AAT L3 Management Accounting (Costing) 4 — Questions and Answers
Question 1: Equivalent units in process costing are used to:
- Allocate costs to by-products
- Deal with closing work in progress that is partially complete (Correct answer)
- Separate normal from abnormal loss
- Convert kilograms to litres
Correct answer: Deal with closing work in progress that is partially complete
Equivalent units convert partially completed units of closing WIP into a notional number of complete units for cost allocation purposes (e.g., 100 units 60% complete = 60 equivalent units).
Question 2: By-products in process costing are:
- The main intended output of a process
- Minor, incidental outputs from a process with low sales value (Correct answer)
- Any output above the expected yield
- Defective output requiring rework
Correct answer: Minor, incidental outputs from a process with low sales value
By-products are secondary outputs of a process that have a relatively low value. Their net realisable value is typically deducted from the process cost before calculating the main product's cost.
Question 3: The difference between absorption costing profit and marginal costing profit is explained by:
- The treatment of selling and distribution overheads
- The change in inventory levels multiplied by the fixed overhead per unit (Correct answer)
- The level of variable costs
- The treatment of direct labour costs
Correct answer: The change in inventory levels multiplied by the fixed overhead per unit
The difference = change in inventory (units) × fixed overhead absorption rate per unit. When inventory rises, absorption costing reports higher profit (fixed OH deferred in inventory); when it falls, marginal costing reports higher profit.
Question 4: Overhead allocation means:
- Sharing overheads between departments on an estimated basis
- Directly attributing a whole overhead cost to a single cost centre (Correct answer)
- Charging overheads to products at a predetermined rate
- Recovering overheads through the selling price
Correct answer: Directly attributing a whole overhead cost to a single cost centre
Overhead allocation is the direct attribution of an entire overhead cost to a single cost centre when the cost is wholly incurred by and can be traced to that centre — as opposed to apportionment which involves sharing.
Question 5: Which of the following methods is used to reapportion service department costs to production departments?
- High-low method
- Repeated distribution method (continuous allotment) (Correct answer)
- Standard costing
- Linear regression
Correct answer: Repeated distribution method (continuous allotment)
The repeated distribution (continuous allotment) method reapportions service department costs iteratively between production departments and other service departments until the service department balances reach zero.
Question 6: A favourable overhead expenditure variance means:
- More overhead was incurred than budgeted
- Actual overhead incurred was less than the budgeted overhead (Correct answer)
- Actual activity exceeded budget
- Overhead was under-absorbed
Correct answer: Actual overhead incurred was less than the budgeted overhead
Overhead expenditure variance = Budgeted overhead − Actual overhead. A favourable variance means the business spent less on overheads than budgeted.
AAT L3 Management Accounting (Costing) 4
Equivalent units in process costing are used to: