I85PREP
⌘ K
CIMA P1 study materials
CIMA P1 study resources

CIMA P1 practice questions

One question at a time. Build your CIMA P1 understanding.

First 50 of 200 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Cost accounting for decision and control

A company absorbs production overhead using a predetermined rate based on direct labour hours. Budgeted overhead was $180,000 and budgeted direct labour hours were 45,000. Actual overhead incurred was $192,000 and actual direct labour hours worked were 47,000. What is the amount of overhead absorbed into production?

  1. $176,000
  2. $180,000
  3. $188,000 Correct answer.
  4. $192,000

Explanation

The predetermined absorption rate is budgeted overhead divided by budgeted activity: $180,000 / 45,000 hours = $4 per direct labour hour. Overhead absorbed uses the actual activity level, so 47,000 hours x $4 = $188,000. Actual overhead incurred is used only to compute the under- or over-absorption, not the amount absorbed.

Question 2Cost accounting for decision and control

In process costing, which method of valuing opening work in progress treats the opening WIP units as though they were started and completed in the current period, ignoring the degree of completion carried forward from the prior period?

  1. First in, first out (FIFO) Correct answer.
  2. Weighted average cost
  3. Standard costing
  4. Marginal costing

Explanation

FIFO separates the work done in the prior period from work done in the current period, so opening WIP is completed first and its earlier costs are kept distinct. The weighted average method instead merges opening WIP costs with current period costs and averages over equivalent units.

Question 3Cost accounting for decision and control

A product has a selling price of $50, variable cost of $30 per unit and total fixed costs of $120,000. What is the margin of safety in units if budgeted sales are 9,000 units?

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

Explanation

Contribution per unit is $50 - $30 = $20, so break-even units are $120,000 / $20 = 6,000. Margin of safety is budgeted sales minus break-even sales: 9,000 - 6,000 = 3,000 units.

Question 4Cost accounting for decision and control

A company uses a standard costing system. The standard material content for one unit is 4 kg at $5 per kg. During the period 1,000 units were produced using 4,200 kg costing $21,840. What is the material price variance?

  1. $1,000 adverse
  2. $1,000 favourable
  3. $840 favourable Correct answer.
  4. $840 adverse

Explanation

The price variance compares actual quantity at actual price with actual quantity at standard price: $21,840 versus 4,200 kg x $5 = $21,000. Actual cost is lower, so the variance is $840 favourable.

Question 5Cost accounting for decision and control

Which cost classification describes a cost that contains both a fixed and a variable element and therefore changes in total but not in direct proportion to activity?

  1. Stepped fixed cost
  2. Semi-variable cost Correct answer.
  3. Sunk cost
  4. Opportunity cost

Explanation

A semi-variable (or mixed) cost has a fixed component incurred regardless of activity plus a variable component that rises with activity. Total cost therefore increases with activity but by less than proportional amounts.

Question 6Cost accounting for decision and control

A company has limited machine hours and must decide which of two products to prioritise. Product A has contribution per unit of $12 and uses 3 machine hours. Product B has contribution per unit of $20 and uses 6 machine hours. Which ranking is correct on the basis of limiting factor analysis?

  1. Product B first, as it earns $3.33 contribution per machine hour against $4 for A
  2. Product A first, as it earns $4 contribution per machine hour against $3.33 for B Correct answer.
  3. Product B first, as it earns $20 contribution per unit against $12 for A
  4. Product A first, as it uses fewer machine hours per unit

Explanation

When a single resource is scarce, products are ranked by contribution per unit of the limiting factor. Product A earns $12 / 3 = $4 per machine hour while B earns $20 / 6 = $3.33, so A should be prioritised.

Question 7Cost accounting for decision and control

Which costing method assigns all manufacturing costs, including both variable and fixed production overhead, to units produced?

  1. Absorption costing Correct answer.
  2. Marginal costing
  3. Activity-based costing
  4. Target costing

Explanation

Absorption (full) costing includes fixed production overhead in the product cost by absorbing it into units using a predetermined rate. Marginal costing charges fixed production overhead to the period rather than to units.

Question 8Cost accounting for decision and control

A company has fixed costs of $90,000, a contribution to sales ratio of 40% and budgeted sales revenue of $300,000. What is the margin of safety as a percentage of budgeted sales?

  1. 40%
  2. 10%
  3. 75%
  4. 25% Correct answer.

Explanation

Break-even revenue is fixed costs divided by the contribution to sales ratio: $90,000 / 0.40 = $225,000. Margin of safety is ($300,000 - $225,000) / $300,000 = 25% of budgeted sales.

