488 is incorrect. You have not deducted the non-chargeable time worked when calculating
the hourly rate.
$1,190 is incorrect. You have not included the overhead costs that need to be paid when
calculating the hourly rate.
6.
Which of the following costing methods is most likely to produce useful information for
decision-making?
A. Standard costing.
B. Total absorption costing.
C. Marginal costing.
D. Activity based costing.
Advice: Marginal costing.
This is because it focuses on incremental costs. Total absorption and activity based costing
involve notional costs (such as depreciation) and fixed costs (such as rent), which are never
relevant to a decision. Standard costing does not necessarily deal with actual cash flow and is
so unlikely to produce useful decision-making information.
7.
The following data relates to production of A Co’s three products in period 6.
Product X Product Y Product Z
Production and sales (units) 300 200 150
Machine hours per unit 30 10 10

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 No of production runs 7 2 1
No of deliveries to customers 5 5 5
No of deliveries of material into store 20 19 1
Production overhead costs $
Machining 35,750
Set-up costs 5,250
Materials handling (receiving) 17,500
Packing costs (despatch) 22,500
What is the overhead cost per unit of product Y using activity based costing?
A. $112.91
B. $525
C. $150.55
D. $2.86
Advice: $112.91.
Rate per cost driver
Machining $35,750/12,500 machine hours $2.86 per machine hour
Set-up costs $5,250/10 production runs $525 per run
Materials handling $17,500/40 materials deliveries $437.50 per delivery
Packing costs $22,500/15 deliveries to customers $1,500 per delivery
Product Y overhead costs S
Machining 2,000 machine hours x $2.86 5,720.00
Set-up costs 2 prod runs x $525 1,050.00
Materials handling 19 deliveries x $43750 8,312.50
Packing costs 5 customer deliveries x $1,500 7,500.00
22,582.50
Overhead cost per unit = $22,582.50/200 units = $112.91
If you answered $2.86: It is the rate per machine hour
If you answered $525: is the rate per Set-up.
If you answered $150.55: It is product Y’s overhead costs divided by product Z volume.
8.
The following data relate to costs, output volume and cost drivers of Heighway Rubbery Co for
June 20X1.
Product P Product Q Product R Total
1. Production and sales 3,000 units 2,000 units 1,500 units
$ per unit $ per unit $ per unit
2. Direct production costs 12 11 8 $70,000
Direct materials 3 6 2 $24,000

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 Direct labour 15 17 10 $94,000
3. Labour hours per unit 1/2 1 1/3
4. Machine hours per unit 2 1 2
5. Number of production runs 8 2 10 20
6. Number of deliveries to customers 3 2 10 15
7. Number of production orders 30 5 15 50
8. Number of deliveries of materials into 17 3 20 40
store
9. Production overhead costs $
Machining 71,500
Set-up costs 10,500
Materials handling (receiving) 35,000
Packing costs (despatch) 22,500
Engineering 25,500
165,000
Indirect production overheads that are not driven by production volume are:
Item Cost driver
Set-up costs Production runs
Materials handling Deliveries of materials
Packing Deliveries to customers
Engineering Production orders
There were no opening inventories at the beginning of June.
What would be the full production cost per unit of product R if materials handling
overhead were absorbed on the basis of direct material cost and all other overheads
were absorbed on a machine hours basis?
Advice: $37.64.
Machine hours (3,000 x 2) + (2,000 x 1) + (1,500 x 2) = 11,000
Absorption rates: Materials handling ($35,000 ÷ $70,000) = 50% of direct materials cost
Other overheads = $(165,000 – 35,000)/11,000 machine hours = $11.82 per machine hour
Cost per unit of R
$
Direct materials 8.00
Direct labour 2.00
Materials handling overhead (50% of $8) 4.00
Other overhead ($11.82 x 2 machine hours) 23.64
37.64

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9.
Which of the following would you not consider to be a strength of activity based costing?
A. Identities the driver of the overhead cost.
B. Particularly fashionable technique.
C. Recognises the complexity of the production process.
D. Particularly appropriate for an AMT environment.
Advice: Activity based costing is a particularly fashionable technique.
Activity based costing is not widely used. The other points are correct.

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10.
A company makes one delivery per week to all of its customers.
The cost of these deliveries is:
A. A selling and distribution cost.
B. A prime cost.
C. A direct production expense.
D. A production overhead.
Advice: A selling and distribution cost.
As the deliveries will only occur when a sale has been made ft is therefore a selling and
distribution cost.
Prime cost is the name given to the total of all the direct production costs, not a cost incurred
when distributing goods after they have been sold.
Production overheads are the costs incurred in making goods which cannot be identified directly
to the goods made by the company, not a cost incurred when distributing goods after they have
been sold.
A direct production expense is incorrect. These are the expenses other than materials and
labour costs which are incurred in full as a direct consequence of making the product, not a cost
incurred when distributing goods after they have been sold

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11.
Supervisor salary costs: one supervisor is needed for every five employees added to the staff.
Which one of the following graphs depicts the cost described?

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12.
CD Co produces a single product, the BC, which passes through three different processes.
Alpha, Beta and Gamma The throughput per hour of the three processes is 25, 30 and 32 units
of BC respectively. The organisation operates for ten hours a day, 5 days a week for 50 weeks
of the year. The BC can be sold for $420 per unit and it has a material cost of $170 per unit It is
anticipated that annual conversion costs will be $1,800,000
What is the throughput accounting ratio per day?
A. 8.68
B. 0.03
C. 14.58
D. 11.11
Advice: 8.68.
Throughput per day (units)
Process alpha = 25 x 10 = 250
Process beta 30 x 10 = 300
Process gamma = 32 x 10 = 320
Throughput is limited to the rate through process alpha.
Throughput contribution per unit = $(420 - 170) = $250
Conversion costs per day = $1,800,000/(5 x 50) = $7,200
Throughput accounting ratio = (throughput contribution per unit x throughput per
day)/conversion costs per day = ($250 x 250 units)/$7,200 = 8.68
If you answered 11.11: You have not taken account of the limit on throughput placed by process
alpha and has used a rate of 320 units per day.
If you answered 0.03: You have used annual conversion costs, not daily conversion costs.
If you answered 14.58: You have used selling price instead of contribution.
13.
ABC is felt to give a more useful product cost than classic absorption costing (with
overheads absorbed on labour hours) if which of the following apply?
A. Few overheads vary with time spent on production.
B. Cost drivers are difficult to identify.
C. Labour costs are a relatively minor proportion of total costs.
D. Overheads are difficult to predict
E. Overheads vary with many different measures of activity.
Advice: Labour costs are a relatively minor proportion of total costs; Few overheads vary
with time spent on production; Overheads vary with many different measures of activity.
That overheads are difficult to predict and cost drivers difficult to identify are not reasons to
prefer ABC.

