ABSORPTION COSTING
1.Share Co has two cost centres, glazing and finishing, along with one service centre,
administration. The following information is available
Allocate and apportion the overheads in the table below to the three departments using the
information provided above. You must enter a 0 in any unused boxes.
Overheads Total Glazing Finishing Administration
($) ($) ($) ($)
Supervisor’s 24,100 [24,100] [0] [0]
salary – Glazing
Administration 35,000 [0] [0] [35,000]
salaries
Rent and rates 18,000 [10,800] [5,400] [1,800]
Insurance of 9,600 [3,200] [6,400] [0]
machinery
Overhead Basis
Power for production machinery [Production machinery power usage]
Light and heat [Floor space]
Canteen costs [Number of employees]
Depreciation of machinery [Carrying value of machinery
2.The budgeted overheads and activity levels for Aqua Co for the next quarter are provided below.
Assembly Finishing
Budgeted overheads ($) 134,334 135,096
Budgeted direct labour hours 4,880 6,240
Budgeted machine hours 8,780 2,530
The assembly department is very machine intensive, however, the finishing department is more
labour orientated.
What is the overhead absorption rate to be used for each department?
Show your answers to 2 decimal places.
$
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Assembly [15.30]
Finishing [21.65]
MARGINAL COSTING
1.FT Co has identified the monthly costs associated with two different levels of activity as follows:
Month Activity level Total cost ($)
January 160 units 10,500
February 168 units 10,996
What is the total cost for the month of March when the activity level is expected to be 182 units?
$[11,864]
2.Just Ltd manufactures three products, X, Y and Z.
All three products use the same material which is in short supply and only 1,000 kg is expected to
be available.
Information for the three products has been provided below.
Product X ($) Y ($) Z ($)
Sales price 140 130 120
Variable costs:
Materials ($3 per kg) 36 12 21
Labour 24 36 18
Fixed costs 15 20 10
Profit per unit 65 62 71
What order would the products be ranked in order to maximise contribution due to the limited
quantity of materials available?
Enter X, Y or Z next to the rankings below.
Ranking Product (X, Y or Z)
1 [Y]
2 [Z]
3 [X]
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3. BT Co produces a single product for which the following standard cost information is available:
Selling price per unit 81
Direct materials per unit 21
Direct labour per unit 12
Variable production overhead per unit 9
Fixed production overhead per unit 15
Information for the last period was provided as follows:
Opening inventory 6,000 units
Closing inventory 4,000 units
Absorption costing profit $288,000
What would the profit for the last period have been if BT Co had used marginal costing?
$[318,000]
4. BC Co is currently preparing its budget for the forthcoming year for its two products, B and C.
Materials for the period are limited to 5,000 kg and the maximum labour hours are 12,400 hours.
B C
Sales demand 2,000 4,500
Materials per unit 1.5 kg 0.25 kg
Labour hours per unit 1.75 hours 2 hours
5. BG Co manufactures a single product. You have been provided with the following information:
Direct materials 3 kg at $9 per kg
Direct labour 5 hours at a total cost of $40
Overheads 5 hours at $3 per hour
What is the prime cost of making one unit?
$[67]
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6. LT Co uses the first in first out (FIFO) method to price issues of inventory. During the current
month, LT Co made the following purchases from suppliers:
Date Transaction
3 May Purchased 500 units at $4 per unit
14 May Purchased 600 units at $4.20 per unit
25 May Purchased 200 units at $4.80 per unit
On 1 May there were 100 units in inventory valued at a cost of $3.80 per unit. During the month
there were two issues from inventory to production:
Date Transaction
10 May 400 units
21 May 300 units
What was the value of the issues made on 21 May?
$[1,220]
7. PG Co uses a single raw material in the manufacture of its products. The opening inventory of
the raw material in stores is 5,000 units at $8 per unit.
During the month, another 5,000 units were received at a price of $10 per unit. The following
week, 7,200 units were issued.
8. Bright Co uses a time-rate method with bonus to pay its direct labour. The time rate used is $14
per hour. Employees are expected to produce 5 units in an hour. Any units produced in excess of
this are paid at a bonus rate of $4 per unit.
Calculate the basic wage and bonus for the two employees in the table below. You must enter 0 if
no amount is payable.
