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AAT Level 2 Principles of Costing study materials
AAT Level 2 Principles of Costing study resources

AAT Level 2 Principles of Costing practice questions

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Question 1Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A company makes wooden garden furniture. Which of the following is a direct material cost of a garden bench?

  1. Wages of the factory supervisor
  2. Timber used to make the bench Correct answer.
  3. Depreciation of factory machinery
  4. Rent of the factory building

Explanation

A direct material cost is one that can be traced specifically to the cost unit being made, such as the timber in a bench. Costs of supervision, premises and machinery cannot be traced to one bench, so they are indirect.

Question 2Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

What is a cost centre?

  1. A single unit of product whose cost is calculated
  2. The total of a business's indirect costs for a period
  3. A document on which costs are first written down
  4. A location or function for which costs are collected Correct answer.

Explanation

A cost centre is a production or service location, function, activity or item of equipment for which costs are gathered. Collecting costs by cost centre lets managers control them and pass them on to cost units.

Question 3Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which document provides the information used to record the cost of materials taken from stores into production?

  1. Supplier's monthly statement
  2. Materials requisition note Correct answer.
  3. Goods received note
  4. Purchase order

Explanation

Materials are released from stores only against a materials requisition note, which shows the quantity and value taken so the cost can be charged to the correct job or cost centre.

Question 4Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following is a non-production overhead?

  1. Advertising costs Correct answer.
  2. Depreciation of factory machinery
  3. Factory rent
  4. Wages of factory supervisors

Explanation

Non-production overheads are costs of selling, distribution, administration and finance rather than of making the product. Advertising is a selling cost.

Question 5Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

How is a fixed cost best described?

  1. A cost that stays the same in total when output changes Correct answer.
  2. A cost that contains both a fixed and a variable element
  3. A cost that rises in direct proportion to output
  4. A cost that stays the same per unit at all levels of output

Explanation

A fixed cost such as rent is constant in total over a relevant range of activity. Because the total does not change, the fixed cost per unit falls as output rises.

Question 6Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A cost unit is best described as:

  1. a document on which costs of a job are recorded
  2. a unit of product or service whose cost is calculated Correct answer.
  3. the total of the direct costs of a job
  4. a department in which costs are collected and controlled

Explanation

A cost unit is the thing for which costs are ascertained, such as one chair, one batch or one service job. Cost centres collect costs; cost units are what those costs are eventually charged to.

Question 7Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following would normally be a service cost centre in a manufacturing business?

  1. Machining department
  2. Assembly department
  3. Maintenance department Correct answer.
  4. Finishing department

Explanation

Service cost centres support the production cost centres without working directly on the product. The maintenance department keeps machines running but does not make output itself.

Question 8Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which document is used to record the time an employee spends on each individual job?

  1. A goods received note
  2. A purchase order
  3. A clock card
  4. A job card Correct answer.

Explanation

A job card (or a time sheet analysed by job) records the hours spent on each job so that direct labour cost can be charged to that job. A clock card only shows total attendance time.

Question 9Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A job incurs direct materials of £4,200, direct labour of £2,600 and direct expenses of £400. Production overhead of £1,500 is charged to the job. What is the prime cost of the job?

  1. £7,200 Correct answer.
  2. £8,700
  3. £6,800
  4. £8,300

Explanation

Prime cost is the total of the direct costs only: £4,200 + £2,600 + £400 = £7,200. Production overhead is added to prime cost to give production cost, so it is excluded here.

Question 10Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A business rents one building that is shared by three departments. On what basis would the rent normally be apportioned?

  1. The number of employees in each department
  2. Machine hours recorded in each department
  3. Value of materials issued to each department
  4. Floor area occupied by each department Correct answer.

Explanation

Rent is a premises cost, so it is shared out according to the space each department occupies. Each cost should be apportioned on a basis that reflects what causes it.

Question 11Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Charging the whole of a cost to the single cost centre that caused it is known as:

  1. Apportionment
  2. Absorption
  3. Allocation Correct answer.
  4. Reapportionment

Explanation

Allocation is used where a cost belongs wholly to one cost centre, for example the rent of a room used by one department only. Apportionment is used when a cost has to be shared between two or more centres.

