19 A Fixed costs = 500.

Variable costs per unit are constant until output is 30, then
additional costs per unit are higher.
The fixed costs are 500 because this is the single point at which the line crosses the
y-axis (the cost incurred at zero activity). The gradient of the total cost line becomes
steeper when output exceeds 30 units, which indicates a higher cost per unit for output
above 30 units.
20 C Management accounts are usually prepared for internal use by an organisation's
managers.
The management accounts provide information to managers within a business to help
them to manage the business by making planning and control decisions. In contrast,
the financial accounts are usually prepared for stakeholders external to the
organisation.
The use of cost accounting systems is not restricted to manufacturing operations. Cost
accounting information is also used in service industries, public sector bodies and not-
for-profit organisations.
The format of management accounts is not regulated by accounting standards. No
strict rules govern the way the management accounts are prepared or presented: the
format is entirely at managers' discretion.
The financial accounting and cost accounting records are not prepared from different
sets of basic data. Both systems record the same basic data for income and
expenditure. However, each system has a different purpose and each therefore
analyses the data in a different way.
21 D Cost per tonne-kilometre
The most useful cost unit from those described is a tonne-kilometre. This is a
composite cost unit which takes account of both the weight carried and the distance
travelled.
The cost per tonne carried is not as useful because it is affected by distance travelled.
For example, it would not be possible to compare for control purposes the cost per
tonne transported on a journey of 500 kilometres with the cost per tonne transported
for 10 kilometres.
Similarly, the cost per kilometre travelled would be affected by the weight transported.
It would not be as useful as the cost per tonne-kilometre for control by comparison.
The cost per driver hour would not be as useful as a cost per tonne-kilometre because
it is distorted both by the weight carried and the distance travelled.
22 D Items (2) and (3) only
It would be appropriate to use the cost per invoice processed and the cost per supplier
account for control purposes.
Postage cost, item (1), is an expense of the department but not a suitable unit for cost
analysis and control.
23 C The line with the constant upward slope represents total costs; D represents fixed costs
The line with the constant upwards slope represents the total of fixed costs and
variable costs, ie, total costs.
The point where the total costs line cuts the y-axis, D, represents the cost incurred at
zero activity, ie, the fixed costs.

ICAEW 2019 Chapter 1: The fundamentals of costing 179

 24 D Variable costs per unit are constant until output reaches Q after which further
production incurs higher variable costs per unit
The line representing fixed costs remains horizontal for all levels of output, therefore
the first two statements are incorrect.
The increase in the gradient of the total cost line at Q indicates that each unit, from that
level of output onwards only, incurs a higher variable cost. Therefore the third
statement is incorrect.
25 B,D,I
Labour costs will vary directly in proportion to the number of hours worked and
therefore are a true variable cost
The factory rent will not vary even if output levels change and is therefore a fixed cost.
Salary plus profit related pay will contain a fixed element, the basic salary, plus an
element that will vary depending upon the profits of the enterprise. Therefore this will
be a semi-variable cost.

26 B, D
A, C and E are all elements of cost.
27 D, E
A, B and C are all cost objects.
28 C Intimidation
Threat of disciplinary proceedings or dismissal over a disagreement about the
application of accounting principle or the way in which financial information is to be
reported is an example of an intimidation threat.
SAMPLE PAPER
29 B A framework-based approach
The ICAEW Code of Ethics is a framework or ethics-based approach, which is the
opposite of the compliance, rule or tick-box approach seen in other jurisdictions such
as the US.

180 Management Information: Question Bank ICAEW 2019

Chapter 2: Calculating unit costs (Part 1)
1 A The basic pay of production line staff
If overtime is worked at the specific request of a customer then it is treated as a direct
labour cost attributable to that job. However the premium paid for general overtime
not required for a specific job is generally treated as an indirect cost.
The cost of indirect workers (production line supervisors) will usually be indirect labour
costs (ie, overheads) as it will not be possible to trace them in full to individual cost
units.
Idle time payments are indirect labour costs because it is not possible to trace them to
specific cost units.
2 A Factory overheads
Overtime premium payments are always classed as factory overheads unless the
overtime is worked at the specific request of a customer (in order to complete the
specific job more quickly) or worked regularly by a production department in the
normal course of operations.
3 D Factory overhead
Idle time is usually treated as an overhead because it cannot be identified with a
specific cost unit. In this case the cost is incurred within the production department and
is therefore a factory overhead.
4 C £70
The indirect labour costs are made up of idle time costs and overtime premiums.
Idle time costs = 10 hours  £5 per hour
= £50
Overtime premium = ½  £5
= £2.50 per hour
Overtime premium for 8 hours = £2.50  8 hours
= £20
Therefore indirect labour costs = £50 + £20
= £70
If you selected £20 you calculated the overtime premium correctly but did not add on
the cost of idle time payments. Wages paid for idle time cannot be traced to a specific
cost unit and are therefore a part of indirect labour cost.
If you selected £50 you classified the idle time payments correctly but did not add on
the cost of the overtime premium. If the overtime had been worked for a specific cost
unit then the premium could have been a direct labour cost of that unit, but this is not
the case here.
If you selected £110 you included all of the overtime cost as an indirect labour cost.
However, the basic pay for overtime hours can be traced to specific cost units and is
therefore a direct labour cost.

ICAEW 2019 Chapter 2: Calculating unit costs (Part 1) 181

 5 B (2) and (3) only
Labels can be identified with a specific cost unit and form a part of the product.
Therefore, the cost of food labels is a direct cost.
Maintenance and cleaning wages (2) and (3) are indirect costs because they cannot be
specifically identified with a specific cost unit.
6 D Direct expenses
The cost of the tools is a direct cost of the job because it can be specifically identified
with the job.
7 C (1), (2) and (4) only
Statement (1) is correct. Direct costs are specific and traceable to the relevant product,
service or department.
Statement (2) is correct. For example a departmental manager's salary is a direct cost
of the department but it is an indirect cost of the individual cost units passing through
the department.
Statement (3) is incorrect. This describes an indirect cost which much be apportioned
between several cost objects because it cannot be specifically identified with any
single one.
Statement (4) is correct. It is likely that if activity changes so will the expenditure on
direct costs, as direct costs are usually costs such as materials, labour and other direct
expenses.
8 B Indirect costs are alternatively called overheads
Total direct costs are not always greater than total indirect costs. The relative size of
direct and indirect costs varies according to the type of output, the industry, the
technology and so on. For example, in highly automated service industries the direct
material and direct labour costs are likely to be small relative to the indirect costs.
The fixed costs per unit are not the same at all levels of production. The total fixed cost
will remain the same but the fixed cost per unit will reduce as output increases.
A direct cost will often be a variable cost, but it will not always be a variable cost. For
example, the cost of hiring a special machine for a job is a direct cost of that job but it
is also a fixed cost which remains the same irrespective of the level of output.
9 B,D,I
The repair person's wages can be analysed between specific jobs and accordingly
would usually be classified as a direct cost. The cost is fixed because it does not vary
with the level of activity.
The cost of electrical components can be traced as a direct cost of each job and the
cost will increase as the level of activity increases.
The rent of the repair shop is an indirect cost because it cannot be traced to a specific
repair job. It is a fixed cost because it does not vary with the level of activity.
10 A Direct expense
The royalty cost can be traced in full to units of the company's product. Therefore it is a
direct expense.