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14.
N Co produces a single product, the N98, which passes through three different processes,
sawing, hammering and drilling. The throughput per hour of the three processes is 178 units,
156 units and 139 units of N98 respectively. The organisation operates for seven hours a day,
six days a week for 52 weeks of the year. The N98 can be sold for $32 per unit and it has a
material cost of $12 per unit. Annual conversion costs are budgeted at $1,600,000.
How much could N Co spend on improving the throughput of the current bottleneck
process if it wished to recover its costs in one year?
A. None of the above.
B. $1,188,096.
C. $1,703,520.
D. $14,280.
Advice: None of the above.
Throughput contribution per unit $(32 - 12) $20
The drilling process is the bottleneck.
Annual throughput (units)
Sawing 178 x 7 x 6 x 52 = 388,752
Hammering 156 x 7 x 6 x 52 = 340,704
Drilling 139 x 7 x 6 x 52 = 303,576
Annual throughput could be increased by (340,704 - 303,576) units = 37,128 units if the
throughput of drilling was increased to that of hammering.
This would increase contribution by 37,128 x $20 = $742,560, the amount which could be spent
on improvements.
If you answered $1,703,520: It is based on the throughput of drilling increasing to that of sawing.
If you answered $1,188,096: It is based on revenue rather than contribution.
If you answered $14,280: It is the possible expenditure if costs have to be recovered in a week.
15.
A company has total overheads of $735,000 of which $488,000 relates to machine use, $85,000
to production set-ups and the balance to handling of orders.
The company has two products X and Y, and expects the following in the next period.
X Y
Quantity made 12,000 25,000
Direct labour hours per unit 2 1
Machine hours per unit 3 1
Production set-ups 10 40
Number of orders 16 20
Calculate the overheads absorbed by each unit of X using an ABC approach and suitable
cost drivers.

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16.
A company makes two products, X and Y, and budgets to produce 80,000 units of X and
100,000 units of Y each year Using traditional absorption costing, with production overheads
absorbed at the rate of 50% of direct labour costs, unit product costs are as follows.
X Y
$ $
Direct materials 6 25
Direct labour 4 4
Production overhead 2 2
Full production cost 12 31
A recent investigation has shown that 10% of total overhead costs are incurred in materials
handling, and that the driver of materials handling costs is the number of stores items handled.
A unit of product X contains 2 materials items and a unit of product Y contains 8 materials items
If activity based costing (ABC) were applied to materials handling costs, by how much
would the cost per unit of products X and Y differ from the unit full costs based entirely
on traditional absorption costing?
A. The unit cost of X would be $0.75 lower and the unit cost of Y $3 higher.
B. The unit cost of X would be $1.25 lower and the unit cost of Y $1 higher.
C. The unit cost of X would be $0.90 lower and the unit cost of Y $0.88 higher.
D. The unit cost of X would be $1 lower and the unit cost of Y $1 higher.
Advice: The unit cost of X would be $1.25 lower and the unit cost of Y would be $1
higher.
Materials handling costs = $2 per unit overheads x (80,000 + 100,000 units) = $360,000.
Number of stores items handled = (80,000 x 2) + (100,000 x 8) = 960,000.
Materials cost per stores item handled = $360,000/960,000 = $0.375 per item.

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 X Y
$ $
Materials handling cost
X: 80,000 x 2 x $0.375 60,000
Y: 100,000 x8 x $0.375 300,000
Overhead cost traditional costing, at $2 per unit
160,000 200,000
lncrease/(decrease) in production cost using
ABC (100,000) (100,000)
Number of units 80,000 100,000
lncrease/(decrease) in unit cost using ABC $(1.25) $1
17.
A manufacturer of electronic products has designed a new product. The organisations
marketing department believes that 200,000 units of the product could be sold at a price of $25
each. Development and manufacturing costs of the product total $16,000,000. The organisation
requires a minimum of 12 % return on any investment.
What is an appropriate target cost for the new product?
A. $9.60
B. $15.40
C. $80
D. $25
Advice: $15.40.
$
Projected revenue (200,000 x $25) 5,000,000
Desired profit (0.12 x $16m) 1,920,000
Total target cost 3,080,000
Unit target cost ($3,080,000/200,000) $15.40
18.
Which of the following is not a feature of activity based costing?
A. It seeks to recognise the causes of the costs of activities through the use of cost drivers.
B. It uses a basis such as labour hours to incorporate overheads into product costs.
C. It recognises that a single factor such as machine hours cannot be the driver of all
overhead costs.
D. It allocates the costs associated with cost drivers into cost pools.
Advice: It uses a basis such as labour hours to incorporate overheads into product
costs. This is a feature of traditional absorption costing methods.
19.
In activity based costing (ABC) what is a cost driver?

