Management Accounting (Costing) 2 Flashcards

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?

Answer: 30%

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.

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

Answer: Absorption costing

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.

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?

Answer: £4.00

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.

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?

Answer: Product Q, because it generates more contribution per machine hour

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.

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

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

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.

A factory produces 4,000 units in a period. Direct materials are £10 per unit, direct labour £6 per unit, variable production overheads £2 per unit, and total fixed production overheads are £20,000. What is the total absorption cost per unit?

Answer: £23

Fixed overhead per unit = £20,000 ÷ 4,000 = £5. Total absorption cost = Direct materials £10 + Direct labour £6 + Variable overheads £2 + Fixed overheads £5 = £23 per unit. Absorption costing includes all production overheads, both variable and fixed, in the unit cost.