Employee Hours worked Units produced Basic wage Bonus
I Jack 38 hours 180 $[532] (1) $[0] (1)
M Braham 32 hours 170 $[448] (1) $[40] (1)
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9. Element & Co is wanting to identify the direct labour cost for a special order from a customer.
The hours needed to complete work have been identified as:
Skilled Semi-skilled
Basic hourly rate $18 per hour $12 per hour
Hours paid at basic rate 65 80
Hours paid a time and a half 34 20
Hours paid at double time 18 0
What is the total direct labour cost for this special order?
$[4,056]
10. KT Ltd pays its employees $12 per hour and expects them to produce 40 units per hour. A
bonus of $14 is payable for each hour saved for units produced in excess of 40 units per hour.
Calculate the total gross pay for each of the following employees.
Employee Hours worked Units produced Gross pay
T Chi 38 hours 1,760 units $[540]
L Price 40 hours 1,580 units $[480]
11. Jackson Ltd is undertaking a costing exercise and wishes to calculate an overhead absorption
rate to apply to each unit produced.
You have been provided with the following forecast factory activity:
Machine hours 12,000 hours
Labour hours 3,000 hours
Production level 20,000 units
Overhead costs $180,000
What is the overhead cost per unit based on machine hours? Show your answer to 2 decimal
places.
$[9.00]
12 Cliff Co wishes to calculate the unit cost of one of the products it makes. The following data
relates to making one unit of the product.
Materials 4 kg at $6 per kg
Labour 20 minutes at $12 per hour
Overheads $9 per direct labour hour
What is the cost of making one unit?
5
$[31]
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13. An employee is paid a basic rate of $12 per hour for each hour worked up to 38 hours a week.
Any hours worked in excess of 38 hours are paid at me and a quarter. In period 4, the employee
worked 44 hours.
What is the employee’s gross pay for period 4?
$[546]
14. An employee receives a salary of $21,600 per annum. Each month the employee pays tax
amounting to $160 and contributes $92 into a pension scheme.
What is the amount of net pay for the month?
$[1,548]
15. Eve is paid on a time basis + bonus scheme at work. Her hourly rate is $14 per hour, and she
works 35 hours in a particular week. She also receives a bonus payment if her production level
exceeds 300 units. Her bonus is $0.50 for each unit above her 300 target. During the week, Eve
produces 340 units.
What is Eve’s pay for the week?
$[510]
16. Kate operates a business as a sole trader. She has 4 employees, and the payroll information for
the latest weekly pay is as follows:
Hours worked at basic rate 150 hours
Hours worked at time and a half 36 hours
Hours worked at double time 12 hours
The hourly rate is $12.50.
What is the wages expense for the week?
$[2,850]
17. BAC Co is currently preparing a quote for a special job for a customer. The estimated costs are
shown below:
Direct materials 240kg at $18 per kg
Direct labour 35 hours at $15 per hour
Overheads $8 per direct labour hour
BAC Co has a policy of applying a 20% mark up on all jobs. What would be the selling price for this
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job?
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$[6,150]
18. A clothing manufacturer is preparing a quote to supply a local football club with 30 new kits.
The following cost estimates have been prepared:
Direct materials A total of 90 metres at $13 per metre
Direct labour Machining will take approximately 20 minutes per kit.
Machinists are paid $12 per hour
Overheads $6 per direct labour hour
What is the total cost of producing a batch of 30 kits?
$[1,350]
20. Lift Ltd operates a taxi business. The following information relates to the costs incurred during
July 2023.
Fuel and other variable overheads $10,800
Fixed costs:
Drivers’ wages $4,575
Other fixed overheads $21,000
Number of miles travelled 3,750 miles
What is the cost per mile using absorption costing? Show your answer to 2 decimal places.
$[9.70]
21. GT & Co is preparing plans for the forthcoming period.
GT & Co sells a single product for $320. It has a marginal cost of $190 and an absorption cost of
$230.
The fixed costs are $679,900. What is the break-even point in units for GT & Co?
[5,230] units
22.MLB Co makes a single product which has a selling price of $550, a variable cost of $210 and an
absorption cost of $255.
Fixed costs are $67,720. MLB Co wishes to make a target profit of $54,000.
