AAT Level 3 - Advanced Diploma in Accounting Management Accounting (Costing) 1 — Questions and Answers
Question 1: In marginal costing, 'contribution' is defined as:
- Sales revenue minus fixed costs
- Sales revenue minus variable costs (Correct answer)
- Sales revenue minus total production costs
- Gross profit minus selling and distribution costs
Correct answer: Sales revenue minus variable costs
Contribution is calculated as sales revenue minus variable costs. It represents the amount each unit of sale contributes towards covering fixed costs and, once those are covered, generating profit.
Question 2: A business has budgeted fixed production overheads of £90,000 and budgeted machine hours of 30,000. What is the overhead absorption rate (OAR) per machine hour?
- £0.33
- £2.00
- £3.00 (Correct answer)
- £4.50
Correct answer: £3.00
The OAR is calculated by dividing budgeted overheads by the budgeted activity level: £90,000 ÷ 30,000 hours = £3.00 per machine hour.
Question 3: During a period, actual fixed overheads incurred were £74,000 and overheads absorbed into production were £80,000. What is the result?
- Under-absorption of £6,000
- Over-absorption of £6,000 (Correct answer)
- Under-absorption of £154,000
- Over-absorption of £154,000
Correct answer: Over-absorption of £6,000
When absorbed overheads (£80,000) exceed actual overheads (£74,000), the difference of £6,000 is an over-absorption. This is credited to the income statement as it means too much overhead was charged to production.
Question 4: The break-even point is best described as the level of output at which:
- Contribution equals fixed costs (Correct answer)
- Variable costs equal fixed costs
- Total revenue equals variable costs
- Profit equals contribution
Correct answer: Contribution equals fixed costs
At break-even, total contribution exactly equals total fixed costs, meaning there is neither a profit nor a loss. This is equivalent to saying total revenue equals total costs.
Question 5: In process costing, equivalent units are calculated in order to:
- Identify the normal loss percentage for the period
- Apportion joint costs between co-products
- Value closing work-in-progress by converting partially complete units into a finished-unit equivalent (Correct answer)
- Calculate the scrap proceeds from abnormal loss
Correct answer: Value closing work-in-progress by converting partially complete units into a finished-unit equivalent
Equivalent units convert partially complete units into a notional number of fully complete units for each element of cost (materials, labour, overheads), allowing work-in-progress to be valued consistently.
Question 6: Under Activity-Based Costing (ABC), which cost driver would most appropriately be used to absorb material handling costs?
- Direct labour hours worked
- Number of machine setups
- Number of material movements or requisitions (Correct answer)
- Units of output produced
Correct answer: Number of material movements or requisitions
Material handling costs are driven by the number of times materials are moved or requisitioned, not by labour hours or output volume. ABC seeks to link overhead costs to the activities that actually cause them.
AAT Level 3 - Advanced Diploma in Accounting Management Accounting (Costing) 1
In marginal costing, 'contribution' is defined as: