ACCA AK Management Accounting (MA) Costing — Questions and Answers
Question 1: A company produces a single product. Fixed production overheads for the period are £120,000 and budgeted output is 40,000 units. Actual output is 38,000 units. What is the fixed overhead volume variance under absorption costing?
- £6,000 adverse (Correct answer)
- £6,000 favourable
- £3,000 adverse
- £3,000 favourable
Correct answer: £6,000 adverse
The overhead absorption rate is £120,000 ÷ 40,000 = £3 per unit. Actual output is 38,000 units, so absorbed overhead = 38,000 × £3 = £114,000. Variance = £114,000 − £120,000 = £6,000 adverse (under-absorption because fewer units were produced than budgeted).
Question 2: Which of the following is a direct cost of producing a table?
- Factory rent
- Salary of the factory supervisor
- Wood used in the table (Correct answer)
- Depreciation of factory machinery
Correct answer: Wood used in the table
A direct cost is one that can be specifically traced to a cost unit. Wood used in making a table is directly attributable to that table. Factory rent, supervisor salary, and machinery depreciation are indirect costs (overheads).
Question 3: Under marginal costing, how are fixed production overheads treated?
- Allocated to each unit of production
- Treated as a period cost and charged in full to the income statement (Correct answer)
- Carried forward as part of closing inventory
- Capitalised on the statement of financial position
Correct answer: Treated as a period cost and charged in full to the income statement
Under marginal costing, only variable production costs are included in inventory valuation. Fixed production overheads are treated as period costs and written off in full against revenue in the period they are incurred.
Question 4: A product passes through two processes. The output of Process 1 becomes the input of Process 2. This is an example of which costing method?
- Job costing
- Batch costing
- Process costing (Correct answer)
- Contract costing
Correct answer: Process costing
Process costing is used where production is continuous and products pass through a series of processes. The output of one process becomes the input of the next, and costs are averaged over units produced.
Question 5: In absorption costing, if actual production exceeds budgeted production, what happens to fixed overheads?
- They are under-absorbed
- They are over-absorbed (Correct answer)
- They remain the same as budgeted
- They are excluded from the cost card
Correct answer: They are over-absorbed
When actual production exceeds budget, more overhead is absorbed (actual units × OAR) than was actually incurred. This results in over-absorption — a favourable situation that increases reported profit.
Question 6: What is the equivalent unit concept used for in process costing?
- To calculate the selling price of finished goods
- To convert partly completed units into an equivalent number of fully completed units for cost allocation (Correct answer)
- To determine the reorder level of raw materials
- To allocate selling and distribution costs to products
Correct answer: To convert partly completed units into an equivalent number of fully completed units for cost allocation
Equivalent units express partly completed work-in-progress in terms of fully completed units. For example, 200 units that are 50% complete equal 100 equivalent units. This allows accurate cost per unit calculations in process costing.
