ACCA AK Management Accounting 1 — Questions and Answers
Question 1: Which of the following is an example of a 'fixed cost'?
- Direct materials consumed in production
- Sales commission paid as a percentage of revenue
- Factory rent paid monthly regardless of output (Correct answer)
- Overtime wages paid when production exceeds a threshold
Correct answer: Factory rent paid monthly regardless of output
A fixed cost remains constant in total regardless of the level of activity within the relevant range. Factory rent does not change with output volume.
Question 2: Prime cost is calculated as:
- Direct materials + Direct labour + Direct expenses (Correct answer)
- Direct materials + Direct labour + Production overhead
- Total production cost less selling costs
- Fixed costs + Variable costs
Correct answer: Direct materials + Direct labour + Direct expenses
Prime cost (or direct cost) = Direct materials + Direct labour + Direct expenses. It excludes all indirect costs (overheads).
Question 3: Which cost classification is most relevant when deciding whether to shut down a product line?
- Historical cost
- Sunk cost
- Relevant (incremental) cost (Correct answer)
- Absorbed overhead
Correct answer: Relevant (incremental) cost
Relevant costs are future incremental cash flows that change as a result of a decision; sunk costs are past and irrelevant. Shutdown decisions focus on relevant costs and revenues.
Question 4: A production overhead absorption rate (OAR) is typically calculated as:
- Actual overhead ÷ Actual activity
- Budgeted overhead ÷ Budgeted activity (Correct answer)
- Actual overhead ÷ Budgeted activity
- Budgeted overhead ÷ Actual activity
Correct answer: Budgeted overhead ÷ Budgeted activity
The OAR is set at the start of the period using budgeted figures: Budgeted overhead ÷ Budgeted activity level (e.g., machine hours or labour hours).
Question 5: If actual overhead incurred is £50,000 and absorbed overhead is £45,000, the result is:
- Over-absorption of £5,000
- Under-absorption of £5,000 (Correct answer)
- A budget variance of £5,000
- A volume variance of £5,000
Correct answer: Under-absorption of £5,000
Under-absorption occurs when absorbed overhead is less than actual overhead (£45,000 < £50,000). The £5,000 shortfall is added back to cost of sales.
Question 6: Which of the following statements about marginal costing is correct?
- Fixed production overheads are included in the unit cost of inventory
- Only variable costs are included in the cost of a unit of product (Correct answer)
- Marginal costing always produces higher profit than absorption costing
- Marginal costing is required under IFRS for external reporting
Correct answer: Only variable costs are included in the cost of a unit of product
Under marginal costing, only variable costs are charged to units; fixed overheads are treated as period costs and written off in full in the period incurred.
ACCA AK Management Accounting 1
Which of the following is an example of a 'fixed cost'?