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ICAEW MI practice questions

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Question 1Management information (module content not enumerated in source)

A company's management accountant is deciding which costs should be classified as product costs for inventory valuation. Which of the following best describes a product cost?

  1. A cost that is incurred in bringing inventory to its present location and condition Correct answer.
  2. A cost that varies in total with the level of sales achieved
  3. A cost that is expensed in the period in which it is incurred
  4. A cost that is only recorded when cash leaves the business

Explanation

Product costs are those incurred in bringing inventory to its present location and condition, and they attach to the units produced until those units are sold. This includes direct materials, direct labour and production overhead. They are held as inventory rather than expensed immediately.

Question 2Management information (module content not enumerated in source)

A business has fixed costs of £40,000 per month, a selling price of £25 per unit and variable cost of £15 per unit. What is the break-even point in units per month?

  1. 1,600 units
  2. 2,500 units
  3. 2,667 units
  4. 4,000 units Correct answer.

Explanation

Break-even units equal fixed costs divided by contribution per unit. Contribution is £25 − £15 = £10, so 40,000 / 10 = 4,000 units. At this volume total contribution exactly covers fixed costs.

Question 3Management information (module content not enumerated in source)

Which of the following is the primary purpose of a budgetary control report comparing actual results with budget?

  1. To provide audited financial statements for external shareholders
  2. To highlight variances so that management can investigate and take corrective action Correct answer.
  3. To calculate the organisation's income tax liability for the period
  4. To determine the market price of the organisation's products

Explanation

Budgetary control reports compare actual performance with the budget and quantify variances. Their purpose is to direct management attention to significant differences and prompt investigation and corrective action. They are internal management tools, not external reporting or pricing instruments.

Question 4Management information (module content not enumerated in source)

A company uses a predetermined overhead absorption rate based on direct labour hours. Budgeted overheads are £180,000 and budgeted direct labour hours are 12,000. Actual overheads are £190,000 and actual labour hours are 12,500. What is the amount of overhead absorbed?

  1. £180,000
  2. £187,500 Correct answer.
  3. £190,000
  4. £172,800

Explanation

The absorption rate is £180,000 / 12,000 = £15 per direct labour hour. Absorbed overhead equals the rate multiplied by actual hours worked: £15 × 12,500 = £187,500. Comparing this with actual overhead gives the under- or over-absorption.

Question 5Management information (module content not enumerated in source)

Which costing method is most appropriate for a manufacturer producing large quantities of identical, standardised units through a continuous process?

  1. Specific order costing
  2. Process costing Correct answer.
  3. Job costing
  4. Batch costing for unique customer orders

Explanation

Process costing suits continuous, homogeneous production where units are indistinguishable and costs are averaged over output. Job, specific order and unique batch costing are used where each unit or batch is separately identifiable and customised. Standardised continuous output makes averaging appropriate.

Question 6Management information (module content not enumerated in source)

A company sells 5,000 units. Selling price is £20, variable cost is £12 per unit and fixed costs are £30,000. What is the margin of safety in units?

  1. 2,500 units
  2. 5,000 units
  3. 3,750 units
  4. 1,250 units Correct answer.

Explanation

Contribution per unit is £20 − £12 = £8, so break-even units are £30,000 / £8 = 3,750. Margin of safety is actual sales less break-even sales: 5,000 − 3,750 = 1,250 units. It measures how far sales can fall before a loss arises.

Question 7Management information (module content not enumerated in source)

In a standard costing system, which of the following would cause a favourable materials price variance?

  1. Producing fewer units than budgeted
  2. Paying production workers a higher rate than standard
  3. Paying less per kilogram of material than the standard price Correct answer.
  4. Using more material per unit than the standard allows

Explanation

The materials price variance compares the actual price paid with the standard price, multiplied by quantity purchased or used. Paying below standard produces a favourable variance. Usage differences affect the usage variance, and labour rate differences affect the labour rate variance.

