Management Accounting

Which of the following costs would be classified as a DIRECT COST in a manufacturing business?

• AFactory rental costs
• BDepreciation of factory machinery
• CRaw material used directly in production✓
• DProduction supervisor's annual salary

Answer: A direct cost can be traced directly to a specific cost unit (product). Raw materials used in production are a direct material cost. Factory rent, machine depreciation, and supervisory salaries are typically indirect (overhead) costs.

What is the contribution per unit if the selling price is £25, variable costs are £15, and fixed costs absorbed are £4 per unit?

• A£6
• B£10✓
• C£14
• D£21

Answer: Contribution per unit = Selling price − Variable costs = £25 − £15 = £10. Fixed costs are NOT deducted when calculating unit contribution; they are covered in total by the overall contribution to derive profit.

A business has fixed costs of £60,000, a selling price of £20 per unit, and variable costs of £12 per unit. What is the BREAK-EVEN POINT in units?

• A3,000 units
• B5,000 units
• C7,500 units✓
• D10,000 units

Answer: Contribution per unit = £20 − £12 = £8. Break-even point = Fixed costs ÷ Contribution per unit = £60,000 ÷ £8 = 7,500 units. At this output, total contribution exactly covers fixed costs and profit is zero.

Which costing method absorbs ALL manufacturing costs — both fixed and variable — into product costs?

• AMarginal costing
• BActivity-based costing
• CAbsorption costing✓
• DStandard costing

Answer: Absorption costing (full costing) includes both fixed and variable manufacturing costs in unit product costs. Fixed production overheads are absorbed into inventory, unlike marginal costing where they are period costs.

Under MARGINAL COSTING, fixed production overheads are treated as:

• AIncluded in the cost of each unit of inventory produced
• BA period cost charged in full to the income statement when incurred✓
• CAbsorbed into units using a predetermined overhead absorption rate
• DCapitalised as part of the cost of non-current assets

Answer: Under marginal costing, only variable costs are treated as product costs. Fixed production overheads are period costs — written off in full to the income statement in the period they are incurred.

A company manufactures 10,000 units and sells 8,000 units. Fixed production overhead is £50,000. By how much does ABSORPTION COSTING profit EXCEED marginal costing profit?

• A£5,000
• B£10,000✓
• C£15,000
• D£50,000

Answer: Under absorption costing, 2,000 unsold units carry fixed overhead = (£50,000 ÷ 10,000) × 2,000 = £10,000. This is deferred in closing inventory under absorption costing but charged immediately under marginal costing, giving absorption costing profit that is £10,000 higher.

The MARGIN OF SAFETY is best described as:

• AThe excess of selling price over variable cost per unit
• BThe difference between budgeted (or actual) sales and break-even sales✓
• CThe contribution as a percentage of sales revenue
• DThe fixed costs divided by the contribution per unit

Answer: Margin of safety = Budgeted or actual sales − Break-even sales. It measures how far sales can fall before a loss is incurred, providing management with an indication of the risk level of the business.

What is the purpose of a FLEXED BUDGET?

• ATo set the original annual budget targets for all departments
• BTo compare actual results against a budget adjusted to the actual level of activity✓
• CTo calculate the income tax liability of the business
• DTo plan long-term capital investment decisions

Answer: A flexed budget adjusts the original (fixed) budget to the actual level of activity achieved. Comparing actuals to a flexed budget provides meaningful variance analysis by isolating efficiency variances from volume variances.

Which of the following is an example of a FIXED COST?

• ADirect materials consumed in production
• BSales commission paid as a percentage of revenue
• CAnnual factory insurance premium✓
• DElectricity consumed by production machinery

Answer: Factory insurance is a fixed cost — it remains constant regardless of the level of output. Direct materials, sales commission, and production electricity are variable costs that change proportionally with activity level.

A company has selling price £40, variable cost £25, and fixed costs of £90,000. How many units must be sold to achieve a TARGET PROFIT of £45,000?

• A6,000 units
• B8,000 units
• C9,000 units✓
• D10,000 units

Answer: Contribution per unit = £40 − £25 = £15. Units required = (Fixed costs + Target profit) ÷ Contribution = (£90,000 + £45,000) ÷ £15 = £135,000 ÷ £15 = 9,000 units.

In standard costing, a FAVOURABLE material USAGE variance indicates:

• AThe actual price paid for materials was less than the standard price
• BLess material was used than the standard quantity allowed for actual production✓
• CMore material was used than the standard quantity allowed for actual production
• DThe total material cost was higher than the budgeted material cost

Answer: A favourable material usage variance occurs when actual material used is LESS than the standard quantity allowed for actual output. This indicates more efficient use of materials than planned, with less waste.

The MATERIAL PRICE VARIANCE formula is:

• A(Standard price − Actual price) × Actual quantity purchased✓
• B(Actual price − Standard price) × Standard quantity
• C(Standard quantity − Actual quantity) × Standard price
• D(Actual quantity − Standard quantity) × Actual price

Answer: Material price variance = (Standard price − Actual price) × Actual quantity purchased. A positive result indicates a favourable variance (paid less per unit than standard); negative indicates adverse (paid more than standard).