How many units does MLB Co need to sell in order to generate the target profit?
7
[358] units
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23. Go Jack manufactures a single product which has a selling price of $55 and a variable cost of
$21.
Fixed costs are $34,952. What is the margin of safety in units if the current sales level is 1,200
units?
[172] units
24. Wrinkles Co manufactures a single product. Details for the next period have been provided
below.
Budgeted output 2,000 units
Selling price $80 per unit
Direct materials 7 kg per unit at $4 per kg
Direct labour 3 hours at a total cost of $36
Fixed overheads $20,000
What is the budgeted profit or loss for the period?
$[12,000]
25.
RATIO ANALYSIS
1. You have been provided with the following extracts from a company’s accounts.
$000
Revenue 5,400
Inventories 300
Cost of sales 2,600
Trade Receivables 600
Gross profit 2,800
Cash 50
Admin costs 1,000
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Trade Payables 460
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Distribution costs 700
Bank overdraft 180
Operating profit 1,100
a. What is the trade receivables collection period in days (to the nearest day)?
[41] days
b. What is the inventory holding period to the nearest day?
[42] days
2. PL Co has partially completed an exercise on working capital ratios. The accountant has
calculated the trade receivables collection period as 39 days and the inventory holding period as
28 days.
The balance on the payables ledger at the yearend was $10,820 and the cost of sales for the year
was $91,848.
What is the working capital cycle for PL Co?
[24] days
3.
MCQ’S
1. JT Co purchased an asset for $40,000 on 1 January 2021. At that me the asset was deemed to
have a useful life of 10 years and a residual value of $4,000.
At 31 December 2023 it was decided that the asset had a remaining useful life of 5 years. The
estimated residual value remained unchanged.
What was the depreciation charge for the year ended 31 December 2024 in respect of this asset?
A $ 5,040 B $ 5840 C $ 5 760 D $ 3 600 A
2. Which one of the following would NOT be classed as a non-current asset?
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A Freehold property occupied by the business and held for its potential increase in value
B A limited-edition lorry used in the entity’s operations
C Freehold property occupied by the entity and used for production
D Shares in another company held as a short-term store of spare cash D
3. AFN Co purchased a motor vehicle for $18,000 on 1 April 2021. It had been depreciated at 20%
each year using the straight-line method, assuming no residual value.
AFN Co have a policy of charging a full year’s depreciation in the year of purchase and no
depreciation in the year of sale.
The motor vehicle was traded in for a replacement vehicle on 1st August 2024 for $6,000.
What was the profit or loss on disposal of the vehicle for the year ended 31 December 2024?
A $ 1,200 Loss B $ 1 200 profit
C $ 2 400 Profit D $ 4 800 Profit A
4. GH Trading purchased an asset for $25,800 on 1 October 2023 and depreciated the asset using
the straight-line method at a rate of 20% on a month-by-month basis. The asset was sold on 1
March 2026 for $11,500.
What is accumulated depreciation for disposed asset.
A $25,800 B $12,470 C $11,500 D $ 14,300 B
5.Leo purchased a motor van for $19,000 on 1 April 2024 at the start of his financial year.
Leo expects to be able to use the motor van for approximately 5 years and has estimated the
residual value of the motor van to be $3,100.
Leo uses the reducing (diminishing) balance method of depreciation at a rate of 30% for all motor
vehicles.
What is the depreciation charge for the year ending 31 March 2027 using the
A $ 2,793 B $ 3,180 C $ 3,800 D $ 3,990 A
6. Tim and Becci trade as a partnership. The profit for the year ending 31 December 2024 was
$34,500 before the following are taken into account.
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Interest on partners’ capital accounts totals $1,950
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Tim has a salary of $9,000 however Becci does not take a salary
The interest on partners’ drawings amounted to $1,400 in total
If the remaining profits are shared equally, how much will each partner receive?
A $17,250 B $21,475 C $ 12,475 D $13,025 C
7. GT Co’s Statement of Financial Posion shows capital and reserves for the year ended 31.12.21
and 31.12.22 as follows:
31.12.22 $ 31.12.21 $
Ordinary share capital 50,000 40,000
Share premium 8,000 5,000
Retained earnings 120,000 95,000
Dividends of $10,000 were paid during the year ended 31.12.22. What was GT Co’s profit for the
year ending 31.12.22?