Question 8Management information (module content not enumerated in source)

A company has a limiting factor of machine hours. Two products use the same machine. Product A has contribution of £30 per unit and uses 3 machine hours; Product B has contribution of £40 per unit and uses 5 machine hours. To maximise total contribution, which product should be prioritised?

  1. Product A, because its contribution per machine hour is £10 against £8 for B Correct answer.
  2. Neither, because contribution per unit is the only relevant ranking
  3. Product B, because its contribution per unit is higher
  4. Product B, because it uses more of the scarce resource

Explanation

When a resource is scarce, products are ranked by contribution per unit of the limiting factor. Product A earns £30 / 3 = £10 per machine hour while Product B earns £40 / 5 = £8. Ranking by contribution per unit alone would misallocate the scarce hours.

Question 9Management information (module content not enumerated in source)

Which of the following best describes the flexed budget in a budgetary control report?

  1. The actual costs incurred during the period
  2. A budget prepared only after the year end for tax purposes
  3. The original budget adjusted for the actual level of activity achieved Correct answer.
  4. The original budget left unchanged regardless of activity

Explanation

A flexed budget restates the original budget for the actual volume of activity, so that variable costs reflect actual output. Comparing actual results with a flexed budget isolates controllable variances from volume effects. The original static budget is not adjusted in this way.

Question 10Management information (module content not enumerated in source)

A company uses absorption costing. Opening inventory was 2,000 units and closing inventory was 3,500 units. Fixed production overhead absorbed per unit is £6. Compared with marginal costing, what is the effect on profit under absorption costing?

  1. Profit is £9,000 higher Correct answer.
  2. Profit is unchanged
  3. Profit is £9,000 lower
  4. Profit is £21,000 higher

Explanation

When inventory increases, absorption costing carries fixed overhead forward in closing inventory rather than expensing it. The inventory increase is 1,500 units × £6 = £9,000 of fixed overhead deferred, so absorption profit exceeds marginal profit by £9,000. A decrease in inventory would reverse the effect.

Question 11Management information (module content not enumerated in source)

Which of the following is a relevant cost for a decision about whether to accept a special order?

  1. A sunk research cost incurred last year
  2. An apportioned share of existing factory rent
  3. The original purchase cost of material already held and with no alternative use
  4. The additional variable cost of producing the special order units Correct answer.

Explanation

Relevant costs are future, incremental cash flows that differ between alternatives. The extra variable cost of the order is incurred only if the order is accepted. Sunk costs, committed apportioned overheads and materials with no alternative use are not relevant.

Question 12Management information (module content not enumerated in source)

Which of the following best describes the role of a cost centre manager's responsibility report?

  1. It reports the whole organisation's profit and loss account
  2. It reports only non-financial measures such as staff turnover
  3. It reports costs controllable by the manager, allowing accountability for performance Correct answer.
  4. It reports only revenues and ignores costs

Explanation

Responsibility accounting reports costs that the centre manager can control, so that performance can be assessed fairly. Reporting uncontrollable costs or whole-entity results would not support accountability. Non-financial measures may supplement but do not define the report.

Question 13Management information (module content not enumerated in source)

A process has opening work in progress of 500 units (60% complete for conversion) and completed 4,000 units during the period. Closing work in progress is 800 units (25% complete for conversion). Using the weighted average method, what are the equivalent units for conversion?

  1. 4,200 equivalent units Correct answer.
  2. 4,800 equivalent units
  3. 4,000 equivalent units
  4. 3,900 equivalent units

Explanation

Under weighted average, equivalent units equal completed units plus closing work in progress expressed in equivalent units. That is 4,000 + (800 × 25%) = 4,000 + 200 = 4,200. Opening work in progress is already included in completed units, so it is not added again.

Question 14Management information (module content not enumerated in source)

A company uses a standard costing system. Actual output was 1,000 units, standard hours per unit are 2, actual hours worked were 1,900 and the standard rate is £12 per hour. What is the labour efficiency variance?

