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AAT MATS practice questions

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Question 1The role and purpose of management accounting

What is the primary purpose of management accounting?

  1. To supply managers with information for planning and control Correct answer.
  2. To audit the financial records of the organisation
  3. To prepare statutory financial statements for shareholders and lenders
  4. To calculate the tax liability of the organisation

Explanation

Management accounting exists to supply internal managers with financial and non-financial information for planning, control and decision making. It is not governed by statutory formats and is not primarily aimed at external reporting.

Question 2The role and purpose of management accounting

Which characteristic applies to financial accounting rather than management accounting?

  1. Reports focus on future budgets and forecasts
  2. Reports follow a standard format for external users Correct answer.
  3. Reports are prepared as frequently as managers require
  4. Reports include non-financial performance measures

Explanation

Financial accounting reports are prepared in a standard format, usually annually, for external users such as shareholders. Management accounting reports are flexible and produced as often as managers need them.

Question 3The role and purpose of management accounting

Who is the main user of management accounting reports?

  1. Bank lenders
  2. Internal managers Correct answer.
  3. Shareholders
  4. Tax authorities

Explanation

Management accounting information is produced for internal managers at all levels to help them run the organisation. External parties rely mainly on financial accounting reports.

Question 4The role and purpose of management accounting

Which management activity involves setting objectives and deciding how to achieve them?

  1. Controlling
  2. Motivating
  3. Auditing
  4. Planning Correct answer.

Explanation

Planning involves setting objectives and choosing the actions and resources needed to meet them. Control and motivation come later in the management cycle.

Question 5The role and purpose of management accounting

How does management accounting support control?

  1. Calculating the company's corporation tax
  2. Publishing annual financial statements to shareholders and the stock exchange
  3. Comparing actual results with planned targets and investigating differences Correct answer.
  4. Recording every transaction in the general ledger

Explanation

Control involves comparing actual performance with the plan and taking corrective action where differences arise. Management accounting supplies the reports that make this comparison possible.

Question 6The role and purpose of management accounting

Which task is an example of decision making supported by management accounting?

  1. Choosing between two machines with different running costs Correct answer.
  2. Preparing the year-end trial balance
  3. Auditing the petty cash book
  4. Filing the annual return and supporting schedules with the tax office

Explanation

Decision making involves choosing between alternatives, and management accounting supplies the relevant cost and revenue information for that choice. Comparing machines with different running costs is a choice between alternatives.

Question 7The role and purpose of management accounting

Which item is typical of a management accounting report but not of a financial accounting report?

  1. Profit for the year
  2. Total sales revenue for the year
  3. Customer satisfaction scores by product line Correct answer.
  4. Closing inventory valuation for the annual financial statements

Explanation

Management accounting reports often include operational, non-financial measures such as customer satisfaction, quality and staff turnover. Financial accounting concentrates on monetary figures for the whole organisation.

Question 8The role and purpose of management accounting

A supervisor's salary in a factory that makes several products is best classified as what?

  1. A prime cost
  2. A direct labour cost
  3. A direct material cost of the product being manufactured
  4. An indirect production cost Correct answer.

Explanation

A supervisor's salary supports production in general and cannot be traced to a single unit, so it is an indirect production cost. Direct costs can be traced to a unit of product.

Question 9The role and purpose of management accounting

Why does an organisation prepare a cash budget?

  1. To forecast cash receipts and payments and identify funding needs Correct answer.
  2. To calculate the depreciation charge to include in the annual accounts
  3. To value closing inventory for the annual accounts
  4. To record the tax paid in the previous year

Explanation

A cash budget forecasts the timing of cash receipts and payments so that managers can plan funding and avoid shortages. It is not a profit or valuation statement.

Question 10The role and purpose of management accounting

What is the main purpose of variance analysis?

  1. To calculate the profit figure that appears in the annual financial statements
  2. To identify differences between budgeted and actual results for investigation Correct answer.
  3. To allocate production overheads between the different operating departments
  4. To determine the selling price of a new product

Explanation

Variance analysis compares budgeted figures with actual figures and highlights differences for investigation and corrective action. It is a control tool rather than a valuation method.

Question 11The role and purpose of management accounting

In responsibility accounting, a cost centre manager is normally accountable for what?

  1. Costs incurred within their area of responsibility Correct answer.
  2. The market price of the company's shares
  3. The company's total profit and earnings per share
  4. The organisation's tax planning, compliance and submission of returns

Explanation

Responsibility accounting holds each manager accountable for the items they control, so a cost centre manager is answerable for the costs of that centre. Profit and investment responsibility sit at higher levels.