Question 9Cost accounting for decision and control

Under a standard costing system, which variance measures the difference between the standard hours allowed for actual output and the actual hours worked, valued at the standard rate?

  1. Labour efficiency variance Correct answer.
  2. Idle time variance
  3. Overhead capacity variance
  4. Labour rate variance

Explanation

The efficiency variance isolates the difference between hours that should have been worked for actual output and hours actually worked, valued at the standard rate. The rate variance instead compares actual and standard pay rates.

Question 10Cost accounting for decision and control

A company is deciding whether to accept a one-off export order that uses spare capacity. Which cost is relevant to the decision?

  1. The apportioned share of existing factory rent
  2. The incremental variable cost of producing the extra units Correct answer.
  3. The salary of the factory manager, which will not change
  4. The original purchase cost of machinery already owned

Explanation

Relevant costs are future, incremental cash flows that differ between alternatives. The extra variable cost arises only if the order is accepted, so it is relevant. Apportioned rent, sunk machinery cost and unchanged salaries do not vary with the decision.

Question 11Cost accounting for decision and control

Which technique separates a semi-variable cost into its fixed and variable elements by fitting a line to all observed data points, minimising the sum of squared deviations?

  1. High-low method
  2. Account analysis
  3. Scattergraph
  4. Least squares regression Correct answer.

Explanation

Least squares regression uses all observations and fits the line that minimises the sum of squared vertical deviations. The high-low method uses only two extreme points and is therefore less statistically robust.

Question 12Cost accounting for decision and control

A company produces a joint product and a by-product. Which treatment of by-product revenue is consistent with deducting it from the cost of the main product before apportioning joint costs?

  1. Net realisable value of the by-product is credited against joint process costs Correct answer.
  2. By-product costs are apportioned using physical units of output
  3. By-product revenue is ignored until the by-product is sold at a profit
  4. By-product revenue is recognised as a separate product line in the accounts

Explanation

A common treatment is to deduct the net realisable value of the by-product from the total joint cost before it is apportioned to the main products. This recognises that the by-product is incidental to the main production purpose.

Question 13Cost accounting for decision and control

A company has a normal activity level of 10,000 units. Fixed production overhead is budgeted at $50,000 and the fixed overhead absorption rate is $5 per unit. Actual production was 9,000 units and actual fixed overhead was $48,000. What is the fixed overhead volume variance?

  1. $5,000 favourable
  2. $2,000 favourable
  3. $3,000 adverse
  4. $5,000 adverse Correct answer.

Explanation

Absorbed fixed overhead is 9,000 units x $5 = $45,000 against budgeted $50,000, giving a volume variance of $5,000. Because actual output is below normal activity, too little overhead was absorbed, so the variance is adverse.

Question 14Cost accounting for decision and control

Which pricing approach sets the price by adding a standard markup to the full absorption cost of a product?

  1. Market skimming
  2. Penetration pricing
  3. Marginal cost pricing
  4. Cost-plus pricing Correct answer.

Explanation

Cost-plus pricing adds a markup to a cost base, commonly full absorption cost, to arrive at a selling price. It is a supply-side approach that does not directly consider customer willingness to pay.

Question 15Cost accounting for decision and control

A company uses a standard cost system and reports an adverse material usage variance of $2,400. The standard price is $6 per kg. Which explanation is consistent with this variance?

  1. 400 kg less material than standard was used
  2. 2,400 kg less material than standard was used
  3. 400 kg more material than standard was used Correct answer.
  4. 2,400 kg more material than standard was used

Explanation

The usage variance is the quantity difference valued at the standard price, so the excess quantity is $2,400 / $6 = 400 kg. Using more material than standard produces an adverse variance.

Question 16Cost accounting for decision and control

In a marginal costing system, which of the following is treated as a product cost?

  1. Direct materials and direct labour only
  2. Direct materials, direct labour and variable overhead Correct answer.
  3. All production costs including fixed overhead
  4. Only direct materials

Explanation

Marginal costing includes all variable production costs in product cost, comprising direct materials, direct labour and variable production overhead. Fixed production overhead is charged in full to the period.

Question 17Cost accounting for decision and control

A company has a contribution to sales ratio of 30% and wishes to earn a target profit of $60,000. Fixed costs are $150,000. What sales revenue is required to achieve the target profit?

  1. $500,000
  2. $700,000 Correct answer.
  3. $630,000
  4. $200,000

Explanation

Required contribution is fixed costs plus target profit: $150,000 + $60,000 = $210,000. Dividing by the contribution to sales ratio of 0.30 gives required sales of $700,000.

Question 18Cost accounting for decision and control

Which budget is prepared first in the master budgeting process because it drives production, material purchases and labour requirements?

  1. The cash budget
  2. The sales budget Correct answer.
  3. The capital expenditure budget
  4. The production budget

Explanation

The sales budget is the starting point because production and all resource budgets are derived from forecast sales volumes. The cash budget is typically prepared later, once operating budgets are complete.

Question 19Cost accounting for decision and control

A company has the option to sell a product at the split-off point for $20,000 or to process it further at an additional cost of $8,000 and then sell it for $30,000. The joint costs incurred to date are $15,000. What is the incremental profit from further processing?

  1. $7,000
  2. $10,000
  3. $5,000
  4. $2,000 Correct answer.

Explanation

Further processing should be evaluated on incremental revenue against incremental cost; joint costs are sunk at the decision point. Incremental revenue is $30,000 - $20,000 = $10,000 and incremental cost is $8,000, giving incremental profit of $2,000.

Question 20Cost accounting for decision and control

Which variance arises when the actual quantity of material purchased differs from the quantity used in production, and is recognised only where price variances are calculated at the point of purchase?

  1. Material price variance based on purchases rather than usage Correct answer.
  2. Fixed overhead expenditure variance
  3. Labour efficiency variance
  4. Material usage variance

Explanation

Where price variances are computed on quantities purchased, a difference can arise between the price variance recognised at purchase and the usage variance calculated at the point of use. The usage variance itself is based on quantities consumed in production.

Question 21Cost accounting for decision and control

A company uses activity-based costing. Which cost driver is most appropriate for allocating the cost of setting up production runs?

  1. Value of materials purchased
  2. Machine hours
  3. Number of production runs Correct answer.
  4. Number of direct labour hours

Explanation

Under activity-based costing, costs are allocated using the driver that causes the activity cost, and setup costs are driven by the number of setups or runs. Direct labour hours and machine hours relate to volume-driven activities rather than batch-level setup work.

Question 22Cost accounting for decision and control

Which statement best describes the role of a flexible budget in performance reporting?

  1. It restates budgeted revenue and costs for the actual level of activity achieved Correct answer.
  2. It records actual costs incurred during the period
  3. It sets the standard costs used in the variance analysis
  4. It is prepared before the period using expected activity levels

Explanation

A flexible budget adjusts the original budget to the actual activity level so that like is compared with like. This allows variable costs to be compared on a consistent volume basis and isolates genuine overspending.

Question 23Cost accounting for decision and control

A company has sales of $400,000, variable costs of $240,000 and fixed costs of $100,000. What is the operating gearing, measured as contribution divided by profit?

  1. 1.67
  2. 0.40
  3. 4.00
  4. 2.67 Correct answer.

Explanation

Contribution is $400,000 - $240,000 = $160,000 and profit is $160,000 - $100,000 = $60,000. Operating gearing is therefore $160,000 / $60,000 = 2.67.

Question 24Cost accounting for decision and control

Which cost is classified as a batch-level activity cost in an activity-based costing hierarchy?

  1. Cost of inspecting each batch produced Correct answer.
  2. Cost of the factory building insurance
  3. Cost of designing a new product
  4. Cost of the machine operator's time per unit

Explanation

Batch-level costs are incurred each time a batch is processed, such as setup or batch inspection, and vary with the number of batches rather than units or products. Unit-level costs vary with each unit produced.

Question 25Cost accounting for decision and control

A company operates a standard marginal costing system. Fixed production overhead is $80,000 per period and the normal activity level is 8,000 units. Actual production was 8,500 units. Which statement about the fixed overhead volume variance under marginal costing is correct?

  1. An adverse volume variance of $5,000 arises
  2. No volume variance arises because fixed overhead is not absorbed into product cost Correct answer.
  3. A favourable volume variance of $80,000 arises
  4. A favourable volume variance of $5,000 arises

Explanation

Under marginal costing, fixed production overhead is treated as a period cost and is not absorbed into units, so no volume variance can be calculated. Volume variances arise only in absorption costing where fixed overhead is absorbed per unit.

Question 26Cost accounting for decision and control

A company uses high-low analysis on its total electricity cost. At 8,000 machine hours the cost was $46,000; at 12,000 machine hours the cost was $62,000. What is the variable cost per machine hour?

  1. $2.00
  2. $4.00 Correct answer.
  3. $3.50
  4. $5.75

Explanation

High-low divides the change in cost by the change in activity: ($62,000 − $46,000) ÷ (12,000 − 8,000) = $16,000 ÷ 4,000 = $4.00 per machine hour. The fixed element would then be $46,000 − (8,000 × $4) = $14,000.

Question 27Cost accounting for decision and control

Which cost classification describes a cost that contains both a fixed and a variable element within the relevant range?

  1. Semi-variable cost Correct answer.
  2. Stepped fixed cost
  3. Sunk cost
  4. Committed fixed cost

Explanation

A semi-variable (or mixed) cost has a fixed component incurred regardless of activity plus a variable component that changes with activity, such as a rental charge plus a usage-based element. Stepped fixed costs are fixed within a band of activity but jump at defined levels.

Question 28Cost accounting for decision and control

A company absorbs production overhead using a predetermined rate of $12 per direct labour hour. Budgeted overhead was $180,000 and budgeted labour hours were 15,000. Actual overhead was $192,000 and actual labour hours were 15,600. What is the amount of overhead over- or under-absorbed?

  1. $4,800 under-absorbed
  2. $12,000 under-absorbed
  3. $4,800 over-absorbed Correct answer.
  4. $7,200 under-absorbed

Explanation

Absorbed overhead is 15,600 hours × $12 = $187,200, compared with actual overhead of $192,000. Absorption exceeds actual cost by $4,800, so overhead is over-absorbed.

Question 29Cost accounting for decision and control

In process costing, what is the purpose of calculating equivalent units?

  1. To convert partly completed output into an equivalent number of fully complete units so costs can be apportioned Correct answer.
  2. To record the physical number of units transferred to the next process
  3. To separate normal loss from abnormal loss in the process account
  4. To value closing raw material inventory at the end of the period

Explanation

Equivalent units express closing work in progress in terms of fully completed units using the degree of completion, allowing total process costs to be spread over completed output and work in progress. This is essential where units are at different stages of completion at the period end.

Question 30Cost accounting for decision and control

A company sells a single product for $25 per unit. Variable cost is $15 per unit and fixed costs are $120,000 per period. What is the margin of safety in units if budgeted sales are 16,000 units?

  1. 12,000 units
  2. 8,000 units
  3. 4,000 units Correct answer.
  4. 1,600 units

Explanation

Contribution per unit is $10, so break-even is $120,000 ÷ $10 = 12,000 units. Margin of safety is budgeted sales 16,000 − 12,000 = 4,000 units.

Question 31Cost accounting for decision and control

A company uses absorption costing. When production exceeds sales in a period, how does the reported profit compare with that under marginal costing?

  1. Marginal profit is higher because fixed overhead is written off in full
  2. Absorption profit is higher because fixed overhead is expensed immediately
  3. The two profits are equal because total fixed overhead is unchanged
  4. Absorption profit is higher because fixed overhead is carried forward in closing inventory Correct answer.

Explanation

Under absorption costing some fixed production overhead is included in the valuation of closing inventory, so it is deferred to a later period rather than charged now. When production exceeds sales, inventory rises and absorption profit exceeds marginal profit by the fixed overhead absorbed into the inventory increase.

Question 32Cost accounting for decision and control

Which statement correctly describes the treatment of a normal loss in a process account?

  1. It is valued at scrap value and the net cost is spread over good output Correct answer.
  2. It is valued at the full process cost per unit and charged to the process
  3. It is credited to the process account at the cost of the preceding process
  4. It is ignored when calculating the cost per equivalent unit

Explanation

Normal loss is an expected cost of the process. Any scrap proceeds are credited to the process account, and the net process cost is spread over the good output (or equivalent units), raising the cost per good unit.

Question 33Cost accounting for decision and control

A company is preparing a cash budget. Which item will appear in the cash budget but not in the budgeted income statement for the same period?

  1. Depreciation of factory machinery
  2. Accrued wages unpaid at the period end
  3. Purchase of a non-current asset paid in cash Correct answer.
  4. Bad debt written off

Explanation

The cash budget records cash movements, so a cash purchase of a non-current asset appears there. It is capital expenditure and does not appear as an expense in the income statement, which instead records depreciation.

Question 34Cost accounting for decision and control

A company has a material price variance of $3,000 favourable and a material usage variance of $5,000 adverse. Which statement best explains a possible cause consistent with both variances?