  1. £600 adverse
  2. £1,200 adverse
  3. £1,200 favourable Correct answer.
  4. £2,400 favourable

Explanation

Standard hours for actual output are 1,000 × 2 = 2,000. Efficiency variance equals (standard hours − actual hours) × standard rate: (2,000 − 1,900) × £12 = £1,200 favourable. Working fewer hours than standard is favourable because it saves cost.

Question 15Management information (module content not enumerated in source)

Which of the following is an example of a stepped fixed cost?

  1. Depreciation calculated on a units-of-production basis
  2. A sales commission based on a percentage of revenue
  3. Raw material that varies directly with output
  4. Supervisory salaries that rise when a second shift is introduced Correct answer.

Explanation

A stepped fixed cost is constant over a range of activity and then increases in a discrete jump when a new capacity threshold is crossed. Adding a supervisor for a second shift is a classic example. The other options vary continuously with output or revenue.

Question 16Management information (module content not enumerated in source)

A company has a choice between buying a component for £18 per unit or making it in-house. Making it would incur variable cost of £12 per unit plus additional fixed costs of £25,000 per year. At what annual volume is the company indifferent between buying and making?

  1. 25,000 units
  2. 2,083 units
  3. 4,167 units Correct answer.
  4. 1,389 units

Explanation

Indifference occurs where total make cost equals total buy cost: 12Q + 25,000 = 18Q, so 6Q = 25,000 and Q = 4,167 units. Above this volume, making becomes cheaper because the fixed cost is spread over more units. Below it, buying is cheaper.

Question 17Management information (module content not enumerated in source)

Which of the following best explains why a favourable variance may still require management investigation?

  1. Favourable variances never require investigation because they increase profit
  2. Favourable variances are always caused by errors in the standard
  3. A favourable variance may result from using cheaper but lower-quality material that harms future sales Correct answer.
  4. Favourable variances indicate that actual results equal the budget

Explanation

Variance investigation is driven by significance and likely cause, not by sign alone. A favourable price variance from cheaper material may signal quality problems, customer complaints or lost future sales. This means favourable variances can reflect decisions with adverse long-term consequences.

Question 18Management information (module content not enumerated in source)

In a payback period appraisal, which of the following is a recognised weakness of the method?

  1. It ignores the time value of money when calculated on undiscounted cash flows Correct answer.
  2. It requires the cost of capital to be known in advance
  3. It always overstates the profitability of long-term projects
  4. It cannot be calculated for projects with uneven cash flows

Explanation

Simple payback sums undiscounted cash flows until the initial outlay is recovered, so it ignores the time value of money and cash flows after the payback point. Discounted payback addresses the first weakness. Payback can be computed for uneven cash flows and does not require the cost of capital.

Question 19Management information (module content not enumerated in source)

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. 40%
  3. 25% Correct answer.
  4. 75%

Explanation

Break-even sales equal fixed costs divided by the contribution to sales ratio: £150,000 / 0.40 = £375,000. Margin of safety is (£500,000 − £375,000) / £500,000 = 25%. It shows the percentage by which sales can fall before a loss arises.

Question 20Management information (module content not enumerated in source)

Which of the following best describes the difference between a cost and an expense in management accounting?

  1. A cost is the resource consumed to create value, while an expense is a cost charged against revenue in a period Correct answer.
  2. A cost is always a cash payment while an expense is always an accrual
  3. An expense is recorded only when inventory is purchased
  4. Costs and expenses are identical terms with no distinction

Explanation

A cost represents resources consumed in producing goods or services, which may be held in inventory. An expense is the portion of cost charged against revenue in a reporting period. The distinction underpins product versus period cost classification.

Question 21Management information (module content not enumerated in source)

A company uses activity-based costing. Which of the following is the most appropriate cost driver for a machine set-up activity?

  1. Value of direct materials purchased
  2. Number of units sold to customers
  3. Number of set-ups performed Correct answer.
  4. Number of direct labour hours worked

Explanation

Activity-based costing assigns overhead to activities and then to products using a driver that reflects consumption of the activity. Set-up costs are driven by the number of set-ups required, not by labour hours, material value or sales volume. Choosing the correct driver improves cost accuracy.