Question 12Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following is an example of indirect labour?

  1. Basic pay of the production staff
  2. Salaries of factory supervisors Correct answer.
  3. Wages of machine operators
  4. Wages of assembly workers

Explanation

Indirect labour is labour that cannot be traced to a specific cost unit. Supervisors support production as a whole, so their salaries are part of production overhead.

Question 13Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following is a direct expense of a particular contract?

  1. Hire of a machine used only on that contract Correct answer.
  2. Insurance of the factory building
  3. Depreciation of office equipment used by all staff
  4. Wages of the factory cleaner

Explanation

A direct expense is a cost other than materials or labour that can be traced to a specific cost unit, such as machine hire for one contract only. Costs that cannot be traced to one unit are overheads.

Question 14Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A business pays a fixed standing charge for electricity plus a charge for every unit used. This cost is:

  1. A stepped fixed cost
  2. A variable cost of production
  3. A fixed cost for the whole business
  4. Semi-variable cost Correct answer.

Explanation

A semi-variable cost contains both elements: the standing charge is fixed and the charge per unit varies with usage. Electricity and telephone bills are common examples.

Question 15Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A company employs one supervisor for each shift. A second supervisor must be recruited once output exceeds 10,000 units a month. The total supervisors' salary cost is:

  1. A direct expense of the factory
  2. A variable cost of production
  3. A stepped fixed cost Correct answer.
  4. A semi-variable cost for the company

Explanation

The salary cost is fixed within each range of output and rises by a step when the next range is reached. This makes it a stepped fixed cost.

Question 16Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which document is the usual source of data for the cost of factory electricity supplied by an outside company?

  1. A goods received note
  2. A clock card
  3. The supplier's purchase invoice Correct answer.
  4. A materials requisition note from stores

Explanation

Overheads bought in from outside suppliers are recorded from the purchase invoice, which shows the amount payable for the period. The invoice is checked before it is entered in the accounting records.

Question 17Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

When recording the labour cost of direct workers, which figure is charged to production?

  1. Net pay
  2. Gross pay Correct answer.
  3. Gross pay less income tax
  4. Net pay plus voluntary deductions

Explanation

The cost to the employer is gross pay, that is basic pay plus overtime and bonuses, before deductions such as tax and pension contributions. Net pay is only what the employee receives after deductions.

Question 18Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

In cost classification, the three elements of cost are:

  1. Direct, indirect and overhead
  2. Materials, labour and expenses Correct answer.
  3. Production, administration and selling
  4. Fixed, variable and semi-variable

Explanation

Cost elements describe what the cost is: materials, labour or expenses. Each element is then split into direct and indirect.

Question 19Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

What is the main purpose of a goods received note in the cost recording system?

  1. To record the quantity and value of materials issued to production
  2. To record the hours worked by each employee
  3. To order goods from an approved supplier
  4. To confirm the quantity of goods received before the invoice is paid Correct answer.

Explanation

A goods received note is completed when goods arrive and is matched with the purchase order and the invoice. This makes sure the business pays only for goods it actually ordered and received.

Question 20Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Why do businesses give each cost a code in the cost recording system?

  1. To reduce the amount of tax payable
  2. To replace the need for source documents
  3. To record and analyse costs consistently Correct answer.
  4. To calculate the selling prices of all products automatically

Explanation

Coding lets every cost be classified quickly by cost centre, cost element and cost behaviour. The coded records can then be analysed reliably for control and decision making.

Question 21Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A direct worker is paid £12 an hour for a 40-hour week. In one week she works 5 hours of overtime at time and a half, worked because of a general shortage of labour. What amount of her week's pay is treated as an indirect cost?

  1. £30 Correct answer.
  2. £0
  3. £90
  4. £60

Explanation

The basic rate for all hours worked is direct labour, but the overtime premium is not caused by any particular job. The premium is 5 hours × £6 = £30 and is charged to production overhead.

