Chapter 11 Self-test questions

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. SC Limited produces large container pots. Variable costs per pot are as follows: direct materials: £15.00; direct labour: £8.00; direct expenses: £5.00. SC Limited has total overheads for the year of £500,000. Expected labour hours are 25,000 per annum but, due to a strike by the workforce in the summer, only 20,000 hours were worked during the current year. Overheads are absorbed into pots on the basis of one labour hour per pot. Selling price is set at total absorption cost + 25%. What is the selling price of one large container pot?

£35.00 correct incorrect

£48.00 correct incorrect

£60.00 correct incorrect

£66.25 correct incorrect

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. Which of the following are constituents of prime cost? Please select all that apply.

Direct materials correct incorrect

Production salaries correct incorrect

Production overhead correct incorrect

Direct expense correct incorrect

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. Administration, marketing and financing fixed costs are known as ___________.

Your response

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. Reducing costs and increasing revenue are the two ways in which a business can increase its profits.

True correct incorrect

False correct incorrect

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. Which one of the following statements is not correct?

Traditional absorption costing allocates overheads to products on the actual level of production. correct incorrect

Activity based costing allocates overhead costs on the basis of activities consumed by each product. correct incorrect

Direct costs of production can be fixed or variable. correct incorrect

At a production level of zero, total costs = fixed costs. correct incorrect

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. Variable costs remain the same for all units of production: this is one of the assumptions upon which costing is based. Which of the following factors would suggest that this assumption will not hold true in the real world? Please select all that apply.

Bulk discounts from suppliers. correct incorrect

A shortage of hourly paid workers with the required skills. correct incorrect

Stepped fixed costs. correct incorrect

Productivity bonuses paid to production workers. correct incorrect

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. Direct material + direct labour + direct expense = _____________

Your response

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. As production increases, the average total cost of each product produced will fall.

True correct incorrect

False correct incorrect

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. Which of the following statements describe activity-based costing? Please select all that apply.

Allocates indirect production overheads to products on the basis of labour- or machine-hours. correct incorrect

Allocates indirect production overheads to cost pools rather than to cost centres. correct incorrect

Allocates indirect production overheads to products on the basis of cost drivers. correct incorrect

Allocates indirect production overheads to products on the basis of activities consumed. correct incorrect

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. Both absorption costing and costing as a whole have been criticized on the grounds that they suffer from various limitations. Which of the following are criticisms of absorption costing and which are criticisms of costing as a whole?

All costs used are accurate

Criticism of costing as a whole. Criticism of absorption costing. Criticism of absorption costing. Criticism of absorption costing. Criticism of costing as a whole. Criticism of costing as a whole.

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Fails to recognize the demands made by products on an entity's resources.

Criticism of absorption costing. Criticism of absorption costing. Criticism of costing as a whole. Criticism of costing as a whole. Criticism of costing as a whole. Criticism of absorption costing.

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Methods of overhead allocation are too simplistic.

Criticism of absorption costing. Criticism of costing as a whole. Criticism of absorption costing. Criticism of costing as a whole. Criticism of absorption costing. Criticism of costing as a whole.

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Fixed costs remain fixed over a given period of time.

Criticism of costing as a whole. Criticism of absorption costing. Criticism of costing as a whole. Criticism of absorption costing. Criticism of absorption costing. Criticism of costing as a whole.

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Methods of allocating overheads result in some products being subsidized by others.

Criticism of costing as a whole. Criticism of absorption costing. Criticism of absorption costing. Criticism of costing as a whole. Criticism of absorption costing. Criticism of costing as a whole.

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Variable costs remain the same for all units of production.

Criticism of absorption costing. Criticism of costing as a whole. Criticism of costing as a whole. Criticism of costing as a whole. Criticism of absorption costing. Criticism of absorption costing.

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. Which one of the following statements is not true?

Fixed costs are assumed to remain fixed over a given level of production. correct incorrect

Variable costs are assumed to remain the same for all units of production. correct incorrect

It is one of the assumptions of costing that all costs can be determined with the required level of precision to enable accurate cost allocations to be made to products and services. correct incorrect

Absorption costing allocates overhead costs to products on the basis of the demands made by each product or service on the resources of the entity. correct incorrect

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. The XYZ company undertakes 50 annual set ups at a total cost of £22,000. The company's quality control costs for the year are £40,000 for a total of 8,000 units of production. 4,000 materials invoices are processed annually at a cost of £28,000. 2,500 ZX42 components are produced annually. ZX42 components account for 20 set ups and 1,000 materials invoices each year. Total annual machine hours are 45,000 and component ZX42 uses 7 machine hours for each component. Total annual labour hours are 36,000 and component ZX42 uses 5 labour hours for one unit of production. How much overhead should the XYZ company allocate to each ZX42 component using an activity-based costing approach to overhead allocation?

£11.25 correct incorrect

£11.32 correct incorrect

£12.50 correct incorrect

£14.00 correct incorrect

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. Which one of the following statements is the odd one out?

These costs can be allocated to products on a machine or labour hour basis. correct incorrect

These costs can be both fixed and variable. correct incorrect

These costs are directly attributable to units of production or service. correct incorrect

These costs consist of direct material, direct labour and direct expenses. correct incorrect

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. The production department at Basel Manufacturing incurs annual production overheads of £180,000. The company has three support departments, stores, set up and maintenance. The maintenance department's resources are used as follows: 30% by production, 20% by stores, 25% by set up. The other 25% of the maintenance department's resources are used by other departments in the business. In addition, the production department uses 50% of the resources of the stores department and 60% of the resources in the set up department. Support department overheads total up as follows: stores: £80,000, set up: £100,000, maintenance: £150,000. Overheads in the production department are allocated to products on a machine hour basis. 50,000 hours of machine time are worked annually in the production department. What is the hourly overhead absorption rate in the production department?

£3.60 correct incorrect

£6.50 correct incorrect

£7.25 correct incorrect

£10.20 correct incorrect

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. When plotting costs against production on a graph, the fixed costs line is a sloping line which starts at zero.

True correct incorrect

False correct incorrect