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 A. A factor which causes the costs of an activity to increase or decrease.
B. A cost relating to more than one product or service.
C. A mechanism for accumulating the costs of an activity.
D. An overhead cost that is incurred as a direct consequence of an activity.
Advice: A factor which causes the costs of an activity to increase or decrease.
For example, a cost driver for materials handling costs could be the number of production runs:
the higher the number of production runs, the higher will be the cost of material handling.
A mechanism for accumulating the costs of an activity is a description of a cost pool.
An overhead cost that is incurred as a direct consequence of an activity is a description of an
attributable overhead cost.
A cost relating to more than one product or service is a description of a common cost.
20.
In throughput accounting, inventory is valued at:
A. Target cost.
B. Total absorption cost.
C. Material cost.
D. Marginal cost.
Advice: Material cost.
This is because in throughput accounting inventory is viewed as having no added value until it is
turned into sales revenue.
21.
Which of the following are most likely to be variable?
A. Production line employee’s wages
B. Telephone bill.
C. Annual salary of factory supervisor.
D. Annual salary of chief accountant.
E. Direct materials for production.
Advice: Production line employee’s wages; Direct materials for production.
Production line employee’s wages and direct materials for production are likely to increase in
line with output.
A telephone bill is typically a mixed cost, with a fixed line rental and a variable cost relating to
the number of telephone calls made.
Salaries are typically fixed costs.
22.
Last year, a firm started to produce a single product with a unit selling price of $14. In the first
year of operation standard capacity was 50,000 units, production was 50,000 units, and sales
were 40,000 units. The actual costs incurred were:
Fixed Variable
Raw materials - $3.00 per unit produced
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 Direct labour - $2.00 per unit produced
Factory overhead $200,000 $1.00 per unit produced
Selling and administrative expenses $80.000 $1.00 per unit sold
Actual variable costs and fixed costs did not diverge from standard. Any under or over applied
overhead was written off directly at year end as an adjustment to the cost of goods sold.
Using absorption costing, what was the unit cost of closing Inventory (to the nearest
$1)?
Advice: $10
$
Materials 3
Labour 2
Factory — variable 1
Factory — fixed (200,000/50,000) 4
10
23.
A printing firm are calculating a product cost for a customer quotation. The total cost of printing
25,000 copies of a leaflet is $1,600. A profit on sales of 20% is required
What is the profit to the nearest $ if the customer accepts the quotation?
Advice: $400.
The selling price is $1600 plus x, where x is the profit.
20% x ($1,600 + x) = profit (x), therefore $320 + 0.2x = x.
So $3,200 = 8x.
Profit (x) = $320/0.8 = $400.
24.
Which two of the following methods should be used to move a currently-attainable cost
closer to target cost?
A. Reducing the quality of the product in question
B. Making staff redundant
C. Acquiring new, more efficient technology.
D. Using standard components wherever possible
Advice: Using standard components wherever possible; Acquiring new, more efficient
technology
To make improvements towards the target cost, technologies and processes must be improved
The use of standard components is a way of improving the production process.
Redundancy creates short-term costs such a redundancy pay-offs, may affect the long-term
morale of the group and, if it leads to the organisation being under resourced, may affect the
quality of the product and customer service
Reducing the quality may lead to a loss of business and competitiveness

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25.
Which of the following statements about Target Costing are true?
A. Target costing focuses on production and selling costs rather than costs over the whole
product lifecycle.
B. A target cost is a product cost estimate which is determined by subtracting a desired
profit margin from a competitive market price
C. The first stage of the target costing process is to estimate the cost to produce the
product.
D. The first stage of the target costing process involves analysing the external environment.
Advice
 A target cost is a product cost estimate which is determined by subtracting a
desired profit margin from a competitive market price
 The first stage of the target costing process involves analysing the external
environment
The incorrect answers are:
 Target costing focuses on production and selling costs rather than costs over the whole
product lifecycle (target costing is seen as an activity which is aimed at reducing lifecycle
costs of new products. It therefore incorporates costs over the whole lifecycle including
R&D and product launch cost.)
 The first stage of the target costing process is to estimate the cost to produce the
product (the first stage is to analyse the external environment in order to ascertain what
customers require and what competitors are producing This enables a company to
specify the products target market share
26.
During which stage of its life cycle is a product’s return on capital not important, it is
expected to be a net user of cash and show growth but not profit?
A. Maturity.
B. Decline.
C. Growth.
D. Introduction.
Advice: Introduction stage.
If a product ¡s in its introductory or growth stages it cannot be expected to be a net generator of
cash as all the cash it generates should be used in expansion through increased sales and so
on.
27.
A product is in the stage of its life cycle which is typified by falling prices but good profit margins
due to high sales volume.
Which stage is it in?
A. Introduction.
B. Decline
C. Growth.
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 D. Maturity.
Advice: Maturity.
The product is in the maturity stage, during which prices tend to fall but profits remain high due
to good sales volume
28.
In which stage of the product life cycle are initial costs of the investment in the product
typically recovered?
A. lntroduction
B. Growth
C. Decline.
D. Maturity
Advice: Growth
During the growth phase the product begins to make a profit. This is due to economies of scale
being received as increased demand for the product occurs

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29.
The following data refers to a soft drinks manufacturing company that passes its product
through four processes and is currently operating at optimal capacity.
Process Washing Filling Capping Labelling
Time per dozen units 6 mins 3 mins 1.5 mins 2 mins
Machine hours available 1,200 700 250 450
Product data
$ per unit
Selling price 0.60
Direct material 0.18
Direct labour 0.02
Factory fixed cost $4,120
Which process is the bottle neck
A. Washing.
B. Labelling.
C. Capping.
D. Filling.
Advice: Capping.
Operation Wash Fill Cap Label
Units Units Units Units
(a) Capacity in mins (1,200x60) (700x60) (250x60) (450x60)
(b)Timeper 12 units 6 3 1.5 2
Capacity in groups of 12 units
((a) ÷ (b)) 12,000 14,000 10,000 13,500
30.
Which of the following statements concerning Life Cycle costing are correct?
A. Life cycle costing enables total profitability of any given product to be determined.
B. Life Cycle costing is a traditional costing principle.
C. Whilst Life cycle costing considers costs associated with the launch of products in the
market place, Research and Development Costs are still treated as period costs and not
traced to products.
D. Life cycle costs are the costs incurred on products from their design stage, through
development to market launch, production and sales, and their eventual withdrawal from
the market.
Advice:
 Life cycle costs are the costs incurred on products from their design stage,
through development to market launch, production and sales, and their eventual
withdrawal from the market (by tracing costs to individual products over
completed lifecycles, total profitability can be determined)
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  Life cycle costing enables total profitability of any given product to be determined
The incorrect answers are:
 Life cycle costing is a traditional costing principle (Life cycle costing is part of modern
management accounting practice)
 Whilst Life cycle costing considers costs associated with the launch of products in the
market place, Research and Development Costs are still treated as period costs and not
traced to products (life cycle costing includes tracing R&D expenditure to products)
31.
Which three of the following costs are likely to rise when Just In Time manufacturing is
introduced?
A. Set-up costs
B. Raw material storage costs
C. Opportunity cost of lost production due to reorganisation of labour and machinery for
different products
D. Customer order costs.
E. Raw material handling costs.
Advice: Set up costs; Raw material handling costs; Opportunity cost of lost production
due to reorganisation of labour and machinery for different products.
These three costs are likely to increase, as batch sizes get smaller
Remember, the whole aim of JIT is to hold no inventory. Thus raw material storage costs should
fall, not rise.
Customer order costs will not be changed by the introduction of JIT
32.
The selling price of product B is set at $65 for each item, and sales for the coming year are
expected to be 4,000 units.
If the company requires a return of 12% in the coming year on its investment of $900,000
in product B, the target cost for each unit in the coming year is:
A. $92.
B. $65
C. $27.
D. $38.
Advice: $38
Required return = 12% x $900,000 = $108,000
Expected revenue = 4,000 x $65 = $260,000
Therefore total target cost = $(260,000 - 108,000) = $152,000
Therefore unit target cost = $152,000/4,000 = $38
33.
In target costing, selling price is determined as:
A. Total cost plus a profit margin.

