AAT Level 3 - Advanced Diploma in Accounting Management Accounting (Costing) 2

Question 1

Budgeted sales for a period are 8,000 units and the break-even point is 5,600 units. What is the margin of safety, expressed as a percentage of budgeted sales?

Accepted Answer

30%

Answer

Margin of safety = (Budgeted sales − Break-even sales) ÷ Budgeted sales × 100 = (8,000 − 5,600) ÷ 8,000 × 100 = 2,400 ÷ 8,000 = 30%. It measures how far sales can fall before a loss is made.

Question 2

When closing inventory is higher than opening inventory in a period, which costing method will report the higher net profit?

Accepted Answer

Absorption costing

Answer

Under absorption costing, fixed production overheads are carried in closing inventory rather than charged fully to the income statement. This defers some overhead to the next period, producing a higher profit than marginal costing when inventory levels rise.

Question 3

Using the high-low method, a company records total costs of £44,000 at 8,000 units of output and £32,000 at 5,000 units. What is the variable cost per unit?

Accepted Answer

£4.00

Answer

Variable cost per unit = Change in total cost ÷ Change in activity = (£44,000 − £32,000) ÷ (8,000 − 5,000) = £12,000 ÷ 3,000 = £4.00. The high-low method isolates the variable element by examining the difference between the highest and lowest activity levels.

Question 4

A company manufactures products P and Q. Product P yields a contribution of £30 and requires 6 machine hours. Product Q yields a contribution of £20 and requires 2 machine hours. Machine hours are the binding constraint. Which product should be prioritised?

Accepted Answer

Product Q, because it generates more contribution per machine hour

Answer

When a resource is scarce, products are ranked by contribution per unit of limiting factor. P = £30 ÷ 6 = £5 per machine hour; Q = £20 ÷ 2 = £10 per machine hour. Product Q makes better use of the scarce resource and should be prioritised.

Question 5

Which of the following is correctly classified as a direct cost?

Accepted Answer

Wages paid to an operative for time worked on a specific job

Answer

A direct cost is one that can be specifically and exclusively identified with a particular cost unit. Wages paid to an operative for time spent on a specific job are direct labour and are therefore a direct cost. Factory rent, depreciation, and a manager's salary are indirect (overhead) costs shared across many cost units.

AAT Level 3 Practice Test

AAT Level 3 Practice Test

AAT Level 3 - Advanced Diploma in Accounting Management Accounting (Costing) 2