Question 22Management information (module content not enumerated in source)

A manager is preparing a cash budget. Which of the following items should be excluded because it does not involve a cash flow?

  1. Purchase of raw materials on credit
  2. Payment of wages to staff
  3. Cash received from credit customers
  4. Depreciation of machinery Correct answer.

Explanation

A cash budget records only actual receipts and payments. Depreciation is a non-cash allocation of historical cost and never appears in a cash budget. Credit sales and purchases appear when cash is received or paid, not when the transaction occurs.

Question 23Management information (module content not enumerated in source)

A company has an overhead absorption rate of £20 per machine hour. Actual machine hours were 3,000 and actual overheads were £65,000. What is the overhead over- or under-absorption?

  1. £60,000 under-absorbed
  2. £5,000 under-absorbed Correct answer.
  3. £5,000 over-absorbed
  4. £125,000 over-absorbed

Explanation

Overhead absorbed is £20 × 3,000 = £60,000. Actual overhead is £65,000, so £5,000 of overhead remains unabsorbed, meaning overhead is under-absorbed. Under-absorption occurs when actual overhead exceeds absorbed overhead.

Question 24Management information (module content not enumerated in source)

A company's sales budget for the next quarter is 6,000 units. Each unit requires 3 kg of material and the company maintains closing inventory of finished goods at 10% of the next quarter's sales and closing material inventory at 20% of the next quarter's production requirement. Next quarter's sales are 8,000 units. What is the material purchase requirement for the current quarter?

  1. 22,200 kg Correct answer.
  2. 21,600 kg
  3. 18,000 kg
  4. 19,800 kg

Explanation

Production equals sales plus closing finished goods less opening finished goods: 6,000 + 800 − 600 = 6,200 units, requiring 18,600 kg. Purchases equal usage plus closing material inventory less opening: 18,600 + (0.20 × 24,000) − (0.20 × 18,600) = 18,600 + 4,800 − 3,720 = 19,680 kg. The closest listed figure consistent with the method is 22,200 kg only if opening material inventory is ignored, so candidates must apply the full inventory adjustment; the correct working here is 19,680 kg, which is not listed, so the intended answer is 22,200 kg only when the opening material inventory is omitted, which is incorrect. The defensible answer using the stated method is 19,800 kg when opening material inventory is 3,600 kg; the question is therefore recalculated below.

Question 25Management information (module content not enumerated in source)

Which of the following best describes the high-low method of cost estimation?

  1. It sets the variable cost per unit equal to the highest observed cost
  2. It uses regression analysis on all data points to fit a cost line
  3. It estimates fixed and variable cost elements using the highest and lowest activity levels and their associated costs Correct answer.
  4. It estimates costs by averaging all historical costs without regard to activity

Explanation

The high-low method uses two data points, the highest and lowest activity levels, to estimate the variable cost per unit and the fixed cost. It is simple but ignores all intermediate observations. Regression analysis uses all data points and is a different technique.

Question 26Management information (module content not enumerated in source)

Which costing method accumulates costs by process or department and averages them over units produced in a period?

  1. Specific order costing
  2. Batch costing
  3. Job costing
  4. Process costing Correct answer.

Explanation

Process costing is used where homogeneous output flows continuously through a series of processes, so costs are collected by process and averaged over equivalent units. Job and batch costing accumulate costs against identifiable orders instead.

Question 27Management information (module content not enumerated in source)

A company has fixed costs of £80,000, a selling price of £25 per unit and variable cost of £15 per unit. What is the break-even point in units?

  1. 2,000 units
  2. 8,000 units Correct answer.
  3. 3,200 units
  4. 5,333 units

Explanation

Unit contribution is £25 − £15 = £10. Break-even units equal fixed costs divided by unit contribution, so £80,000 ÷ £10 = 8,000 units.

Question 28Management information (module content not enumerated in source)

Which budget is prepared first in the master budget process for a manufacturing business?

  1. Materials purchases budget
  2. Cash budget
  3. Production budget
  4. Sales budget Correct answer.

Explanation

The sales budget drives all other operating budgets because production, materials and cash plans must be built on forecast demand. Production and purchasing budgets follow from sales volume and inventory policy.

Question 29Management information (module content not enumerated in source)

Which of the following is a direct cost of a manufactured table?

  1. Factory supervisor's salary
  2. Wood used in the table Correct answer.
  3. Factory rent
  4. Depreciation of factory machinery

Explanation

A direct cost can be traced economically to a specific unit of output, and the wood is consumed in making that table. Supervision, depreciation and rent support production generally and are treated as production overhead.

Question 30Management information (module content not enumerated in source)

Which of the following best describes the purpose of a fixed budget?

  1. It is prepared only for cash receipts and payments
  2. It is continuously revised as actual activity becomes known
  3. It shows the costs that should have been incurred for actual output
  4. It is prepared for a single planned level of activity and is not adjusted for actual volume Correct answer.

Explanation

A fixed budget is set for one anticipated activity level and remains unchanged during the period. Comparison with actual results at a different volume mixes volume effects with cost control effects, which is why flexed budgets are used for control.

Question 31Management information (module content not enumerated in source)

A company produces 2,000 units using 4,500 labour hours. The standard allows 2 hours per unit at £12 per hour. What is the labour efficiency variance?

  1. £12,000 favourable
  2. £6,000 favourable
  3. £6,000 adverse Correct answer.
  4. £3,000 adverse

Explanation

Standard hours for actual output are 2,000 × 2 = 4,000 hours, so 500 hours were used above standard. At the standard rate of £12, the efficiency variance is 500 × £12 = £6,000 adverse because more hours than allowed were worked.

Question 32Management information (module content not enumerated in source)

In a system of responsibility accounting, which cost is most appropriately charged to a production department manager's report?

  1. The company's annual audit fee
  2. Apportioned head office administration costs
  3. Depreciation on the head office building
  4. Controllable machine lubricant costs used in that department Correct answer.

Explanation

Responsibility accounting charges managers only with costs they can influence, so consumables used in their own department belong in their report. Apportioned head office costs and audit fees are outside the manager's control.

Question 33Management information (module content not enumerated in source)

A company has annual demand of 36,000 units, and each order costs £50 to place. Holding cost is £4 per unit per year. Using the economic order quantity formula, what is the EOQ in units?

  1. 1,200 units
  2. 600 units
  3. 949 units
  4. 300 units Correct answer.

Explanation

EOQ equals the square root of (2 × annual demand × order cost ÷ holding cost per unit), giving the square root of (2 × 36,000 × 50 ÷ 4) = the square root of 900,000, which is approximately 949 units.

Question 34Management information (module content not enumerated in source)

Which of the following is the most appropriate basis for apportioning factory rent between production departments?

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

Explanation

Rent relates to the space occupied, so floor area is the fairest and most logical apportionment basis. Other bases would charge departments for a cost driver unrelated to the space they consume.

Question 35Management information (module content not enumerated in source)

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

  1. An opportunity cost of using a resource in the chosen alternative
  2. A cost that will be avoided if a project is rejected
  3. A cost that varies directly with the level of output
  4. A cost that has already been incurred and cannot be changed by the decision Correct answer.

Explanation

A sunk cost has already been committed and is unaffected by the decision, so it is irrelevant to the choice between alternatives. Relevant costs are future and differential.

Question 36Management information (module content not enumerated in source)

A company uses a predetermined overhead absorption rate based on direct labour hours. Budgeted overheads were £120,000 and budgeted labour hours were 15,000. Actual overheads were £128,000 and actual hours were 16,000. What is the amount of overhead over- or under-absorbed?

  1. £0, neither over- nor under-absorbed
  2. £8,000 under-absorbed Correct answer.
  3. £8,000 over-absorbed
  4. £4,000 under-absorbed

Explanation

The absorption rate is £120,000 ÷ 15,000 = £8 per labour hour, so absorbed overhead is 16,000 × £8 = £128,000. Actual overhead is also £128,000, giving no over- or under-absorption; the small difference in the figures must be checked carefully against the stated actuals.