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 B. Back flush cost plus a profit margin.
C. A competitive market price.
D. Standard cost plus a profit margin.
Advice: A competitive market price.
34.
Which of the following statements are true concerning Activity Based Costing?
A. ABC is particularly useful in organisations where overheads account for a significant
proportion of total costs.
B. In the modern compared to the traditional business environment, support department
costs have a tendency to increase.
C. The traditional absorption costing approach to dealing with overheads was developed at
a time when most organisations produced only a narrow range of products and when
overheads were only a small fraction of total costs.
D. ABC is equally as time-consuming for a business as traditional absorption costing
Advice
 ABC is particularly useful in organisations where overheads account for a
significant proportion of total costs
 In the modern compared to the traditional business environment, support
department costs have a tendency to increase
 The traditional absorption costing approach to dealing with overheads was
developed at a time when most organisations produced only a narrow range of
products and when overheads were only a small fraction of total costs
The incorrect answers:
ABC is equally as time-consuming for a business as traditional absorption costing (ABC uses
many cost drivers as absorption bases and whilst this tends to produce more realistic product
costs it is significantly more time consuming).

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35.
Last year, a firm started to produce a single product with a unit selling price of $14. In the first
year of operation standard capacity was 50,000 units, production was 50,000 units, and sales
were 40,000 units. The actual costs incurred were:
Fixed Variable
Raw materials - $3.00 per unit produced
Direct labour - $2.00 per unit produced
Factory overhead $200.000 $1.00 per unit produced
Selling and administrative expenses $80,000 $1.00 per unit sold
Actual variable costs and fixed costs did not diverge from standard. Any under or over applied
overhead was written off directly at year end as an adjustment to the cost of goods sold.
What would be the values of net income, calculated using the different bases of marginal
and absorption costing (to nearest $000)?
Advice:
Marginal costing = $0
Absorption Costing = $40,000
Marginal costing Contribution = 14 - 7 variable =7
Profit = 7 x 40,000 - 280,000 (fixed costs) = Nil
Absorption costing profit higher by the fixed production costs in 10,000 units of inventory
The fixed production costs are = 10,000 x $200,000/50,000 = 10,000 x $4 = $40,000
36.
Life cycle costing is:
A. The profiling of cost over a product’s development, production life and dismantling
period.
B. The profiling of cost and revenues over a product’s production life.
C. The profiling of cost over a product’s production life.
D. The profiling of cost and revenues over a product’s development, production life and
dismantling period.
Advice: The profiling of cost over a product’s development, production life and
dismantling period.
LCC looks at costs only, but over the product’s whole life cycle.

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37.
JJ Co has recently introduced an activity based costing system. It manufactures three products,
details of which are set out below.
L D S
Budgeted annual production (units) 200,000 200,000 100,000
Batch size (units) 200 100 50
Machine set-ups per batch 2 3 5
Purchase orders per batch 3 2 1
Processing time per unit (minutes) 4 5 5
Three cost pools have been identified. Their budgeted costs for the year ending 30 April 20X3
are as follows.
Machine set-up costs $270,000
Purchasing of materials $150,000
Processing $100,000
The budgeted machine set-up cost per unit of product L is nearest to:
A. $30
B. $0.54
C. $0.15
D. $15
Advice: $0.15
Number of batches produced
L 200,000/200 1,000
D 200,000/100 2,000
S 100,000/50 2,000
Number of set-ups required
L 1,000x2 2,000
D 2,000x3 6,000
S 2,000x5 10,000
18,000
Cost per set-up = $270,000/18,000 = $15
Machine set-up cost per batch of L = $15 x 2 = $30
Cost per unit of L = $30/200 = $0.15
$30: is the set-up cost per batch of L.
$15: is the cost per set-up
$054: is found by dividing the total cost by the total production level of 500,000 units

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38.
A business has collected data about a cost, at four different levels of production: when
production was loo units, the cost totalled $1,000; when production was 150 units, the cost
totalled $1,500; when production was 200 units, the cost totalled $1,500 and when production
was 250 units, the cost totalled $2,000.
Which of the following best describes the behaviour of this cost?
A. A fixed cost.
B. A semi-variable (or mixed) cost.
C. A variable cost.
D. A step cost.
Advice: A step cost.
This cost remains fixed within a certain range of activity, and then ‘steps up’ to a higher cost
when the activity level increases beyond this range.
This cost is not fixed, because the cost increases as the activity level increases
This cost is not variable, because the cost does not vary directly with the number of units
produced. This is apparent from the cost being equal at two different levels of production (150
and 200 units).
This cost is not a semi-variable (mixed) cost, which is a cost that contains a fixed element and a
variable element. Given that the cost is equal for two levels of production (150 and 200 units)
this cost could not be made up of a fixed element together with a cost that varies directly with
production.
39.
Which three of the following statements about ABC are true?
A. ABC establishes separate cost pools for support activities
B. ABC reapportions support activity costs.
C. ABC is an appropriate costing system when overheads vary with time spent on
production.
D. ABC recognises the complexity of modern manufacturing by the use of muftiple cost
drivers.
E. ABC is an appropriate costing system when overheads vary with something other than
time spent on production.
Advice: ABC recognises the complexity of modern manufacturing by the use of multiple
cost drivers; ABC establishes separate cost pools for support activities; ABC is an
appropriate costing system when overheads vary with something other than time spent
on production.

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40.
A company has these results in May:
Opening inventory 10 units Material costs $100,000
Sales 4000 units Conversion costs $60,000
Scrapped 5 units
Total 4,015 units Total $160,000
Using back flush accounting, scrapped units were valued at $200.
How many units were in closing inventory?
Advice: 5 units.
Cost per unit is $200/5 = $40
So with total costs of $160,000, production must have been $160,000/$40 = 4,000 units.
Production = sales - opening inventory + closing inventory + scrapped
4,000 = 4,000 – 10 + ? + 5
Thus, the closing inventory is 5 units.
41.
Which three of the following are recognised stages in a product le cycle?
A. Development
B. Improvement
C. Introduction.
D. Decline
E. Marketing
Advice: Development, introduction and decline (the other recognised stages are
research, maturity and abandonment).
Whilst products are likely to be marketed and improved upon, these are not recognised stages
in the life cycle of a product

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42.
JH Co produces three products, the Li, the L2 and the 13. The LI has a TA ratio of 1.4, the 12 a
ratio & 1.8, the 13 a ratio of 1.0. Which of the following statements is/are true?
i. L1 should be produced before L2.
ii. L3 should be produced before L1.
iii. L3 should not be produced at all
iv. Only L3 should be produced.
v. It is impossible to state a preference between the products.
A. Only statement (iv) is true
B. All of the statements are true
C. None of the statements are true
D. Statements (i) and (ii) are true
Advice: None of the statements are true.
The product with the highest TA ratio should be produced first
43.
How is target cost calculated?
A. Desired selling price - desired profit margin.
B. Market price - standard profit margin
C. Market price - desired profit margin.
D. Desired selling price - actual profit margin.
Advice: Market price - desired profit margin.
Target cost means a product cost estimate derived by subtracting a desired profit margin from a
competitive market price.
44.
F Co operates an activity based costing system to attribute its overhead costs to cost objects.
In its budget for the year ending 30 June 20X2, the company expected to place a total of 3,250
purchase orders at a total cost of $97,500. This activity and its related costs were budgeted to
occur at a constant rate throughout the budget year, which is divided into 13 four-week periods.
During control period 10, a total of 267 purchase orders were placed at a cost of $10,146.
What was the under recovery of these costs for control period 10?
A. $2,136.
B. Cannot be determined from the information provided.
C. $34,398.
D. $2,646.

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 Advice: $2,646.
$
Budgeted recovery of costs during control period 10 ($97,500 ÷ 13) 7,500
Actual costs 10,146
Under recovery 2,646
if you selected $34,398: You multiplied the period 10 cost by 13 to get an ‘annual’ cost, and
compared this with the budgeted total cost.
If you selected $2,136: You found a budgeted recovery rate per order ($97,500 ÷ 3,250), found
the standard recovery for the actual number of orders (x 267), and compared this with the actual
cost.
45.
The following data relate to costs, output volume and cost drivers of Heighway Rubbery Co for
June 20X1.
Product P Product Q Product R Total
10. Production and sales 3,000 units 2,000 units 1,500 units
$ per unit $ per unit $ per unit
11. Direct production costs 12 11 8 $70,000
Direct materials 3 6 2 $24,000
Direct labour 15 17 10 $94,000
12. Labour hours per unit 1/2 1 1/3
13. Machine hours per unit 2 1 2
14. Number of production runs 8 2 10 20
15. Number of deliveries to customers 3 2 10 15
16. Number of production orders 30 5 15 50
17. Number of deliveries of materials into 17 3 20 40
store
18. Production overhead costs $
Machining 71,500
Set-up costs 10,500
Materials handling (receiving) 35,000
Packing costs (despatch) 22,500
Engineering 25,500
165,000
Indirect production overheads that are not driven by production volume are:
Item Cost driver
Set-up costs Production runs
Materials handling Deliveries of materials
Packing Deliveries to customers

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Engineering Production orders
There were no opening inventories at the beginning of June.
What would be the full production cost per unit of product R using activity-based costing
and the cost drivers described above, with overheads that are driven by production
volume allocated on a machine hour basis?
Advice: $53.27.
Overhead rates
Machining: $71,500/ 11,000 machine hours = $6.50 per machine hour
Set-up costs: $10,500/20 production runs = $525.00 per run
Materials handling: $35,000/40 materials deliveries = $875.00 per delivery
Packing costs: $22,500/15 deliveries to customers = $1,500.00 per delivery
Engineering: $25,500/50 production orders = $510.00 per order
Product R overhead costs
$
Machinery (3,000 machine hours x $6.50) 19,500
Set-up costs (10 production runs x $525.00) 5,250
Materials handling (20 deliveries x $875.00) 17,500
Packing costs (10 customer deliveries x $1,500.00) 15,000
Engineering (15 production orders x $510.00) 7,650
64,900
Cost per unit of R
$
Direct materials 8.00
Direct labour 2.00
Overhead ($64,900 ÷ 1,500 units of R) 43.27
53.27

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46.
LEFM Co operates a throughput accounting system. One of its products, product R, is sold for
$12.50. It has a unit material cost of $2.60 and unit conversion costs of $6.00. Each unit of
product R spends 4.95 minutes on the bottleneck resource.
What is the return per factory hour for product R to the nearest $?
A. $120
B. $2
C. $9.90
D. $47
Advice: $120.
Throughput contribution or return per unit $(12.50 - 2.60) = $9.90
Return per minute = $9.90/4.95 = $2
Return per hour = $2 x 60 = $120
If you answered $9.90: It is the return per unit.
If you answered $2: It is the return per minute.
If you answered $47: You incorrectly included conversion costs in the calculation of the return.
47.
Which of the following are likely to be consequences of setting a target price for a new
product or service, at the product design stage?
A. Greater standardisation of component elements in the new product or service.
B. Reducing the quality of the product or service in order to reduce its cost.
C. Ensuring the profitability of the product or service over its life cycle.
D. Eliminating features of the product or service that do not add value.
E. Reducing the number of component elements in the new product or service.
Advice: Reducing the number of component elements on the new product or service
Greater standardisation of component elements in the new product or service and
Eliminating features of the product or service that do not add value.
Aspects of target pricing are likely to be greater use of standard components, fewer component
elements and the removal of features in the product or service that do not add value.
The aim should not be to reduce quality, because the target price is set for a product or service
that will provide specific value to the customer. Compromising on quality will reduce the added
value to the customer. Target pricing is not concerned with costing over the life cycle of the
product.