Question 22Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Service cost centre costs of £18,000 are reapportioned to two production cost centres, A and B, in the ratio of their floor areas, 4:2. How much is reapportioned to cost centre A?

  1. £6,000
  2. £12,000 Correct answer.
  3. £4,500
  4. £9,000

Explanation

Total floor area parts are 4 + 2 = 6, so A receives 4/6 of the cost. 4/6 × £18,000 = £12,000.

Question 23Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A direct worker is paid £9 an hour and is at work for 36 hours in a week, of which 4 hours are idle through a machine breakdown. What amount is charged as direct labour cost for the week?

  1. £324
  2. £288 Correct answer.
  3. £360
  4. £252

Explanation

Only the 32 hours actually worked on production can be traced to jobs: 32 × £9 = £288. The 4 idle hours (£36) are treated as production overhead.

Question 24Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A job uses direct materials of £3,500 and direct labour of £2,000. Direct expenses are £250 and production overhead is charged at 50% of direct labour cost. What is the total production cost of the job?

  1. £6,750 Correct answer.
  2. £6,000
  3. £7,500
  4. £5,750

Explanation

Prime cost is £3,500 + £2,000 + £250 = £5,750. Overhead is 50% × £2,000 = £1,000, so production cost is £5,750 + £1,000 = £6,750.

Question 25Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A £600 repair to a machine used only in the cutting department has been coded to the general maintenance cost centre instead of to the cutting department. What is the effect on the costing records?

  1. Cutting department costs are understated by £600 Correct answer.
  2. Total production overhead is overstated by £600 in the period
  3. Cutting department costs are overstated by £600
  4. Total production overhead is understated by £600

Explanation

The cost has still been recorded, so total overhead is correct, but it has been charged to the wrong centre. Too little has been charged to cutting, so its costs are understated and the maintenance centre is overstated by £600.

Question 26Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following is a variable cost for a furniture manufacturer?

  1. The timber used in each unit of production Correct answer.
  2. Insurance of the factory building paid yearly
  3. The salary of the factory manager
  4. The annual rent of the factory

Explanation

A variable cost changes in total in direct proportion to the level of activity, so it rises as more units are made. Timber is consumed with every unit produced, which makes it variable.

Question 27Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A cost centre is best described as:

  1. A document used to record material issues
  2. A location or function to which costs are charged Correct answer.
  3. A single unit of output produced by a business
  4. A summary of all the expenses in the ledger

Explanation

Costs are collected by cost centre so that the person responsible for each area can see what has been spent. A cost centre is therefore a location, department, function or person to which costs are gathered.

Question 28Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which document is used by the stores department to record the issue of materials to production?

  1. Supplier invoice
  2. Materials requisition note Correct answer.
  3. Delivery note
  4. Purchase order

Explanation

The materials requisition note is completed when goods leave the stores for production and shows the quantity issued and the cost centre or job to be charged. It is the source document for direct material cost in the cost records.

Question 29Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following is a production overhead cost?

  1. Raw materials that become part of the product
  2. Wages of machine operators paid per unit produced
  3. Royalties paid per unit for a patented design
  4. Lubricating oil for the factory machines Correct answer.

Explanation

Production overheads are indirect costs of running the factory that cannot be traced to individual units. Lubricating oil is used across production generally, so it is an indirect material and part of production overhead.

Question 30Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following would be classified as an administration overhead?

  1. Depreciation of factory machinery
  2. Packaging added to finished goods for delivery
  3. The salary of the purchase ledger clerk Correct answer.
  4. Wages of assembly workers

Explanation

Administration overheads are the indirect costs of running the office and management side of the business. The purchase ledger clerk works in the finance function, so the salary is an administration cost.

Question 31Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which document records the total hours an employee is present at the workplace and forms the basis of the basic wage?

  1. Purchase invoice
  2. Payslip
  3. Clock card Correct answer.
  4. Job card

Explanation

A clock card (or time card) records time in and time out, giving total attendance hours for pay purposes. Job cards record how those hours are split between jobs.

Question 32Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following costs is fixed within the relevant range of activity?