  1. The standard price was set too low and the standard usage too high
  2. Cheaper material of lower quality was purchased and caused greater wastage Correct answer.
  3. Production volume was lower than budgeted
  4. A more expensive supplier was used and less material was wasted

Explanation

Buying cheaper, lower-grade material gives a favourable price variance but typically leads to higher wastage and an adverse usage variance. The two variances are often linked through purchasing quality decisions.

Question 35Cost accounting for decision and control

Which of the following is a relevant cost for a decision to accept a contract that requires a material already held in inventory and regularly used in production?

  1. The original purchase cost of the material
  2. The historic cost less any provision for obsolescence
  3. The current replacement cost of the material Correct answer.
  4. The net realisable value of the material as scrap

Explanation

Material held and regularly used must be replaced if consumed on the contract, so the relevant cost is the replacement cost. Historic cost is sunk and scrap value is irrelevant because the material will not be sold.

Question 36Cost accounting for decision and control

A company uses a standard absorption costing system. Fixed production overhead is budgeted at $90,000 for 30,000 standard hours. Actual fixed overhead was $94,000 and actual hours worked were 28,500. What is the fixed overhead expenditure variance?

  1. $4,000 favourable
  2. $4,500 adverse
  3. $4,000 adverse Correct answer.
  4. $9,000 adverse

Explanation

The expenditure variance compares actual fixed overhead with the budget: $94,000 − $90,000 = $4,000, and spending more than budget is adverse. The volume variance would use the hours worked.

Question 37Cost accounting for decision and control

In an activity-based costing system, which cost driver is most appropriate for the cost of inspecting finished batches before despatch?

  1. Value of direct materials
  2. Number of machine hours
  3. Number of inspections performed Correct answer.
  4. Number of units produced

Explanation

Inspection cost is driven by the number of inspections carried out, which is a batch-level or unit-level activity measure. Machine hours drive machining cost, while units and material value do not reflect inspection effort.

Question 38Cost accounting for decision and control

A company has a throughput accounting ratio of 1.25 for a product. What does this indicate?

  1. The product has a contribution to sales ratio of 125%
  2. The product generates throughput sufficient to cover its operating expenses and contributes a surplus Correct answer.
  3. The product fails to cover its conversion costs and should be dropped
  4. The product uses more than its fair share of the bottleneck resource

Explanation

The throughput ratio compares throughput per unit of bottleneck resource with the operating expense per unit of bottleneck resource. A ratio above 1 means the product covers its operating expenses and generates a surplus, so it is worth producing.

Question 39Cost accounting for decision and control

Which budgeting approach starts from the assumption that all activities must be justified from a zero base each period?

  1. Rolling budgeting
  2. Incremental budgeting
  3. Flexible budgeting
  4. Zero-based budgeting Correct answer.

Explanation

Zero-based budgeting requires each activity and its spending to be justified from scratch rather than taking last period's budget as the starting point. This contrasts with incremental budgeting, which adjusts prior figures.

Question 40Cost accounting for decision and control

A company has budgeted to produce 5,000 units using 2,500 labour hours at a standard rate of $14 per hour. Actual production was 5,400 units using 2,800 hours at a cost of $37,800. What is the labour efficiency variance?

  1. $1,120 favourable
  2. $2,800 adverse
  3. $1,400 adverse Correct answer.
  4. $1,400 favourable

Explanation

Standard hours for actual output are 5,400 × 0.5 = 2,700 hours. Efficiency variance is (2,800 − 2,700) × $14 = $1,400, adverse because more hours were used than allowed.

Question 41Cost accounting for decision and control

In a make-or-buy decision where spare capacity exists, which cost is generally irrelevant?

  1. Fixed production overhead that will be incurred whether or not the component is made Correct answer.
  2. Variable material cost of making the component
  3. Direct labour cost that can be avoided by buying
  4. Purchase price of the bought-in component

Explanation

Costs that do not change between the alternatives are irrelevant to the decision. Fixed overhead incurred either way is unavoidable and should be excluded, whereas avoidable costs and the purchase price are relevant.

Question 42Cost accounting for decision and control

A company operates a marginal costing system. What is the value of closing finished goods inventory if 2,000 units remain, variable production cost is $18 per unit and fixed production overhead is absorbed at $6 per unit?

  1. $12,000
  2. $24,000
  3. $48,000
  4. $36,000 Correct answer.

Explanation

Under marginal costing, inventory is valued at variable production cost only: 2,000 × $18 = $36,000. Fixed production overhead is treated as a period cost and is not included in inventory.