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48.
Which two of the following statements are not true in the context of a Just in Time (JIT)
inventory system?
A. It inevitably increases the need for safety inventories.
B. It works best if supplies are obtained from a number of different suppliers.
C. It is dependent upon a close and mutually beneficial working relationship with suppliers.
D. It can result in much reduced inventory holding costs.
E. It requires suppliers to operate sound quality control procedures.
Advice: It inevitably increases the need for safety inventories and, It works best if
supplies are obtained from a number of different suppliers
The aim of JIT is to increase efficiency of inventory control systems in order to reduce company
costs, principally by minimising inventory levels and thus stockholding costs
This is achieved by using local, reliable suppliers who can deliver goods of the right quality in
the right quantity at the right time; The burden of quality control is generally passed back to the
supplier to cut costs of the company.
JIT works best when a tied supplier relationship is formed, where the orders form a large part, if
not the entirety, of the supplieras business. This precludes the use of many different suppliers
In a JIT system, steps will also be taken to improve customer relations and communications, so
that demand can be more accurately determined This means that re-order levels, and thus
safety inventories, can be minimised without necessarily increasing the risks (and thus costs) of
inventory outs
49.
Which of the following statements are not correct?
A. Activity-based costs can be used to identify relevant costs for decision-making.
B. Activity-based costs provide an approximation of long-run variable unit costs.
C. Activity-based costing is a form of absorption costing.
D. Activity-based costing ¡s an alternative to traditional volume-based costing models.
E. Activity-based costing cannot be used to cost services.
Advice: Activity-based costs can be used to identify relevant costs for decision-making;
Activity-based costing cannot be used to cost services.
ABC is an alternative to traditional volume-based costing models, where production overhead is
absorbed in the basis of the volume of direct labour hours or machine hours worked.
However, it is still a form of absorption costing, because production overheads are absorbed
into product costs. ABC identifies costs with support activities, and the overhead costs of a
product or service could reflect the long-run variable cost of that product or service. ABC can be
used for costing services as well as products, although in practice ¡t has been used most by
manufacturing organisations. Although ABC looks at the costs of activities, it is not a costing
method for identifying relevant costs for decision-making.

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50.
What is the throughput accounting ratio of this product?
$ per hour $ per hour
Selling price 50
Production cost
Material 10
Direct labour 15
Other variable costs 4
Fixed conversion costs 6
Total cost 35
Profit 15
A. 0.3
B. 0.625
C. 1.6
D. 3.5
Advice: 1.6.
The throughput accounting ratio of the product is (sales - material cost) per time period/(labour
+ overhead) per time period (50 - 10)/(15 + 4 + 6) 40/25 1.6
51.
A company absorbs fixed production overhead using a direct labour hour rate.
Which of the following factors would not contribute to an increase in the budgeted
overhead absorption rate?
A. A budgeted improvement in direct labour productivity.
B. An increase in the budgeted hourly rate of pay for direct labour
C. A planned increase in the level of mechanisation,
D. A reduction in budgeted output.
Advice: An increase in the budgeted hourly rate of pay for direct labour.
Increased mechanisation may increase overhead costs, for example extra depreciation may be
incurred. The number of direct labour hours is also likely to fall. Both factors would lead to an
increase in the overhead absorption rate.
Improved productivity would lead to a reduction in direct labour hours for a given output. The
overhead would be spread over fewer hours and therefore the absorption rate would increase.

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52.
Which of the following would normally be treated as a direct labour cost?
A. Overtime premiums paid - ¡f the overtime is not worked at the specific request of a
customer.
B. The basic pay of indirect workers (e.g. supervisors).
C. Bonuses paid to staff.
D. The basic pay of direct workers (e.g. production line staff).
Advice: The basic pay of direct workers (e.g production line staff).
Only if the overtime is worked at the customer’s request is ¡t a direct cost attributable to that job.
The cost of indirect workers will usually be indirect labour costs (i.e. overheads) as it will not be
possible to trace them in full to individual cost units.
Bonuses will usually be indirect labour costs (i.e. overheads) as it will not be possible to trace
them in full to individual cost units.

DECISION MAKING TECHNIQUES

1.
Which of the following are relevant costs when considering undertaking a new project?
1. Incremental costs
2. Committed costs
3. Fixed overheads allocated to the project
A. 1 and 2.
B. 1 only.
C. 1 and 3.
D. 2 and 3.
Advice: Incremental costs.
Committed costs are not relevant to decision-making as they have to be incurred whatever the
decision is. Absorption of existing fixed costs, similarly, are costs which will be incurred in any
case, only if they are new fixed costs would they be taken into account.

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2.
Chemco Co generates a 25% contribution on weekly chemical sales of $25,000. The managing
director proposes to run a special offer on a chemical called Zacco which previously was not
sold by Chemco Co. Chemco Co purchases Zacco from a manufacturer at $3.50 per unit. The
managing director plans to offer Zacco at $2.40 per unit in an effort to generate increased sales
and publicity. Weekly chemical sales excluding Zacco are expected to increase 8% as a result
of the promotion and Zacco sales are expected to be 400 units per week.
The effect of the Zacco promotion on Chemco Co’s profitability is to increase weekly
profit by?
Advice: $60.
$
Current contribution 6,250
New contribution
Zacco sales 400x 1.1 loss (440)
Order sales 6,250 x 1.08 6,750
6,310
Therefore profit is increased by $6,310 - $6,250 = $60.
3.
Which two pieces of information are required when deciding, purely on financial
grounds, whether or not to process a joint product further?
A. The value of the common process costs.
B. The final sales value of the joint product.
C. The further processing cost of the joint product.
D. The method of apportioning the common costs between the joint products.
Advice: The final sales value of the joint product; The further processing cost of the joint
product.
When deciding whether or not to process further a joint product, the final sales value of the joint
product is deducted from the sum of the further processing cost of the joint product and the
opportunity cost of further processing (ie the sales value of the joint product at the separation
point).
4.
Clamps Co have 150 litres of yellow paint in inventory from a previous job. This paint is used
regularly by Clamps Co. The original cost of the paint was $10 per litre. Although identical paint
is currently being sold by the same suppliers at $499 per litre, local painters were only prepared
to pay $340 for the entire inventory. The paint can be used on a new job that Clamps Co is
about to start.
What is the relevant cost of the paint (to the nearest $) for the purposes of this new job?
Advice: $749.
The current replacement cost is $4.99/litre. The paint is used regularly by the company and so
the volume of paint used will need to be replaced.