  1. Direct materials
  2. Sales commission of 2% of sales value
  3. The factory rent fixed by a five-year lease Correct answer.
  4. Packaging charged per unit sold

Explanation

A fixed cost stays constant in total over a range of activity, though it falls per unit as output rises. Rent set by a lease is the same amount each period whatever is produced.

Question 33Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following would be treated as indirect materials for a furniture maker?

  1. Upholstery fabric specified for each sofa
  2. Glass tops ordered specifically for each table
  3. Timber cut to size for each table
  4. Nails and glue used throughout production Correct answer.

Explanation

Indirect materials are used in production but cannot be traced to individual units in an economic way. Nails and glue are consumed generally and in small amounts across all output, so they form part of production overhead.

Question 34Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Why are the costs of service cost centres reapportioned to production cost centres?

  1. So that all overheads end up in product costs Correct answer.
  2. To record service department costs as direct costs of production
  3. To transfer the service costs into the financial accounting ledger
  4. So that service department costs can be excluded from the profit calculation

Explanation

Service cost centres support production but do not work directly on the product, so their costs cannot be absorbed until they have been shared out to production centres. Reapportionment ensures the whole of the overhead is eventually recovered from output.

Question 35Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which of the following is treated as a period cost rather than a product cost?

  1. Direct labour
  2. Commission paid to sales staff Correct answer.
  3. Depreciation of production machinery
  4. Direct materials

Explanation

Product costs are attached to the units made and carried in inventory until sale, while period costs are written off in the period they arise. Sales commission is a selling cost of the period and is not part of the cost of making the product.

Question 36Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A business's total costs are £30,000 at 5,000 units and £34,000 at 6,000 units. What is the variable cost per unit?

  1. £6.00
  2. £4.00 Correct answer.
  3. £5.67
  4. £0.25

Explanation

The variable cost per unit is the change in total cost divided by the change in units: £4,000 ÷ 1,000 units = £4.00 per unit. The fixed element is the same at both activity levels and so cancels out in the difference.

Question 37Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A profit centre is best described as:

  1. A unit of product used to value the closing inventory
  2. A department measured on both its costs and its revenues Correct answer.
  3. A department to which only costs are charged and recorded
  4. A location where raw materials are held before production begins

Explanation

A profit centre is accountable for the surplus it generates, so both its income and its expenditure are recorded against it. A cost centre, by contrast, is accountable only for the costs it incurs.

Question 38Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Employer's National Insurance contributions on the wages of direct production workers are classified as:

  1. Direct labour
  2. Administration overhead
  3. Direct expenses
  4. Production overhead Correct answer.

Explanation

Only the basic pay for time worked on the product can be traced to units as direct labour. The employer's contributions arise from employing the workforce generally and cannot be traced to a unit, so they are part of production overhead.

Question 39Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

When direct workers are paid for hours lost through a machine breakdown, the idle time cost is normally treated as:

  1. Direct labour charged to the job being worked on
  2. An indirect cost included in production overhead Correct answer.
  3. A direct expense of the job
  4. A deduction from the gross wages paid

Explanation

Idle time produces no output for any particular unit, so it cannot be traced to a job. The cost of those hours is therefore collected with production overhead and absorbed across all production.

Question 40Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which basis is most appropriate for apportioning the cost of a factory canteen between cost centres?

  1. Machine hours used
  2. Kilowatt hours consumed
  3. Number of employees Correct answer.
  4. Value of materials issued

Explanation

Apportionment should follow the benefit each cost centre receives from the service. A canteen is used by people, so the number of employees in each centre is the fairest available measure of that benefit.

Question 41Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

To calculate the value of direct materials issued to a job, the cost accountant needs:

  1. The supplier's invoice total and the date of payment
  2. The quantity issued and the price per unit of those materials Correct answer.
  3. The number of hours worked and the hourly rate
  4. The quantity received and the reorder level of the item

Explanation

Material cost charged to a job is quantity issued multiplied by the unit price taken from the requisition note and the stores pricing records. Quantity received and payment dates are purchasing matters and do not value an internal issue.

