Deck 16: Absorption Costing

Question 1

An example of a production overhead would be:

A) Direct labour
B) Supervisory costs
C) Direct materials
D) None of the above

Answer 1

B

Question 2

Which of the following statements is correct?

A) Activity based costing (ABC) will be less detailed than absorption costing
B) Absorption costing will produce more accurate overhead charges than Activity based costing (ABC)
C) Statements A & B are both correct
D) Activity based costing (ABC) makes more accurate overhead charges than absorption costing

Answer 2

D

Question 3

Which of the following statements is correct?

A) Absorption costing is the most appropriate method of classifying costs to inform short-term decision making
B) Absorption costing is a method of attributing all production costs to individual products with no expectation that they will be covered by sales revenue
C) Absorption costing is not appropriate for valuing closing inventory
D) Absorption costing is a method of attributing all production costs to individual products in the expectation that they will be covered by sales revenue

Answer 3

C

Question 4

The manufacturing plant at Daydream plc has three departments.The budgets for each department are shown below:
$$\begin{array} { l c c c } & \text { A } & \text { B } & \text { C } \\\text { Production Overheads } & £ 3 \mathrm {~m} & £ 6 \mathrm {~m} & £ 30 \mathrm {~m} \\\text { Hours worked } & 1 \mathrm {~m} & 1 \mathrm {~m} & 1 \mathrm {~m} \\\text { Direct wages } & £ 12 \mathrm {~m} & £ 16 \mathrm {~m} & £ 20 \mathrm {~m}\end{array}$$
Calculate the wage rate per hour for each department.

A) A= £12 per hour; B = £16 per hour; C = £20 per hour
B) A= £0.25 per hour; B = £0.36 per hour; C = £1.50 per hour
C) A= £3 per hour; B = £6 per hour; C = £30 per hour
D) A= £4 per hour; B = £2.67 per hour; C = £0.66 per hour

Question 5

Which of the following statements is false?

A) One approach charging direct materials to a job is to use a standard price, regardless of the cost of different purchases made
B) One approach to charging direct materials to a job is to use replacement cost
C) Replacement cost is equal to the cost initially paid for stock
D) The average price could be used in charging direct materials to a job

Question 6

Which of the following statements is correct?

A) Closing inventory should be shown at the higher of cost and net realizable value
B) Manufacturing costs include administration costs
C) In determining the cost of producing something, costs have to be allocated between cost of sales and closing inventory
D) All of the above statements are correct

Question 7

Direct labour costs are wages and employment costs charged directly to particular jobs as well as maintenance staff costs

Question 8

Under recovery of overheads occurs when:

A) Actual overhead incurred is less than the overhead charged to the product
B) Budgeted levels of production have decreased
C) The overhead charged to production is lower than the actual overhead incurred
D) Budget levels of production have increased

Question 9

Possible methods of charging production overheads to different products include charging a percentage of direct material costs and price per mile.

Question 10

The cost of goods that have not been sold are carried forward to be shown as an expense in the following period

Question 11

The manufacturing plant at Daydream plc has three departments.The budgets for each department are shown below:
$$\begin{array} { l c c c } & \text { A } & \text { B } & \text { C } \\\text { Production Overheads } & £ 3 \mathrm {~m} & £ 6 \mathrm {~m} & £ 30 \mathrm {~m} \\\text { Hours worked } & 1 \mathrm {~m} & 1 \mathrm {~m} & 1 \mathrm {~m} \\\text { Direct wages } & £ 12 \mathrm {~m} & £ 16 \mathrm {~m} & £ 20 \mathrm {~m}\end{array}$$
If product ABC takes 20 direct labour hours (10 hours department A,5 hours department B and 5 hours from department C),calculate the production overhead for product ABC using the production overhead rate.

A) £30 per hour
B) £29 per hour
C) £14 per hour
D) £39 per hour

Question 12

The budget of Daydream plc shows total production overheads of £39m.They plan to work 3m hours and total labour cost for the year are £48m.
Calculate the average wage rate per hour.

A) £16 per hour
B) £13 per hour
C) £1.20 per hour
D) £3 per hour

Question 13

The budget of Daydream plc shows total production overheads of £39m.They plan to work 3m hours and total labour cost for the year are £48m.
Calculate the production overhead rate per hour.