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5.
Bollinger Co is considering the production of a limited number of B One of the raw materials
needed to produce a B is also regularly used in the production of another product, the Y
Details of this material are given below.
$ per kg
Original cost 12
Resale value 14
Current purchase price 15
There are currently 500 kg of the material in inventory, and 380 kg are needed for the
production of Bs
What is the total relevant cost of the material for the costing of the B production run?
Advice: $5.700.
Quantity x replacement cost 380 x $15
NB this is only true so long as the replacement cost is greater than the resale value.
The original cost is irrelevant as it is sunk. The resale value is also irrelevant, as the material is
needed for the production of Y; it would not make economic sense to sell the materials for $14
per kg and replace them at $15 per kg. Only if there were inventories of the material that were
not going to be replaced would the resale value be relevant.
6.
A company buys and processes a chemical at a cost of $40,000 to produce 1,000kg of X and
1,000kg of Z. X can be sold at $30 per kg or be treated at a cost of $2,000 to make 500kg of A
and 500kg of B. Untreated A can be sold at $35 per kg and untreated B at $30 per kg. If treated,
which costs $3,000 for A and $200 for B, improved A sells at $40 per kg and improved B at
$3050 per kg. The Z can be sold at $20 per kg or be turned into Z* at a cost of $1,000 and sold
at $22 per kg.
Joint costs are allocated by relative final sales value. If the company wants to maximize its
profits, which products should it sell?
A. X and Z*
B. X only
C. Treated A, treated B and Z*
D. A, treated B and Z*
Advice: A, treated B and Z.
A process is worth doing, irrespective of how joint costs are allocated, if the incremental cost
incurred is less than the increase in sales revenue.
So make X and Z?
Incremental cost $40,000
Incremental revenue $30,000 + $20,000 = $50,000
this is worthwhile
Make A and B?
Incremental cost $2,000

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 Incremental revenue $17,500 + $15,000 - $30,000 (can’t sell X) = $2,500
this is worthwhile
Treat A?
Incremental cost $3,000
Incremental revenue $20,000 - $17,500 = $2,500
this is NOT worthwhile
Treat B?
Incremental cost $200
Incremental revenue $15,250 - $15,000 = $250
this is worthwhile
Treat Z?
Incremental cost $1,000
Incremental revenue $22,000 - $20,000 = $2,000
this is worthwhile
7.
Water Supply Co is considering accepting a one-year contract which will require 5 skilled
employees. The 5 skilled employees could be recruited on a one-year contract at a cost of
$45000 per employee. The employees would be supervised by an existing manager who earns
$65,000 per annum. It is expected that supervision of the contract would take 12% of the
manager’s time.
Instead of recruiting new employees the company could retrain live existing employees who
currently earn $25,000 each per year. The training would cost $35,000 in total. If these
employees were used they would need to be replaced at a total cost of $110,000.
What is the relevant labour cost of the contract?
Advice: $145,000.
The cost of recruiting live new employees 5 x $45,000 = $225.000.
The cost of retraining $(35,000 + 110,000) = $145,000.
The relevant cost is therefore $145,000, the lower of the two options.

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8.
Litton Co has been asked to tender for a one-off contract to build a machine. The costs involved
are detailed below.
Material A is in inventory. It cost $5,000 originally, and it is used continually by the company.
The current purchase price is $6,500.
Material B is in inventory. This was left over from another job, and is unlikely to be used
otherwise. It originally cost $2,800; it can currently be bought for $3,000, and could be sold, net
of delivery costs, for $2,600.
Skilled labour is in short supply and would have to be diverted from other production, with an
estimated loss of contribution of $7,300. The direct cost of the 500 hours skilled labour needed
for the contract would be $4,900.
Unskilled labour is plentiful, and the 300 hours needed could be found without affecting other
production due to spare capacity. Unskilled labour costs are $4 per hour and all workers are
paid for a 40 hour week.
The overhead absorption rate is $2 per labour hour. No additional overheads would be incurred
as a result of accepting this contract.
What is the minimum price that Linon Co should quote for this contract?
Advice: $21,300
Relevant costs $
Material A: current purchase price (it the contract goes ahead, more will need 6,500
to be bought for other production)
Material B: sales proceeds foregone 2,600
Skilled labour toss of contribution 7,300
Skilled labour: variable cost 4,900
Minimum price 21,300
Unskilled labour not relevant as this cost will be unaffected by the contract the workers are paid
anyway.
Overheads absorbed not relevant as there is no incremental cost resulting from the acceptance
of the contract.
9.
An investment opportunity has four possible outcomes:
Profit/(Ioss) Probability
$(10,000) 0.2
$13,000 0.1
$9.000 0.6
$8,000 0.1
Calculate the expected value of profit.
Advice: $5,500.
Profit/(loss) Probability EV
$(10,000) 0.2 $(-2,000)

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 $13,000 0.1 $1,300
$9000 0.6 $5,400
$8,000 0.1 $800
$5,500
10.
The shadow price of a scarce resource is $4.80. Which of the following statements is
correct?
A. The organisation should be prepared to pay $4.80 for any extra available units of the
scarce resource.
B. Contribution would decrease by $4.80 if one extra unit of the scarce resource was made
available.
C. The change ¡n contribution of $480 per extra unit of the scarce resource made available
is only valid if the organisation is prepared to pay in excess of the normal variable cost
for the scarce resource.
D. Contribution would increase by S480 if one extra unit of the scarce resource was made
available.
Advice: Contribution would increase by S480 if one extra unit of the scarce resource was
made available.
The shadow price shows by how much contribution would increase if an extra unit of the scarce
resource was made available or by how much it would decrease if one unit less of the scarce
resource was available.
11.
The cost of producing one unit of product Tidser is:
Direct materials $4
Direct labour $6
Variable overheads $3
Fixed overheads $2
$15
The Tidser is to be priced using the marginal cost plus method.
What would the price be if 190% were added to cost on this basis?
Advice: $37.70.
$
Direct materials 4
Direct labour 6
Variable overheads 3
Marginal cost 13
Profit = $13x190% = $24.70
Marginal cost plus price = marginal cost + profit = $13 + $24.70 = $37.70

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12.