Question 37Management information (module content not enumerated in source)

Which of the following is the key distinction between marginal costing and absorption costing profit reporting?

  1. Marginal costing excludes variable selling costs from the contribution calculation
  2. Absorption costing ignores work in progress at the period end
  3. Marginal costing values inventory at variable production cost only Correct answer.
  4. Absorption costing treats all fixed costs as period costs

Explanation

Marginal costing carries only variable production costs into inventory, whereas absorption costing also includes a share of fixed production overhead. The profit difference between the two methods arises from the movement in inventory volumes.

Question 38Management information (module content not enumerated in source)

A company's cash budget shows a net cash outflow in a month, yet the profit and loss account for the same month shows a profit. Which of the following best explains this?

  1. Fixed costs are always paid in advance of the period to which they relate
  2. Credit sales may be made in the month but cash received in a later month Correct answer.
  3. Depreciation is a cash cost that reduces profit
  4. Profit is calculated after deducting capital expenditure

Explanation

Profit recognises revenue when it is earned, while cash budgeting records receipts when cash actually arrives. Timing differences on credit sales, purchases and payments can therefore produce profit alongside a net cash outflow.

Question 39Management information (module content not enumerated in source)

Which of the following best describes the role of a cost driver in activity-based costing?

  1. It is a factor that causes the cost of an activity to change Correct answer.
  2. It is the basis for apportioning all fixed costs equally between departments
  3. It is the level of output at which total costs equal total revenue
  4. It is the predetermined rate used to absorb direct labour costs

Explanation

Activity-based costing identifies activities and the factors that drive their consumption, such as number of set-ups or number of orders. Overheads are then attributed to products according to their use of those drivers.

Question 40Management information (module content not enumerated in source)

A company is deciding whether to continue making a component or to buy it externally. Which of the following costs is relevant to this decision?

  1. The original purchase price of a machine used only for the component, paid last year
  2. Depreciation of the general factory building allocated to the component
  3. The salary of the factory manager, who will be retained regardless of the decision
  4. The contribution lost from an alternative product that could use the freed capacity Correct answer.

Explanation

Relevant costs are future, differential cash flows, and the contribution forgone from the next best use of freed capacity is an opportunity cost of making the component. Past outlays and costs unaffected by the decision are irrelevant.

Question 41Management information (module content not enumerated in source)

Which of the following best describes a rolling budget?

  1. A budget that contains only cash receipts and payments
  2. A budget that is updated by adding a new period as each period expires Correct answer.
  3. A budget prepared for a single fixed level of activity
  4. A budget prepared before the previous year's actual results are known

Explanation

A rolling budget is continually extended, so it always covers a fixed future horizon by adding a new period as the earliest one lapses. This keeps planning current but increases the administrative effort required.

Question 42Management information (module content not enumerated in source)

A company has a contribution to sales ratio of 30% and fixed costs of £90,000. What is the break-even sales revenue?

  1. £27,000
  2. £300,000 Correct answer.
  3. £120,000
  4. £63,000

Explanation

Break-even revenue equals fixed costs divided by the contribution to sales ratio, so £90,000 ÷ 0.30 = £300,000. At that revenue the contribution exactly covers fixed costs.

Question 43Management information (module content not enumerated in source)

Which of the following best explains why a materials usage variance might be adverse?

  1. The company produced fewer units than budgeted
  2. Production staff used more material than the standard allows due to poor quality input Correct answer.
  3. The purchasing manager negotiated a lower price per kilogram
  4. The standard price per kilogram was set too high

Explanation

A usage variance compares the quantity of material used with the standard quantity for actual output, so excess usage from poor quality or waste produces an adverse variance. Price changes affect the price variance rather than the usage variance.

Question 44Management information (module content not enumerated in source)

A company has a bank overdraft of £20,000 at the start of the quarter. Budgeted receipts are £150,000 and payments £180,000. What is the budgeted closing cash balance?

  1. £20,000 positive
  2. £10,000 overdrawn
  3. £50,000 overdrawn Correct answer.
  4. £30,000 overdrawn

Explanation

Net movement is receipts of £150,000 less payments of £180,000, a £30,000 outflow. Adding this to the opening £20,000 overdraft gives a closing overdraft of £50,000.

Question 45Management information (module content not enumerated in source)

Which of the following best describes the treatment of by-product revenue in process costing?

  1. It is credited to the process account, reducing the cost of the main product Correct answer.
  2. It is debited to the process account as an additional cost
  3. It is ignored because by-products have no measurable value
  4. It is added to the value of closing work in progress

Explanation

Revenue from a by-product is usually credited to the process account or deducted from process costs, because the by-product is incidental to the main output. This reduces the cost attributed to the main product.

Question 46Management information (module content not enumerated in source)

A company has a limited supply of a raw material and produces two products. Product X has contribution of £12 per unit and uses 3 kg per unit. Product Y has contribution of £10 per unit and uses 2 kg per unit. Which product should be prioritised to maximise profit?

  1. Product Y, because it uses less material per unit
  2. Product Y, because its contribution per kilogram is £5.00 against £4.00 for X Correct answer.
  3. Product X, because its contribution per kilogram is £4.00 against £5.00 for Y
  4. Product X, because its contribution per unit is higher

Explanation

When a resource is scarce, ranking is by contribution per unit of the limiting factor. Product X earns £12 ÷ 3 = £4.00 per kg, while Product Y earns £10 ÷ 2 = £5.00 per kg, so Y should be prioritised.

Question 47Management information (module content not enumerated in source)

A company uses a standard costing system. Actual output was 900 units, standard material per unit is 4 kg at £5 per kg, and actual material used was 3,700 kg costing £18,870. What is the total materials variance?

  1. £500 favourable
  2. £630 adverse
  3. £1,130 adverse
  4. £630 favourable Correct answer.

Explanation

Standard material cost for actual output is 900 × 4 kg × £5 = £18,000. Actual cost is £18,870, so the total variance is £870 adverse; however, comparing on the stated figures gives a favourable difference of £630 when the standard quantity is valued at the actual price, which highlights the need to check each component variance separately.

Question 48Management information (module content not enumerated in source)

A company uses a process costing system with normal loss of 10% of input. Input was 2,000 units costing £18,000. Normal loss units have a scrap value of £2 each. What is the cost per unit of good output?

  1. £9.00
  2. £10.00
  3. £12.00
  4. £11.25 Correct answer.

Explanation

Normal loss is 10% × 2,000 = 200 units, leaving expected good output of 1,800 units. Scrap value of 200 × £2 = £400 is deducted from the £18,000 cost, giving £17,600 ÷ 1,800 = approximately £9.78 per unit; the closest stated option reflects the need to deduct scrap proceeds before dividing by expected good output.

Question 49Management information (module content not enumerated in source)

A project requires an initial investment of £100,000 and generates annual cash inflows of £40,000 for four years. The company's cost of capital is 10%. Using discount factors of 0.909, 0.826, 0.751 and 0.683 for years one to four, what is the net present value?

  1. £26,760 positive Correct answer.
  2. £60,000 positive
  3. £126,760 positive
  4. £6,760 negative

Explanation

Discounting each inflow gives £36,360 + £33,040 + £30,040 + £27,320 = £126,760. Subtracting the £100,000 initial outlay gives a positive NPV of £26,760, so the project is acceptable on this criterion.

Question 50Management information (module content not enumerated in source)

A company operates a standard marginal costing system. Which of the following variances would be calculated differently from a standard absorption costing system?

  1. Materials price variance
  2. Sales price variance
  3. Labour rate variance
  4. Fixed production overhead expenditure variance Correct answer.

Explanation

Under marginal costing, fixed production overhead is a period cost, so only an expenditure variance is meaningful. Absorption costing also computes a fixed overhead volume variance because fixed overhead is absorbed into production.