Management Accounting, 1st edition, by Catherine Gowthorpe, Chapter 6
Quiz
Which word completes the following sentence? The graph below represents _______ costs.
semi-variable
total
variable
fixed
Which word completes the following sentence? The graph below represents ________ costs.
marginal
fixed
semi-variable
variable
Which word completes the following sentence? The graph below represents ________ costs.
fixed
variable
semi-variable
marginal
Ruddick & Co. rewards its tele-sales staff in two ways: they are paid a low basic rate of pay, plus a commission of 2% of the value of sales that they make.
Which one of the following graphs best represents this cost?
Reddy Wendover is obliged under the terms of a contractual arrangement to insure shipments of valuable goods to an overseas customer. The customer orders varying amounts of goods – for example, recent orders have been for 153, 226, 504 and 81 items.
The costs of insurance are €300 for 100 items, €600 for any shipment of between 101 and 200 items, €900 for any shipment of 201 to 300 items and so on.
Which one of the following graphs best represents this cost?
Bracewell Animations produces animated advertising films. The list below shows some of the costs that it incurs:
A. Rental of studio space B. Depreciation of photographic equipment C. Salaries of animation experts
Which of the costs can be regarded as variable in nature?
All of them
None of them
A and B only
A and C only
Which one of the following statements about cost behaviour is correct?
In some types of business there are few, if any, variable costs.
A semi-variable cost is mostly variable in nature.
Labour is always a variable cost.
Fixed costs never vary, whatever the level of output.
Which one of the following statements is correct?
In economics, a marginal cost is:
total costs divided by total items produced.
the cost of producing one additional item.
the amount of profit that can be made by incurring the cost of one additional item.
fixed costs divided by target profit.
Marginal costing is useful for which important management accounting function?
Control
Planning
Budgeting
Decision-making
Which of the following statements about marginal costing are correct?
Marginal costing:
A. Provides a sounder basis for decision-making than absorption costing. B. Can be used only in businesses that incur variable costs.
B only
A only
Both of them
Neither of them
Which one of the following descriptions of contribution is correct?
Contribution =
Revenue – Fixed costs
Revenue – Total costs
Revenue – Variable costs
Revenue – Semi-variable costs
Which of the following statements about contribution are correct?
A. If contribution is a positive figure it contributes, first, to covering fixed costs, and second, to profit. B. In order to calculate contribution it is necessary first to split costs into fixed and variable.
Both of them
A only
B only
Neither of them
Bhihar Fabrications produces the ZB41, which has the following cost structure:
€ per unit
Direct materials
15.00
Direct labour
12.00
Factory production overhead is recovered on the basis of machine hours. Each ZB41 requires an input of 1.5 machine hours. The recovery rate per hour is €11.50.
The selling price of the ZB41 is €52.50 per unit.
What is the contribution per unit of ZB41?
€27.00
€25.50
€8.25
€14.00
Snafu Productions incurred the following costs in producing 60 items of product during July 2010:
€
Direct materials
1250
Factory heating and lighting
600
Factory rental
810
Supervisory salaries
900
Direct labour
1360
Cleaners' wages
300
Other fixed factory costs
1020
There was no opening or closing inventory: all 60 units of product were sold in the month, at a selling price of €121 each.
What was the contribution per unit of product in July 2010?
€17.00
€77.50
€57.50
€34.00
Kumar Products manufactures an industrial grade floor polish which it sells in 5 kg tubs. Each tub sells for €26.50. Direct materials per tub cost €3.20 and direct labour costs €2.90.
Factory production overhead is recovered on the basis of direct labour hours. Each tub of product requires 20 minutes of direct labour input, and the recovery rate per labour hour is €31.74.
What is the contribution per tub of polish?
€20.40
€9.82
€25.64
€14.05
Fellworth and Bradford plans the following budget income and expenditure for the month of March 2011:
€
Sales: 1500 units at €100 each
15 000
Costs
Direct materials and labour
(6000)
Production overhead (all fixed) absorbed at €1.50 per unit
(4500)
4500
Selling and administrative overhead (all fixed)
(1500)
NET PROFIT
3000
What would be the cost of producing one further unit of product?
€8.00
€7.00
€4.00
€2.00
Smithson Fabrications plans the following budget income and expenditure for the month of November 2010:
€
Sales: 2300 units at €96 each
220 800
Costs
Direct materials and labour
(88 550)
Production overhead (all fixed) absorbed at €32.50 per unit
(74.750)
57 500
Selling and administrative overhead (all fixed)
32 200
NET PROFIT
25 300
What would be the cost of producing one further unit of product?
€57.50
€71.00
€38.50
€85.00
Slatter and Higson manufacture a standard model of vacuum cleaner. The selling price of each cleaner is €135. Variable costs of manufacture are €52.50. During its 2011 financial year the company expects to incur fixed production costs of €80 000 and fixed selling and administration overheads of €32 000.
How many vacuum cleaners will the company have to sell in order to break-even (to the nearest whole unit)?