13.
A business intends to enter into a contract, which it estimates will cost a total of $800. lithe
business charges a markup of 20%
How much should the contract be priced at?
Advice: $960.
Cost of job (100%) = $800
Profit = $160 (20% x $800)
Price = $960
14.
Which of the following factors are relevant to the decision to process a joint product after
the split-off point?
A. The cost of the joint product at the split-off point.
B. The cost of processing the joint product further.
C. The sales value of the joint product at the split-off point.
D. The sales value of the joint product after further processing.
Advice: The cost of processing the joint product further; The sales value of the joint
product at the split-off point; The sales value of the joint product after further
processing.
The cost of the joint product at the split-off point is merely an arbitrary apportionment of the total
common process costs which would be incurred anyway. These costs would not be affected by
the decision to process further and are therefore not relevant.
15.
Alan Castle is a sole practitioner. He has recently been asked to provide one day’s training for a
local charity. He has provisionally agreed the date and accepted their daily rate of $1,500. On
checking his diary, however, Alan discovers that he has planned to meet with a client, Ms Chan,
on the provisional date. At the meeting Alan is due to collect $2,000 outstanding from the most
recent audit of Ms Chan’s company. W Alan does agree to accept the date of the training
course; he will have to cancel the meeting with Ms Chan.
What type of cost does the $2,000 represent?
A. A relevant cost.
B. An avoidable cost.
C. A non-relevant cost.
D. An opportunity cost.
Advice: A non-relevant cost.
The $2,000 is a non-relevant cost. The $2,000 which is due to be collected at the meeting is not
material in Alan’s decision to cancel his meeting, as the $2,000 will still be collectable.
The $2,000 is not an opportunity cost because it is not the cost Alan will forgo for not being
present at the preplanned meeting.

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 The $2,000 is not an avoidable cost. The $2,000 is income that is outstanding.
The $2,000 is not relevant to any decision taken to cancel the meeting.
16.
If a company has to subcontract work to make up a shortfall in its own in-house
capabilities, how will its total costs be minimised?
A. If those units bought from the subcontractor have the highest extra variable cost per unit
of scarce resource saved.
B. If those units bought from the subcontractor have the lowest extra variable cost per unit
of scarce resource saved
C. If those units bought from the subcontractor are the cheapest to buy
D. If those units produced in house are the most expensive to produce.
Advice: If those units bought from the subcontractor have the lowest extra variable cost
per unit of scarce resource saved.
For example, if machine hours are a scarce resource, a company should minimise the extra
variable cost of subcontracting per machine hour saved.
17.
In order to utilise some spare capacity, La La Co is preparing a quotation for a special order
which will require 90 square metres of material P.
The company only has 60 square metres of the material in inventory (which originally cost $30
per square metre). The material is used in the production of the company’s main
product, the Super Desk Each unit of the Super Desk uses 3 square metres of P and, based on
an input value of $30 per square metre of P, each unit of Super Desk yields a contribution of
S54 The resale value of P is $29 per square metre, while its present replacement price is $37
per square metre Material P is readily available
What is the relevant cost of the 90 square metres of material P to be included in the
quotation?
Advice: $3,330.
The relevant cost of material P is its current replacement cost (because it is used frequently by
La La Co) = 90 x $37 = $3,330
18.
Roger is considering undertaking a contract which will yield income of $15,000 over a 15 month
period.
To carry out the contract he will have to use 1,000 kg of material. 800 kg is already held in
inventory and cost $15 per kg. The current replacement cost is $20. If not used for the contract
the material would be sold to Moore for $2,000 in total.
Roger could utilise his old machine for the contract if conversion costs of $5,000 are
undertaken. Alternatively he could scrap his old machine and receive $3,000 and hire another
one at a cost of $500 per month.
Labour currently has spare capacity and variable overheads are estimated to be $1 per hour.
2,000 hours are believed to be required for the period of the contract.
What is the net relevant cashflow for the contract? (Ignore the time value of money)
Advice: $2,500.

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 $ $
Revenue 15,000
Material: 200 kg @ $20 (4,000)
Scrap proceeds foregone (2,000)
Machine: Use old + convert 5,000
Scrap old + hire (3,000 - 7,500) 4,500
Best option (4,500)
Labour: Variable overheads (2,000 x $1) (2000)
2,500

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19. Only relevant costs need to be considered in decision-making
situations.
Which of the following are relevant costs?
1. Differential costs
2. Future costs
3. Common costs
4. Unavoidable costs
A. 1, 2 and 3 only.
B. 1, 2, 3 and 4.
C. 2 and 4 only.
D. 1 and 2 only.
Advice: 1 and 2 only.
Relevant costs are future, incremental cash flows.
Unavoidable costs and common costs will be incurred regardless of the decision taken.

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20.
The following data relate to material held in inventory and needed immediately for a contract:
$
Replacement cost 4,000
Realisable value 3,900
Storage costs for this quantity for one month 200
There will be no alternative use for this material until one month later when the replacement cost
will be $4,300.
What cost should be included for the material when assessing the viability of the
contract?
Advice: $4,000.
Since we need the material in one month then:
If we do the contract:
$
(a) Replace now 4,000
One month storage 200
4,200
or (b) Buy in one month 4,300
The better option is (a)
If we do not do the contract:
$
(a) Realise value 3,900
Purchase in one month (4,300)
(400)
or (b) Store (200)
The better option is (b)
Therefore the storage costs will be incurred whether we do the contract or not and so the
relevant cost becomes $4,000, not $4,200.
21.
In the context of decision making, only relevant costs should be considered
Which of the following statements about relevant costs are true?
A. Relevant costs are past costs.
B. Relevant costs are cash flows.
C. Relevant costs are opportunity costs.
D. Relevant costs are incremental costs.
Advice: Relevant costs are cash flows; Relevant costs are incremental costs; Relevant
costs are opportunity costs.

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 Relevant costs are future, incremental cash flows.
Opportunity costs are also relevant costs.
22.
Wasps Co regularly uses material K and currently has in inventory 1,500 litres for which it paid
$13,500 three weeks ago
If this were to be sold as raw material, it could be sold today for $6.00 per litre.
The management accountant knows that the material can be bought on the open market for
$13.3 per litre, but it must be bought in batches of 3,000 litres.
What is the relevant cost of 1,300 litres of material K?
Advice: $17,290.
The relevant cost 1,300 x $13.3 = $17,290
The material is in regular use, so any that is bought in excess of current requirements will be
used elsewhere in the company. Therefore the litres required and the current market price is the
only variables that need to be considered when calculating the relevant cost of material K.

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