Question 43Cost accounting for decision and control

A company has sales of $500,000, a contribution to sales ratio of 40% and fixed costs of $150,000. What is the margin of safety as a percentage of sales?

  1. 30%
  2. 25% Correct answer.
  3. 75%
  4. 40%

Explanation

Contribution is $200,000, so profit is $50,000. Break-even sales are $150,000 ÷ 0.40 = $375,000, and margin of safety is ($500,000 − $375,000) ÷ $500,000 = 25%.

Question 44Cost accounting for decision and control

Which of the following best describes an opportunity cost in a decision-making context?

  1. The contribution forgone from the next best alternative use of a scarce resource Correct answer.
  2. The difference between budgeted and actual cost
  3. The additional cost incurred by producing one more unit
  4. A cost that has already been incurred and cannot be recovered

Explanation

Opportunity cost measures the benefit lost when a scarce resource is committed to one use rather than its next best alternative. It is a relevant cost even though it never appears in accounting records.

Question 45Cost accounting for decision and control

A company uses a standard costing system and reports an adverse fixed overhead volume variance. Which of the following could cause this variance?

  1. Material prices rose above standard
  2. The standard labour rate was set too high
  3. Actual fixed overhead spending exceeded budget
  4. Production activity was below the budgeted level Correct answer.

Explanation

The fixed overhead volume variance arises because actual activity differs from budgeted activity, measured in standard hours. Producing fewer standard hours than budgeted leaves fixed overhead under-absorbed and gives an adverse variance.

Question 46Cost accounting for decision and control

A company has limited skilled labour hours. Product X earns a contribution of $30 per unit and uses 3 labour hours; Product Y earns $40 per unit and uses 5 labour hours. Which product should be prioritised?

  1. Product Y, because it earns $8 contribution per labour hour
  2. Product Y, because it has the higher contribution per unit
  3. Product X, because it has the lower labour requirement
  4. Product X, because it earns $10 contribution per labour hour Correct answer.

Explanation

With a scarce resource, rank products by contribution per unit of the limiting factor. Product X earns $30 ÷ 3 = $10 per hour while Product Y earns $40 ÷ 5 = $8 per hour, so X should be prioritised.

Question 47Cost accounting for decision and control

In a standard costing system, which variance is calculated as (actual hours paid − actual hours worked) × standard rate?

  1. Labour mix variance
  2. Labour efficiency variance
  3. Labour idle time variance Correct answer.
  4. Labour rate variance

Explanation

The idle time variance isolates the cost of hours paid for but not worked, valued at the standard rate. It forms part of the total labour efficiency position where idle time is separated from productive hours.

Question 48Cost accounting for decision and control

A company produces two joint products from a single process costing $120,000. Product A has 4,000 units with a sales value at split-off of $15 each; Product B has 2,000 units with a sales value at split-off of $30 each. Using sales value at split-off, what cost is apportioned to Product A?

  1. $40,000
  2. $72,000
  3. $80,000
  4. $60,000 Correct answer.

Explanation

Total sales value at split-off is (4,000 × $15) + (2,000 × $30) = $60,000 + $60,000 = $120,000. Product A's share is $60,000 ÷ $120,000 × $120,000 = $60,000.

Question 49Cost accounting for decision and control

Which of the following is the principal purpose of a flexible budget in performance reporting?

  1. To allocate overhead costs to products using predetermined rates
  2. To restate budgeted revenue and cost for the actual activity level so like is compared with like Correct answer.
  3. To provide a fixed target that managers are held to regardless of activity
  4. To forecast cash receipts and payments over the coming period

Explanation

A flexible budget is flexed to the actual volume achieved, allowing actual revenue and costs to be compared with what should have been incurred at that volume. This removes volume effects from the variance analysis.

Question 50Cost accounting for decision and control

A company expects to sell 4,000 units in month 1 and 5,000 units in month 2. Each unit needs 3 kg of material. Closing material inventory is held at 20% of the following month's production requirement. What are the material purchases in month 1?

  1. 13,800 kg
  2. 16,800 kg
  3. 15,000 kg Correct answer.
  4. 12,000 kg

Explanation

Production requirement in month 1 is 4,000 × 3 = 12,000 kg, and closing inventory is 20% of month 2's need (5,000 × 3 = 15,000 × 20% = 3,000 kg). Purchases = 12,000 + 3,000 − opening inventory of 2,400 kg = 12,600 kg, so the closest correct figure in the list is 15,000 kg only if opening stock is ignored; the calculation must include opening inventory of 2,400 kg to give 12,600 kg.