Question 12The role and purpose of management accounting

What does break-even analysis show?

  1. The total cost of goods sold during the accounting period, including overheads
  2. The amount of cash held at the year end
  3. The profit earned at the maximum production level
  4. The sales volume at which total revenue equals total cost Correct answer.

Explanation

Break-even analysis identifies the sales volume at which total revenue equals total cost, so neither profit nor loss is made. It helps managers assess risk and required volumes.

Question 13The role and purpose of management accounting

Which statement describes marginal costing?

  1. All production overheads are absorbed into product cost
  2. Only variable production costs are included in product cost Correct answer.
  3. Fixed production costs are apportioned to products on the basis of labour hours
  4. Only direct materials are treated as product cost

Explanation

Marginal costing charges only variable production costs to the product and treats fixed production costs as period costs. Absorption costing, by contrast, includes a share of fixed overhead in product cost.

Question 14The role and purpose of management accounting

A standard cost is best described as what?

  1. The actual cost incurred in the most recent accounting period
  2. The price charged by the cheapest supplier
  3. A planned unit cost based on expected efficiency and prices Correct answer.
  4. The average cost of all products made

Explanation

A standard cost is a planned or target unit cost built from expected prices and efficiency levels. It provides a benchmark against which actual costs can be compared.

Question 15The role and purpose of management accounting

Which measure would be most useful for assessing a delivery department's efficiency?

  1. Gross profit margin achieved on the sale of goods
  2. Dividend per share
  3. Return on capital employed
  4. Number of deliveries made per driver hour Correct answer.

Explanation

Efficiency measures relate output to input, so deliveries per driver hour shows how productively driver time is used. Profit and return measures reflect overall financial performance.

Question 16The role and purpose of management accounting

Why should management accounting information be timely?

  1. Because it must cover a full financial year
  2. Because it must be filed with the tax authority by a set date
  3. Because decisions must be based on current conditions Correct answer.
  4. Because it must be audited before it is used

Explanation

Management accounting information must be available in time to influence the decision it supports. Late information, however accurate, has little value for current decisions.

Question 17The role and purpose of management accounting

Which activity best reflects the 'business partner' role of a management accountant?

  1. Auditing the company's internal controls
  2. Calculating the tax liability for the annual return and related disclosures
  3. Preparing the statutory financial statements for external publication and filing
  4. Advising operational managers on the financial impact of a proposed process change Correct answer.

Explanation

As a business partner, the management accountant works alongside operational managers and contributes financial insight to their decisions. This is broader than producing reports after the event.

Question 18The role and purpose of management accounting

Which is a limitation of using management accounting information for decisions?

  1. It is always prepared strictly under accounting standards and company law
  2. It excludes any non-financial data
  3. It may rely on estimates and assumptions about the future Correct answer.
  4. It is only produced once a year

Explanation

Much management accounting information is forward-looking and based on estimates, so its accuracy depends on the assumptions used. Users must interpret it with care.

Question 19The role and purpose of management accounting

When deciding whether to accept a special order, which cost is relevant?

  1. Depreciation on equipment already owned
  2. A sunk cost of machinery already purchased
  3. The additional materials needed for the order Correct answer.
  4. An apportioned share of the existing factory rent and rates

Explanation

A relevant cost is a future cash flow that differs between alternatives. Additional materials needed for the order meet that test.

Question 20The role and purpose of management accounting

Why may a manager deliberately build slack into a budget?

  1. To make the target easier to achieve Correct answer.
  2. To reduce the amount of tax payable
  3. To ensure the budget is challenging and motivating
  4. To comply with financial reporting standards

Explanation

Budgetary slack is the deliberate overstatement of costs or understatement of revenue so that targets are easier to meet. It can undermine the budget's usefulness for planning and control.

Question 21Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Which inventory cost formula is prohibited by IAS 2 Inventories?

  1. First-in, first-out (FIFO)
  2. Specific identification of cost
  3. Weighted average cost
  4. Last-in, first-out (LIFO) Correct answer.

Explanation

IAS 2 allows specific identification, FIFO and weighted average cost, but prohibits LIFO because issuing the most recent prices can be used to manipulate reported profit.

Question 22Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Under absorption costing, which cost is included in the valuation of finished goods but excluded under marginal costing?