A $ 25,000 B $ 15,000 C $ 38,000 D $ 35,000 D
8. On 1 January 2022 a business had assets of $20,000 and liabilities of $14,000. By 31 December
2022 it had assets of $30,000 and liabilities of $20,000. The owner contributed capital of $8,000.
Which of the following represents the profit or loss made for the year ending 31 December 2022?
A Profit of $2,000 B Loss of $12,000
C Loss of $4,000 D Loss of $2,000 C
9. JT Co had all of its closing inventory destroyed by a flood at the end of the year.
The business needs a valuation for the purposes of an insurance claim. The following information
for the year has been provided:
Sales $240,000
Purchases $162,000
Opening inventory $12,000
Margin 30%
Calculate the value of the closing inventory destroyed by the flood.
A $ 18,000 B $22,000 C $ 6,000 D $ 12000 C
10. The balance on the receivables account of Wye co was $44,000 at 1 April 2022. The Income
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Statement showed revenue from credit sales of $581,020 during the year ending 31 March 2023.
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The trade receivables collection period was 49 days at the year-end 31 March 2023.
How much cash did Wye Co receive from its customers during the year to 31 March 2023?
Round your answers to the nearest $ throughout your calculations.
A $ 547,020 B $ 78,000 C $ 615,020 D $ 122,000 A
11. You have been provided with the following information relating to MT Co.
Trade payables as at 1 April 2023 18,760
Discounts allowed 680
Credit purchases 68,970
Purchase returns 1,610
Bank payments to payables 59,130
Contra offset between payables and receivables 2,600
The closing balance as at 31 March 2024 on the trade payables account will be
A $26,990 B $24,390 C $ 34,230 D $22,780 B
12. Assuming MT Co does not hold inventory and purchases for the year amounts to $ 67,360. It
operates using a mark-up of 20%, the sales for the year ending 31 March 2024 were
A $ 53,888 B $ 13,472 C $80,832 D $56,133 C
13. A sole trader runs a market stall and sells goods at a markup on cost of 40%. Sales in the year
were $32,599 and purchases were $23,015.
The inventory at the beginning of the year was $4,160, however the entire closing inventory was
stolen from the trader’s storage facility.
Calculate the value of the inventory that was stolen.
A $4,430 B $ 7,615 C $3,455 D $ 3,890 D
14. the following extracts from the financial statements for a limited company for the year ending
30th September 2024.
Profit from operations 187,650
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Finance costs 3,500
Profit before tax 184,150
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Tax 36,830
profit for the period 147,320
Share Capital and reserves 630,600
Non-current Liability 40,000
Return on capital employed is
A 24% B 28% C 27.46% D 21.97% B
15. Jack Ltd operates as a retailer. During the month of March, cost of sales was $135,000, trade
payables increased by $42,500 and inventory decreased by $12,000.
Calculate the amount paid to payables in the month of March.
A $80,500 B $ 104,500 C $165,500 D $ 189,500 A
16. Which one of the following is an advantage of absorption costing when compared to marginal
costing?
A It is more relevant for short-term decision-making
B It avoids subjective allocation and absorption of overheads
C Fixed costs are taken into account and can be a significant part of total costs
D It encourages over-production C
17. A business sells a single product and has budgeted sales of 4,500 unts for the next period.
The selling price per unit is $450 and the variable costs of production are $187.50.
The fixed costs of the business are $840,000.
What is the break-even point in units?
A 4,500 units B 1,320 units
C 1,300 units D 3,200 units D
18. A business sells a single product and has budgeted sales of 6,000 units. A target profit of
$180,000 for the period has been set.
The fixed costs of the business are $624,000.
The product sells for $200 and provides a contribution of $120 per unit.
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How many units does the business need to sell in order to generate the required target profit?
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A 6,700 units B 7,600 units
C 10,050 units D 7,800 units A
19. Which one of the following statements is true regarding marginal costing?
A The contribution per unit will change if the sales volume increases.
B The marginal cost of a product represents the additional cost of producing an extra unit.
C The marginal cost of a product includes an allowance for fixed production costs.
D If the inventory increases over the year, the profits under absorption costing will be lower
than with marginal costing. B
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