AAT L3 Management Accounting: Costing

Question 1

Which costing method charges all production overheads to products, including fixed overheads?

Accepted Answer

Absorption costing

Answer

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:

Accepted Answer

Budgeted overheads / Budgeted activity level

Answer

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:

Accepted Answer

Under-absorption

Answer

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?

Accepted Answer

Variable production costs only

Answer

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:

Accepted Answer

Selling price minus variable cost per unit

Answer

Contribution = Selling price − Variable cost per unit. It shows how much each unit sold contributes towards covering fixed costs and generating profit.

AAT Level 3 Practice Test

AAT Level 3 Practice Test

AAT L3 Management Accounting: Costing