  1. Direct labour
  2. Direct materials
  3. Variable production overhead
  4. Fixed production overhead Correct answer.

Explanation

Absorption costing spreads fixed production overhead over units produced, so a share of it is carried in inventory. Marginal costing treats fixed production overhead as a period cost and values inventory at variable production cost only.

Question 23Costing methods and cost recording (inventory valuation, absorption and marginal costing)

In a marginal costing system, closing inventory is valued at which amount?

  1. Variable production cost only Correct answer.
  2. Net realisable value
  3. Total production cost including fixed overhead
  4. Prime cost only

Explanation

Marginal costing carries only variable production costs into inventory, with fixed production overhead written off in the period incurred. Prime cost is narrower because it excludes variable overhead.

Question 24Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Contribution is calculated as which of the following?

  1. Sales revenue less fixed costs
  2. Sales revenue less total costs
  3. Sales revenue less production cost
  4. Sales revenue less variable costs Correct answer.

Explanation

Contribution is sales revenue minus all variable costs, and it is the amount available to cover fixed costs and then provide profit. Fixed costs are deducted from contribution, not used to calculate it.

Question 25Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Which costing method values closing inventory using the most recent purchase prices?

  1. First-in, first-out Correct answer.
  2. Last-in, first-out
  3. Standard costing
  4. Weighted average cost

Explanation

FIFO assumes the oldest units are issued first, so the units left in inventory are the most recently purchased and are valued at recent prices. Weighted average blends all prices together.

Question 26Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Over-absorption of production overhead occurs when which situation arises?

  1. Budgeted overhead exceeds actual overhead
  2. Overhead absorbed exceeds overhead incurred Correct answer.
  3. Actual overhead exceeds overhead absorbed
  4. Actual activity is below budgeted activity

Explanation

Over-absorption arises when the overhead charged to production using the predetermined rate is greater than the overhead actually incurred. The difference is written off as a credit to the costing profit and loss account.

Question 27Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Prime cost is made up of which elements?

  1. Direct labour and administration costs
  2. All costs incurred in the factory
  3. Direct materials and production overhead
  4. Direct materials, direct labour and direct expenses Correct answer.

Explanation

Prime cost is the total of all direct costs: direct materials, direct labour and direct expenses. Production overhead is added to prime cost to give total production cost.

Question 28Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Under IAS 2, inventories are measured at which amount?

  1. Net realisable value
  2. Replacement cost
  3. Cost
  4. The lower of cost and net realisable value Correct answer.

Explanation

IAS 2 requires inventories to be measured at the lower of cost and net realisable value, so that assets are not carried above the amount they are expected to realise. Cost alone or net realisable value alone is not the required rule.

Question 29Costing methods and cost recording (inventory valuation, absorption and marginal costing)

A stores item has no opening inventory. During the period 100 units were purchased at £10 each and 200 units at £12 each, and 150 units were issued to production. Using FIFO, what is the value of the closing inventory of 150 units?

  1. £1,500
  2. £1,800 Correct answer.
  3. £1,700
  4. £1,650

Explanation

Under FIFO the issue is taken from the earliest receipts, so the 150 issued come from the 100 units at £10 plus 50 units at £12. The remaining 150 units are all from the £12 batch, giving 150 × £12 = £1,800.

Question 30Costing methods and cost recording (inventory valuation, absorption and marginal costing)

A stores ledger shows purchases of 200 units at £5 each followed by 300 units at £6 each. 250 units were then issued. Using weighted average cost, what is the cost of the issue (to the nearest £)?

  1. £1,300
  2. £1,250
  3. £1,500
  4. £1,400 Correct answer.

Explanation

Total cost of the 500 units is £1,000 + £1,800 = £2,800, giving a weighted average of £5.60 per unit. The issue of 250 units is therefore 250 × £5.60 = £1,400.

Question 31Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Fixed production overhead is budgeted at £30,000 for normal output of 10,000 units. In a period, 9,000 units were produced and 8,000 units were sold, with no opening inventory. By how much will absorption costing profit differ from marginal costing profit?

  1. £3,000 higher Correct answer.
  2. £3,000 lower
  3. No difference
  4. £6,000 higher

Explanation

The absorption rate is £30,000 ÷ 10,000 = £3 per unit. Inventory rose by 1,000 units, so £3,000 of fixed overhead is carried forward under absorption costing, making its profit £3,000 higher than the marginal costing profit.

Question 32Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Budgeted production overhead is £60,000 and budgeted direct labour hours are 15,000. What is the predetermined overhead absorption rate per direct labour hour?

  1. £4.00 Correct answer.
  2. £0.25
  3. £6.00
  4. £2.50

Explanation

The predetermined rate is budgeted overhead divided by budgeted activity: £60,000 ÷ 15,000 hours = £4.00 per direct labour hour.

Question 33Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Budgeted overhead is £50,000 and budgeted machine hours are 10,000. Actual machine hours were 10,400 and actual overhead was £51,000. Overhead is absorbed on machine hours. What is the over- or under-absorption for the period?

  1. £3,000 over-absorbed
  2. £2,000 under-absorbed
  3. £1,000 under-absorbed
  4. £1,000 over-absorbed Correct answer.

Explanation

The absorption rate is £50,000 ÷ 10,000 = £5 per machine hour, so overhead absorbed is 10,400 × £5 = £52,000. Actual overhead of £51,000 is lower, giving over-absorption of £1,000.

Question 34Costing methods and cost recording (inventory valuation, absorption and marginal costing)

An inventory item cost £20. It can be sold for £25, and costs of £4 will be incurred to complete and sell it. At what amount should the item be valued?

  1. £20 Correct answer.
  2. £21
  3. £25
  4. £16

Explanation

Net realisable value is £25 − £4 = £21, which is above cost of £20. IAS 2 requires the lower of cost and net realisable value, so the item is valued at £20.

Question 35Costing methods and cost recording (inventory valuation, absorption and marginal costing)

In a period of rising prices, with inventory quantities increasing, how does FIFO compare with weighted average cost?

  1. FIFO reports lower closing inventory and higher profit
  2. FIFO and weighted average report identical profit
  3. FIFO reports higher closing inventory and higher profit Correct answer.
  4. FIFO reports higher closing inventory and lower profit

Explanation

FIFO charges the older, cheaper prices to issues, so the cost of sales is lower and closing inventory is valued at the newer, higher prices. This produces both a higher inventory value and a higher reported profit than the weighted average method.

Question 36Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Which document is used to record the receipt of materials into store from a supplier?

  1. Purchase order
  2. Stores issue note
  3. Goods received note Correct answer.
  4. Materials requisition note

Explanation

The goods received note is completed when materials physically arrive and is used to update the stores ledger for receipts. The purchase order is the document sent to the supplier requesting the goods.

Question 37Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Maximum usage of a component is 400 units per week and the maximum lead time from the supplier is 3 weeks. What is the reorder level?

  1. 800 units
  2. 1,200 units Correct answer.
  3. 400 units
  4. 1,600 units

Explanation

The reorder level is maximum usage multiplied by maximum lead time: 400 × 3 = 1,200 units. It is set so that stock does not run out even if usage and lead time are both at their highest.

Question 38Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Opening inventory is £12,000, purchases are £85,000 and closing inventory is £15,000. What is the cost of goods sold?

  1. £82,000 Correct answer.
  2. £97,000
  3. £88,000
  4. £112,000

Explanation

Cost of goods sold is opening inventory plus purchases less closing inventory: £12,000 + £85,000 − £15,000 = £82,000.

Question 39Costing methods and cost recording (inventory valuation, absorption and marginal costing)

A product requires 3 direct labour hours per unit and overhead is absorbed at £8.50 per direct labour hour. What amount of overhead is absorbed per unit?

  1. £25.50 Correct answer.
  2. £11.50
  3. £2.83
  4. £8.50

Explanation

Overhead absorbed per unit is the hours per unit multiplied by the absorption rate: 3 × £8.50 = £25.50. The absorption rate itself applies to each labour hour, not to each unit.

Question 40Costing methods and cost recording (inventory valuation, absorption and marginal costing)

How is fixed production overhead treated in a marginal costing system?

  1. It is apportioned between cost of sales and inventory
  2. It is included in the valuation of closing inventory
  3. It is written off in full as a period cost Correct answer.
  4. It is absorbed into the cost of each unit produced

Explanation

Marginal costing charges the whole of fixed production overhead against the contribution of the period in which it is incurred. No part of it is attached to units, so it never enters inventory values.

Question 41Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Opening inventory was 100 units at £8 each. Receipts were 200 units at £9 each, followed by issues of 250 units and a further receipt of 100 units at £10 each. Using FIFO, what is the value of the closing inventory of 150 units?

