AAT L4 Management Accounting Decision and Control 2 — Questions and Answers
Question 1: A company has two products, Alpha and Beta. Alpha has a contribution to sales ratio of 40% and Beta has 60%. The sales mix is 70% Alpha and 30% Beta. What is the weighted average contribution to sales ratio?
- 50%
- 46% (Correct answer)
- 52%
- 48%
Correct answer: 46%
Weighted average C/S ratio = (40% x 0.70) + (60% x 0.30) = 28% + 18% = 46%. This weighted ratio is used in multi-product break-even analysis.
Question 2: What does a favourable labour efficiency variance indicate?
- Workers were paid less than the standard rate
- Fewer hours were worked than standard for the actual output achieved (Correct answer)
- More units were produced than budgeted
- Material wastage was lower than expected
Correct answer: Fewer hours were worked than standard for the actual output achieved
A favourable labour efficiency variance means actual hours worked were less than the standard hours allowed for actual production. Workers completed the output in less time than expected, indicating greater productivity.
Question 3: A company is deciding whether to make or buy a component. Internal variable cost is £12 per unit. An external supplier quotes £15 per unit. If bought externally, freed capacity earns additional contribution of £5 per unit on 2,000 units. Annual demand is 8,000 units. What should the company do?
- Make, saving £14,000 (Correct answer)
- Buy, saving £14,000
- Make, saving £24,000
- Buy, saving £24,000
Correct answer: Make, saving £14,000
Cost to make: 8,000 x £12 = £96,000. Cost to buy: 8,000 x £15 = £120,000, less opportunity benefit 2,000 x £5 = £10,000. Net cost to buy = £110,000. Making saves £110,000 - £96,000 = £14,000.
Question 4: In investment appraisal, which of the following is an advantage of Net Present Value (NPV) over the payback method?
- NPV is simpler to calculate
- NPV considers the time value of money for all cash flows (Correct answer)
- NPV always gives a shorter decision timeframe
- NPV ignores the cost of capital
Correct answer: NPV considers the time value of money for all cash flows
NPV discounts all future cash flows to their present value using the cost of capital, accounting for the time value of money over the entire project life. Payback only measures how quickly the initial investment is recovered and ignores cash flows after the payback period.
Question 5: A company operates a process costing system. 10,000 units input, 8,000 completed, 2,000 in closing WIP (50% complete for conversion, 100% for materials). Normal loss is 5% of input. What are the equivalent units for conversion costs?
- 9,000 (Correct answer)
- 8,500
- 9,500
- 8,000
Correct answer: 9,000
Normal loss = 5% x 10,000 = 500 units. Completed output = 8,000 units. Closing WIP conversion equivalent = 2,000 x 50% = 1,000. Total equivalent units for conversion = 8,000 + 1,000 = 9,000. Normal loss units do not receive equivalent units.
Question 6: Life cycle costing differs from traditional costing because it:
- Only considers manufacturing costs
- Focuses exclusively on the selling phase
- Considers all costs from design through to disposal (Correct answer)
- Allocates costs based on labour hours only
Correct answer: Considers all costs from design through to disposal
Life cycle costing tracks all costs attributable to a product over its entire life — from research and development, through production and marketing, to end-of-life disposal. This gives a more complete picture of product profitability.
AAT L4 Management Accounting Decision and Control 2
A company has two products, Alpha and Beta.
Alpha has a contribution to sales ratio of 40% and Beta has 60%.
The sales mix is 70% Alpha and 30% Beta.
What is the weighted average contribution to sales ratio?