AAT L4 Management Accounting Decision and Control — Questions and Answers
Question 1: A company manufactures a product with a selling price of £50, variable costs of £30, and fixed costs of £200,000 per year. How many units must be sold to break even?
- 4,000 units
- 6,667 units
- 10,000 units (Correct answer)
- 5,000 units
Correct answer: 10,000 units
Contribution per unit = £50 - £30 = £20. Break-even point = Fixed costs / Contribution per unit = £200,000 / £20 = 10,000 units.
Question 2: A company is considering a special order for 500 units at £35 each. Normal selling price is £50, variable cost is £28 per unit, and the company has spare capacity. Should the order be accepted?
- No, because the price is below the normal selling price
- No, because it will reduce overall profit
- Yes, because the price exceeds the variable cost and there is spare capacity (Correct answer)
- Yes, because it will cover fixed costs
Correct answer: Yes, because the price exceeds the variable cost and there is spare capacity
With spare capacity, fixed costs are already covered by normal production. The relevant cost is the variable cost of £28. Since £35 exceeds £28, each unit contributes £7 to profit, generating additional contribution of £3,500.
Question 3: Which of the following is a limitation of using standard costing in a modern manufacturing environment?
- It helps identify variances from expected performance
- It provides a basis for pricing decisions
- It may be inappropriate where production is customised and non-repetitive (Correct answer)
- It encourages cost control through variance analysis
Correct answer: It may be inappropriate where production is customised and non-repetitive
Standard costing works best in repetitive manufacturing environments. In modern, customised production environments, each job may differ significantly, making predetermined standards less useful and potentially misleading.
Question 4: A product requires 3 kg of material at £4 per kg. During the period, 2,000 units were produced using 6,200 kg at a total cost of £25,420. What is the material price variance?
- £700 Adverse
- £620 Favourable
- £700 Favourable
- £620 Adverse (Correct answer)
Correct answer: £620 Adverse
Standard cost for actual quantity = 6,200 x £4.00 = £24,800. Actual cost = £25,420. Material price variance = £24,800 - £25,420 = -£620 (Adverse). The company paid more than the standard price, so the variance is adverse.
Question 5: In a limiting factor scenario, products should be ranked for production based on:
- Highest selling price per unit
- Highest total contribution
- Highest contribution per unit of the limiting factor (Correct answer)
- Lowest variable cost per unit
Correct answer: Highest contribution per unit of the limiting factor
When a resource is scarce, the optimal production plan prioritises products that generate the highest contribution per unit of the scarce resource, maximising total contribution from the limited resource available.
Question 6: A company uses absorption costing. Opening inventory was 500 units and closing inventory was 800 units. Fixed production overhead is £10 per unit. Compared to marginal costing, absorption costing profit will be:
- £3,000 higher (Correct answer)
- £3,000 lower
- £8,000 higher
- The same
Correct answer: £3,000 higher
When inventory levels increase, absorption costing reports higher profit than marginal costing because more fixed overhead is carried forward in closing inventory. Difference = (800 - 500) x £10 = £3,000 higher under absorption costing.
AAT L4 Management Accounting Decision and Control
A company manufactures a product with a selling price of £50, variable costs of £30, and fixed costs of £200,000 per year.
How many units must be sold to break even?