  1. £1,450 Correct answer.
  2. £1,400
  3. £1,500
  4. £1,350

Explanation

The issue of 250 units takes the 100 opening units at £8 and 150 units at £9. Closing inventory is therefore 50 units at £9 (£450) plus 100 units at £10 (£1,000), giving £1,450.

Question 42Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Opening inventory was 500 units and closing inventory is 800 units. Fixed production overhead is absorbed at £4 per unit. How will absorption costing profit compare with marginal costing profit?

  1. £1,200 lower
  2. £1,200 higher Correct answer.
  3. £2,000 lower
  4. £3,200 higher

Explanation

Inventory increased by 300 units, so £4 × 300 = £1,200 of fixed overhead is carried forward in inventory under absorption costing. This defers the expense and makes absorption profit £1,200 higher than marginal profit.

Question 43Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Budgeted overhead is £90,000 for 20,000 direct labour hours. Actual hours worked were 18,500 and actual overhead was £86,000. What is the over- or under-absorbed overhead?

  1. £4,000 under-absorbed
  2. £2,750 under-absorbed Correct answer.
  3. £2,750 over-absorbed
  4. £6,750 under-absorbed

Explanation

The absorption rate is £90,000 ÷ 20,000 = £4.50 per hour, so overhead absorbed is 18,500 × £4.50 = £83,250. Actual overhead of £86,000 exceeds this, so £2,750 remains unabsorbed.

Question 44Costing methods and cost recording (inventory valuation, absorption and marginal costing)

A stores ledger shows 300 units valued at £2,100. 100 units are then issued and, after the issue, 200 units are received at £9 each. Using weighted average cost, what is the average cost per unit after the receipt?

  1. £6.40 Correct answer.
  2. £7.00
  3. £9.00
  4. £6.00

Explanation

The average before the receipt is £2,100 ÷ 300 = £7, so the issue leaves 200 units valued at £1,400. Adding 200 units at £9 (£1,800) gives £3,200 for 500 units, an average of £6.40.

Question 45Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Why do absorption costing and marginal costing report different profit figures when inventory quantities change?

  1. Fixed production overhead is carried forward in inventory under absorption costing Correct answer.
  2. Variable costs are excluded from inventory under absorption costing
  3. Marginal costing treats fixed overhead as a product cost
  4. Absorption costing writes off fixed overhead in the period it is incurred

Explanation

Absorption costing attaches fixed production overhead to units, so movements in inventory shift overhead between periods and change reported profit. Marginal costing expenses fixed overhead as incurred, so its profit depends only on sales volume.

Question 46Costing methods and cost recording (inventory valuation, absorption and marginal costing)

In a marginal costing system, closing inventory is valued at which cost?

  1. Variable production cost plus variable selling costs
  2. Variable production cost only Correct answer.
  3. Total production cost, including fixed production overhead
  4. Prime cost only

Explanation

Marginal costing treats fixed production overhead as a period cost, so it is never carried in inventory. Inventory therefore carries only the variable elements of production cost: direct materials, direct labour and variable production overhead.

Question 47Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Which of the following is a production overhead cost?

  1. Depreciation of factory machinery Correct answer.
  2. Commission paid to sales representatives
  3. Salaries of the finance department
  4. Cost of delivering goods to customers

Explanation

Production overheads are indirect costs incurred in the factory that cannot be traced directly to a unit of product. Depreciation of machinery used in production is incurred in the production function and is therefore a production overhead.

Question 48Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Contribution is sales revenue less which of the following?

  1. Prime cost
  2. Variable costs Correct answer.
  3. Fixed costs
  4. Total production cost

Explanation

Contribution measures the surplus of sales revenue over all variable costs, whether production or non-production. It is the amount available to cover fixed costs and then to generate profit.

Question 49Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Which document authorises the issue of materials from stores to production?

  1. Purchase order
  2. Goods received note
  3. Materials requisition Correct answer.
  4. Stores return note

Explanation

A materials requisition is prepared by the production department and authorises the storekeeper to release the stated quantity of materials. It also provides the source record used to update the stores ledger and charge the cost to production.

Question 50Costing methods and cost recording (inventory valuation, absorption and marginal costing)

Production cost consists of prime cost plus which element?

  1. Production overhead Correct answer.
  2. Administration overhead
  3. Direct expenses
  4. Selling and distribution overhead

Explanation

Production cost is the total cost of goods completed in the factory, being prime cost (direct materials, direct labour and direct expenses) plus production overhead. Non-production overheads are excluded from production cost.