AAT L3 Management Accounting: Costing — Questions and Answers
Question 1: Which costing method charges all production overheads to products, including fixed overheads?
- Marginal costing
- Direct costing
- Absorption costing (Correct answer)
- Variable costing
Correct answer: Absorption costing
Absorption costing (also called full costing) includes both fixed and variable production overheads in the cost of a unit, which is then included in inventory valuation and cost of sales.
Question 2: The overhead absorption rate (OAR) is calculated as:
- Actual overheads / Actual activity level
- Budgeted overheads / Budgeted activity level (Correct answer)
- Actual overheads / Budgeted activity level
- Budgeted overheads / Actual activity level
Correct answer: Budgeted overheads / Budgeted activity level
The OAR is predetermined using budgeted data: OAR = Budgeted overheads / Budgeted activity level (e.g., per machine hour, per labour hour, or per unit). It is applied to actual activity to absorb overheads into products.
Question 3: When actual overheads exceed overheads absorbed, the result is:
- Over-absorption
- Under-absorption (Correct answer)
- Favourable variance
- Cost saving
Correct answer: Under-absorption
Under-absorption occurs when the actual overhead incurred is greater than the overhead absorbed into products (OAR × actual activity); the difference is charged as an expense in the income statement.
Question 4: In marginal costing, which costs are included in the cost of a unit of production?
- All costs including fixed and variable overheads
- Variable production costs only (Correct answer)
- Direct materials and direct labour only
- Fixed overheads only
Correct answer: Variable production costs only
Marginal costing includes only variable production costs (direct materials, direct labour, variable overheads) in unit costs. Fixed production overheads are treated as period costs.
Question 5: The contribution per unit is calculated as:
- Selling price minus total cost per unit
- Selling price minus fixed cost per unit
- Selling price minus variable cost per unit (Correct answer)
- Gross profit per unit
Correct answer: Selling price minus variable cost per unit
Contribution = Selling price − Variable cost per unit. It shows how much each unit sold contributes towards covering fixed costs and generating profit.
Question 6: Breakeven point in units is calculated as:
- Variable costs / contribution per unit
- Fixed costs / contribution per unit (Correct answer)
- Total costs / selling price
- Fixed costs / selling price per unit
Correct answer: Fixed costs / contribution per unit
Breakeven point = Fixed Costs / Contribution per Unit. At this output level, total contribution exactly covers fixed costs and profit is zero.
AAT L3 Management Accounting: Costing
Which costing method charges all production overheads to products, including fixed overheads?