ACCA AK Management Accounting 4 — Questions and Answers
Question 1: Which of the following is a characteristic of a 'profit centre'?
- It is responsible only for costs incurred
- It is accountable for both revenues and costs (Correct answer)
- It is measured solely on return on capital employed
- It has no budget
Correct answer: It is accountable for both revenues and costs
A profit centre is responsible for both revenues and costs, so its performance is measured by the profit it generates, unlike a cost centre which tracks costs only.
Question 2: Which inventory valuation method charges the most recent purchase prices to cost of sales during a period of rising prices?
- FIFO (First In First Out)
- LIFO (Last In First Out) (Correct answer)
- Weighted average cost
- Standard cost
Correct answer: LIFO (Last In First Out)
LIFO issues the most recently purchased (and therefore most expensive in a rising price environment) inventory first, resulting in higher COGS and lower closing inventory.
Question 3: Which of the following is included in the cost of conversion under IAS 2?
- Purchase price of raw materials
- Carriage inwards on raw materials
- Direct labour and production overheads (Correct answer)
- Selling and distribution expenses
Correct answer: Direct labour and production overheads
IAS 2 defines cost of conversion as direct labour, direct expenses and a systematic allocation of fixed and variable production overheads.
Question 4: A limiting factor (key factor) is:
- A cost that cannot be reduced
- A resource in short supply that restricts output (Correct answer)
- An external regulation limiting production
- A fixed cost that cannot be avoided
Correct answer: A resource in short supply that restricts output
A limiting factor is a scarce resource (e.g., machine hours, labour hours, materials) that constrains the organisation's ability to maximise its objectives.
Question 5: When there is a single limiting factor, the optimal production plan ranks products by:
- 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
With one limiting factor, products are ranked by contribution per unit of the limiting factor (e.g., contribution per machine hour) to maximise total contribution.
Question 6: Which of the following describes 'absorption costing'?
- Only variable costs are included in unit cost
- Both fixed and variable production costs are included in unit cost (Correct answer)
- Only direct costs are included in unit cost
- Fixed costs are treated as period costs
Correct answer: Both fixed and variable production costs are included in unit cost
Absorption costing includes both variable and fixed production overhead in the cost per unit. This is required for external reporting under IAS 2.
ACCA AK Management Accounting 4
Which of the following is a characteristic of a 'profit centre'?