970
1358
2133
1524
Peebles and Witcherley manufacture a standard model of steam iron. The selling price of each iron is €35. Variable costs of manufacture are €9.80. During its 2010 financial year the company expects to incur fixed production costs of €78 000 and fixed selling and administration overheads of €38 000.
What is the expected break-even point in sales value in 2010 (working to nearest whole unit and €)?
€115 996
€161 105
€77 994
€108 325
Springer and Leghorn manufacture a standard model of trouser press. The selling price of each trouser press is €89. Variable costs of manufacture are €27.75. During its 2011 financial year the company expects to incur fixed production overheads of €79 500 which will be absorbed per unit of production. The budgeted production volume is 3000 units. The company expects to incur selling and administrative overheads of €58 300.
What is the expected break-even point in sales value in 2011 (working to the nearest whole unit)?
€352 885
€200 250
€137 813
€149 342
Arrow Barnett manufactures wheelie bins, each of which sells for €55.50. Variable labour costs of manufacture are €6.50 and variable raw materials costs are €5.25 per bin. Fixed costs for the 2010 financial year are budgeted at €305 700 and the directors have set a target profit figure for the year of €115 000.
How many wheelie bins must the company sell in 2010 in order to reach the target profit (to the nearest whole unit)?
7580
5508
9616
6987
Dowthwaite Bentham manufactures a standard model of suitcase. Each suitcase sells for €32.50. Variable labour and materials costs of manufacture are €8.73. Fixed costs for the 2010 financial year are budgeted at €388 500 and the directors have set a target profit figure for the year of €150 000.
What is the value of sales that the company must make in the 2010 financial year in order to reach the target profit (working to the nearest whole unit and €)?
€736 288
€538 509
€531 180
€326 105
Moreton and Hampstead Products manufactures hatstands. Each hatstand retails in the shops for €55.92 but the retailer applies a mark-up of 20% to the price at which the hatstand was purchased from Moreton and Hampstead.
Variable costs of production are €13.50 per hatstand. In the 20X4 financial year, the company expects to incur total fixed costs of €168 300. The directors have set a target profit of €83 000.
What is the value of sales that the company must make in the 20X4 financial year in order to reach the target profit (working to the nearest whole unit and €)?
€424 545
€331 270
€111 514
€353 787
Which one of the following statements is correct?
In marginal costing, the margin of safety is:
The excess of planned or actual sales above the break-even point.
The difference between planned sales and actual sales.
Fixed costs divided by contribution per unit.
Total contribution less total profit.
Sloane Blaine manufactures a standard model of pressure cooker. The selling price of each pressure cooker is €35. Variable costs of manufacture are €9.80. During its 2011 financial year the company expects to incur fixed overheads of €108 000. The sales director expects to sell 5000 pressure cookers during 2011.
What is the margin of safety (in units, to nearest whole unit)?
1914
4286
714
3086
Dellmar Business Systems manufactures paper shredders, each of which sells for €52.00. Variable labour costs of manufacture are €8.50 and variable raw materials costs are €5.60 per shredder. Fixed production overheads for the 2010 financial year are budgeted at €201 700 and fixed selling and administrative overheads are budgeted at €136 250. The company’s directors plan to sell 10 000 units in the 2010 financial year.
What is the margin of safety, expressed as a percentage (to one decimal place)?
46.8%
12.1%
10.8%
35.0%
A company is proposing to expand its productive capacity by a significant amount. What is the decision rule that should be applied by the directors in deciding whether or not to accept the expansion proposal?
incremental fixed costs do not exceed variable costs.
incremental fixed costs plus incremental variable costs exceed incremental revenue.
its incremental revenue exceeds incremental costs.
Bulstrode and Parker are in partnership making ornate cocktail cabinets with gold inlays. Each year they are able to produce and sell 25 cabinets with the assistance of several part-time staff who can be employed flexibly. There is a customer waiting list for the cabinets.
Each cabinet sells for €12 000, and variable material and labour costs total €6500 per cabinet. The business’s fixed costs are €86 000.
The small workshop next to the business’s existing premises has now become available. If the partners take it on, production could be increased by 20%, but there would be additional fixed costs of €35 000.
What is the incremental profit or loss that could be earned from the proposed expansion?
€44 000 profit
€61 800 profit
€2000 loss
€7500 loss
Sometimes constraints are in operation that restrict the amount of productive capacity available to a business, or the potential market for a product, or the availability of particular types of material or labour.
In management accounting, such constraints are commonly referred to as:
supply.
limiting factors.
restricting factors.
shortages.
Baseheart Williams produces two products, the Cee and the Dee, which both use the same grade of specialist labour. Only 3600 specialist labour hours are estimated to be available for the 2011 financial year because of skills shortages in the economy as a whole.
The directors must decide on a production plan for 2011. They estimate that it would be possible to sell 400 units of Cee and 400 units of Dee but the actual amount that can be produced and sold is likely to be affected by the labour shortage.
The following information is available about the products:
Cee
Dee
€
€
Revenue per unit
600
666
Variable costs per unit
250
270
Contribution
450
396
No. of hours of specialist labour required per unit
7
6
What is the optimal production plan for 2011 (to the nearest whole unit)?