Question 42Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Within the relevant range, as output increases, total fixed cost and fixed cost per unit respectively:

  1. Fall and fall
  2. Rise and stay the same
  3. Stay the same and rise
  4. Stay the same and fall Correct answer.

Explanation

By definition a fixed cost does not change in total when output changes, so the same amount is spread over more units. That spread means the fixed cost per unit falls as activity rises.

Question 43Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

At 2,000 units a business's total cost is £50,000, of which £20,000 is fixed. What is the variable cost per unit?

  1. £10.00
  2. £25.00
  3. £15.00 Correct answer.
  4. £35.00

Explanation

Total variable cost is £50,000 − £20,000 = £30,000, and dividing this by 2,000 units gives £15.00 per unit. Fixed cost must be removed before the variable rate is calculated.

Question 44Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Factory insurance of £8,000 covers a factory of 1,200 square metres and an office of 800 square metres. Using floor area, the amount charged to the factory is:

  1. £4,000
  2. £4,800 Correct answer.
  3. £6,400
  4. £3,200

Explanation

The factory occupies 1,200 of the 2,000 square metres in total, that is 60% of the space. Applying 60% to the £8,000 premium gives £4,800 charged to the factory and £3,200 to the office.

Question 45Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

What is the first stage in accounting for production overheads?

  1. Collecting overheads and sharing them between cost centres Correct answer.
  2. Reapportioning service cost centre costs to production centres
  3. Calculating the overhead absorption rate for the period
  4. Absorbing overheads into the cost of the products made

Explanation

Overheads must first be gathered from the source documents and charged to cost centres, either directly where a cost belongs wholly to one centre or by apportionment where it is shared. Only then can service centre costs be reapportioned and an absorption rate set.

Question 46Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Depreciation of a machine used exclusively on one long-term contract is best classified as:

  1. A selling and distribution cost
  2. A direct expense of the contract Correct answer.
  3. A production overhead
  4. An administration overhead

Explanation

Direct expenses are costs other than materials and labour that can be identified with a specific cost unit. Because the machine is devoted entirely to this one contract, its depreciation is traceable to that contract and is charged to it directly.

Question 47Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Total costs are £85,000 at 10,000 units and £115,000 at 15,000 units. What are the total fixed costs?

  1. £15,000
  2. £30,000
  3. £25,000 Correct answer.
  4. £55,000

Explanation

The variable element is (£115,000 − £85,000) ÷ (15,000 − 10,000) = £6 per unit. At 10,000 units variable cost is £60,000, so fixed cost is £85,000 − £60,000 = £25,000.

Question 48Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

A direct worker works overtime at a premium to complete a rush order at a customer's request. The overtime premium should be charged as:

  1. A direct labour cost of that order Correct answer.
  2. General production overhead
  3. A direct expense of that order
  4. An administration overhead

Explanation

Overtime premium is normally spread through production overhead because it is not caused by any one job. Where a customer specifically requests the work to be done in overtime, however, the extra cost is caused by that order and is charged to it as part of its direct labour.

Question 49Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Why may the same cost be classified as direct in one business and indirect in another?

  1. Because cost ledger accounts differ between businesses
  2. Because indirect costs are never recorded in a cost centre
  3. Because direct costs are always variable and indirect costs are always fixed
  4. Because traceability to a cost unit varies with how work is organised Correct answer.

Explanation

A cost is direct only if it can be identified with a specific cost unit on an economical basis, which depends on the circumstances of the business. A supervisor working solely on one contract is a direct cost, but the same type of salary spread across a factory is indirect.

Question 50Understand the cost recording system within an organisation (cost classification, cost centres, sources of cost data)

Which pairing of a cost with an apportionment basis is appropriate?

  1. Canteen costs - machine hours
  2. Rent and rates - number of employees
  3. Machine depreciation - machine value Correct answer.
  4. Heating costs - value of machinery

Explanation

Apportionment should reflect the benefit received, and depreciation of machinery broadly follows the value of the machines held in each centre. The other pairings do not match the factor that drives the cost.