182 Management Information: Question Bank ICAEW 2019

 11 A £220,000
MATERIALS CONTROL ACCOUNT
£ £
Opening 13,000 Returns 25,000
inventories
Deliveries 250,000 Issue to production 220,000
Closing inventory 18,000
263,000 263,000

12 B First in, First out (FIFO)

C Last in, First out (LIFO)
E Standard cost
First in, Last out (FILO) and future anticipated cost are not recognised methods of
valuing inventory.
13 B £68,670
The FIFO method uses the cost of the older batches first.
Cost of units sold on 24 February £
750 units @ £80 60,000
102 units @ £85 8,670
852 units 68,670

If you answered £68,160 you valued all of the units sold at the opening inventory cost
of £80 per unit. However there are only 750 units held at this cost. The cost of the
remainder of the units sold must be taken from the next batch received.
The option of £69,960 uses the LIFO basis rather than the required FIFO basis.
The option of £93,720 uses the sales revenue, not the cost of the units sold.
14 B £23,760
The LIFO method uses the cost of the most recent batches first.
Cost of units sold on 24 February £
90 product A @ £90 8,100
180 product A @ £85 15,300
582 product A @ £80 46,560
852 69,960
Sales revenue = 852 units  £110 93,720
Less cost of units sold 69,960
Gross profit 23,760

The option of £17,040 values all the units sold at the cost of the latest batch received.
However, there are only 90 units at this cost. The remaining units must be valued at the
cost of earlier batches received.
If you selected the option of £69,960 you calculated the correct cost of goods sold, but
the question asks for the gross profit earned.
The option of £93,720 is the sales revenue of the units sold, not the gross profit
earned.

ICAEW 2019 Chapter 2: Calculating unit costs (Part 1) 183

 15 A £33,696
Weighted average cost per unit: £
330 units @ £75 24,750
180 units @ £80 14,400
90 units @ £85 7,650
600 46,800

Weighted average cost per unit = £46,800/600

= £78.00
Cost of units sold on 24 February = £78.00  432 units
= £33,696
The option of £34,560 uses a simple average cost of the three available batches, rather
than a weighted average cost.
If you answered £35,280 you based your weighted average on the cost of two batches
received in February. You did not take account of the unit cost of the opening
inventory.
The option of £38,880 is the sales value of the units sold, not the weighted average
cost.
16 B £590.85
£
60 pixies received on day 3 of week 15 @ £7.96 477.60
15 pixies received in week 14 @ £7.55 113.25
75 590.85

If you selected £566.25 you ignored the receipts on day 3 of week 15 and based your
calculations on the opening inventory. However the LIFO method uses the cost of the
latest batch first.
The option of £593.25 would have been the correct cost of pixies issued if the FIFO
method was used.
If you selected £597.00 you valued all of the pixies issued at the price of the latest
batch received. However, there are only 60 units in this batch and the remaining units
must be taken from the latest batch in the opening inventory.
17 D £3,605
Components issued on day 4 = 90 from week 10 receipts
Closing inventory week 12:
£
Remaining 210 components from week 10 @ £6.50 1,365
200 components from week 11 @ £6.25 1,250
150 components from week 12 @ £6.60 990
560 3,605

If you answered £585 you selected the cost of the issues rather than the value of the
closing inventory.
The answers of £594 and £3,596 are the cost of the issues and the closing inventory
respectively, using the LIFO valuation method.
18 D Student D
The LIFO method charges the latest prices paid to cost of sales. In a period of falling
prices the latest prices will be the lowest prices. Therefore the student using the LIFO
method would record the lowest cost of sales and the highest gross profit.

184 Management Information: Question Bank ICAEW 2019

 19 D (1), (2), (3) and (4)
With FIFO, the oldest prices are charged first to cost of sales and inventory is valued at
the latest prices paid, which will be close to replacement cost.
With LIFO, the most recent prices are charged first to cost of sales, therefore
inventories are issued at a price which is close to the current market value.
20 A Higher cost of sales and lower inventory value
The LIFO method charges the latest prices paid to cost of sales. In a period of rising
prices the cost of sales will be higher than with FIFO. The remaining items in inventory
will be valued at the older, lower prices.
Workings for questions 21 and 22

Units £/unit Value FIFO Units £/unit Value LIFO

£ £
Purchase 1/1 4,000 2.50 10,000 4,000 2.50 10,000
31/1 1,000 2.00 2,000 1,000 2.00 2,000
5,000 12,000 5,000 12,000
Sales 15/2 (3,000) 2.50 (7,500) (1,000) 2.00 (2,000)
(2,000) 2.50 (5,000)
2,000 4,500 2,000 5,000
Purchase 28/2 1,500 2.50 3,750 1,500 2.50 3,750
3,500 8,250 3,500 8,750
Sales 14/3 (500) 2.50 (1,250) (500) 2.50 (1,250)
3,000 7,000 3,000 7,500

21 C £7,000
If you selected the wrong option then check your working carefully against the above
table.
22 C £7,500
If you selected the wrong option then check your working carefully against the above
table.
23 C Each time a purchase is made
Each time a purchase is made this is likely to change the average price of the items
held in inventory. If it is required to keep prices up to date, the average price must be
re-calculated each time a purchase is made at a different price.
Each time an issue is made is incorrect because the average price of remaining
inventory items is not altered when an issue is made at the average price.
Re-calculating the average price at the end of each accounting period would not keep
prices up to date.
An inventory count is verification of physical quantities and does not require the re-
calculation of average prices.

ICAEW 2019 Chapter 2: Calculating unit costs (Part 1) 185

 24 B £1,067
Total inventory
Date Received Issued Balance value Unit cost
£ £
1 June 100 500 5.00
3 June 300 1,440 4.80
400 1,940 4.85*
5 June 220 180 (1,067) 4.85
873 4.85
12 June 170 884 5.20
350 1,757 5.02*
24 June 300 (1,506) 5.02
Closing inventory 50 251 5.02

* A new weighted average price is calculated every time there are receipts into
inventory.
From the above records, it can be seen that the cost of material issued on 5 June was
£1,067.
If you selected £1,056 you used a unit rate of £4.80, ie, the price of the latest goods
received, rather than the average price of £4.85.
If you selected £1,078 you used a simple average price of £4.90, rather than a
weighted average price.
If you selected £1,100 you used a unit rate of £5, ie, the price of the oldest items in
inventory.
25 C £251
From the table in solution 25, the closing inventory value is £251.
If you selected £248 you used a periodic weighted average cost of all inventory at the
month end, instead of recalculating the average every time there are receipts into
inventory.
If you selected £250 you calculated a simple average of all three available prices.
£260 would be the correct solution if the FIFO method of inventory valuation was used.
26 C FIFO = £840
£ £
Sales value £3  800 2,400
Less cost of sales:
400  £1.80 720
400  £2.10 840
(1,560)
Gross profit 840

If you selected £780 you have used a LIFO calculation.

If you selected £960 you priced all units at the first price of £1.80 for FIFO. However,
you must deal with the separate batches of units, taking account of how many were
received at each price.
£1,560 is the correct figure for cost of sales, but the question asked for the gross profit.

186 Management Information: Question Bank ICAEW 2019

 27 C LIFO = £780
£ £
Sales value £3  800 2,400
Less cost of sales:
600  £2.10 1,260
200  £1.80 360
(1,620)
Gross profit 780

If you selected £840 you have used a FIFO calculation.

If you selected £720 you priced all units at the latest price of £2.10 for LIFO. However,
you must deal with the separate batches of units, taking account of how many were
received at each price.

£1,620 is the correct figure for cost of sales, but the question asked for the gross profit.
28 A £3,150
Units Value
£
Opening inventory 600 3,600
Week 6 400 3,200
Week 8 100 900
1,100 7,700

Periodic weighted average price = £7,700/1,100 = £7 per unit

Closing inventory = 1,100 – (350 + 300)
= 450 units
Value of closing inventory = 450 units  £7
= £3,150
If you selected £3,431 you used the cumulative weighted average method whereby a
new average cost is calculated each time a batch is received into inventory.
If you selected £3,450 you calculated a simple average of the three unit costs available.
However, the unit cost calculation must take account of how many units were
purchased at each price.
If you selected £3,690 you excluded the value of the opening inventory from your
average cost calculations.

ICAEW 2019 Chapter 2: Calculating unit costs (Part 1) 187

188 Management Information: Question Bank ICAEW 2019