A) £16 per hour
B) £13 per hour
C) £1.20 per hour
D) £3 per hour

Question 14

The FlyOnTheWall company made the following purchases of camera components:
$$\begin{array} { l l l l r } \text { Date } & \text { Units } & \text { Cost price per unit } & \text { Amount } & \text { Total } \\1 \text { st Feb } & 800 & £ 10 & 8,000 & 8,000 \\15 \text { th Feb } & 1,000 & f 9 & 9,000 & 17,000 \\25 \text { th Feb } & 6,000 & £ 11 & 6,600 & 23,600\end{array}$$
The company took out a job on the 27th February,using 1,200 components.Show the price charged for the job under the last in first out approach (LIFO)

A) £11,800
B) £12,000
C) £11,600
D) £12,800

Question 15

The amount of overheads charged to jobs during the year is likely to be different from the amounts actually incurred

Question 16

Production overheads include the costs of operating a production facility that can be charged directly to individual products or customers

Question 17

The FlyOnTheWall company made the following purchases of camera components:
$$\begin{array} { l l l l r } \text { Date } & \text { Units } & \text { Cost price per unit } & \text { Amount } & \text { Total } \\1 \text { st Feb } & 800 & £ 10 & 8,000 & 8,000 \\15 \text { th Feb } & 1,000 & f 9 & 9,000 & 17,000 \\25 \text { th Feb } & 6,000 & £ 11 & 6,600 & 23,600\end{array}$$
The company took out a job on the 27th February,using 1,200 components.Show the price charged for the job under the first in first out approach (FIFO)

A) £11,800
B) £12,000
C) £11,600
D) £12,800

Question 18

The manufacturing plant at Daydream plc has three departments.The budgets for each department are shown below:
$$\begin{array} { l c c c } & \text { A } & \text { B } & \text { C } \\\text { Production Overheads } & £ 3 \mathrm {~m} & £ 6 \mathrm {~m} & £ 30 \mathrm {~m} \\\text { Hours worked } & 1 \mathrm {~m} & 1 \mathrm {~m} & 1 \mathrm {~m} \\\text { Direct wages } & £ 12 \mathrm {~m} & £ 16 \mathrm {~m} & £ 20 \mathrm {~m}\end{array}$$
Calculate the production overhead for each department.

A) A= £12 per hour; B = £16 per hour; C = £20 per hour
B) A= £0.25 per hour; B = £0.36 per hour; C = £1.50 per hour
C) A= £3 per hour; B = £6 per hour; C = £30 per hour
D) A= £4 per hour; B = £2.67 per hour; C = £0.66 per hour

Question 19

A company has a winding machine in a specific cost centre.The production overhead for the cost centre is £875,000,the machine is expected to operate for 2,500 hours per annum.What is the machine hour rate?

A) £350
B) £35
C) £10
D) It is not possible to calculate from the information provided

Question 20

The FlyOnTheWall company made the following purchases of camera components:
$$\begin{array} { l l l l r } \text { Date } & \text { Units } & \text { Cost price per unit } & \text { Amount } & \text { Total } \\1 \text { st Feb } & 800 & £ 10 & 8,000 & 8,000 \\15 \text { th Feb } & 1,000 & f 9 & 9,000 & 17,000 \\25 \text { th Feb } & 6,000 & £ 11 & 6,600 & 23,600\end{array}$$
The company took out a job on the 27th February,using 1,200 components.Show the price charged for the job under the average price approach

A) £11,800
B) £12,000
C) £11,600
D) £12,800

Question 21

A "Cost-Plus" pricing approach is:

A) A costing system that involves working out the cost of one unit and adding on extra for the selling price in order to make a profit
B) A costing system that includes the basic direct costs of the product, plus all of the overheads of running the factory as a separate cost total
C) The direct cost of producing the products sold in the month plus the cost of any unsold inventory
D) Used in job costing - for example the cost of the raw materials plus the labour required for a building job

Question 22

A company uses a machine hour absorption rate.
During one month,the budgeted overheads are £24,000 and the budgeted machine hours are 6,400 hours.
The actual overheads incurred are £25,000.The actual machine hours operated were 6,250.
What is the total over/under absorption of overhead in the month,comparing the actual cost to the budget?

A) The overhead is UNDER absorbed by £1,000
B) The overhead is UNDER absorbed by £585.94 (to the nearest penny)
C) The overhead is UNDER absorbed by £1,562.50
D) The overhead is UNDER absorbed by £562.50

Question 23

When issuing inventory,what are the correct abbreviations and definitions for the distribution of inventory to production?

A) LILO means Last in, Last out and FIFO means First in, First Out
B) LIFO means Last in, First out and FIFO means First in, First Out
C) FILO means First in, Last Out and FIFO means First in, First Out
D) FILO means First in, Last Out and LILO means Last in, Last Out

Question 24

A small company has one factory but produces several different products.
It has direct material and direct labour costs which are allocated to the different products directly.
The factory is machine intensive,rather than labour intensive.
It also has overheads such as rent,rates and electricity costs.
As well as the factory,it also has a staff canteen and a maintenance department.
Which of the following statements about Absorption Costing is INCORRECT?

A) Where possible, costs should be directly allocated, such as direct material and direct labour in producing each product.
B) Costs that cannot be allocated may be apportioned, for example rent based on floor area.
C) Other overheads such as maintenance and canteen costs may be absorbed using machine hours.
D) Overheads that are incurred in overhead areas cannot be absorbed - eg maintenance of the canteen

Question 25

A small company has one factory and produces only one product,although production fluctuates weekly according to demand.
It has a range of fixed and variable costs.
Which of the following statements about Absorption Costing is Correct?

A) As there is only one product, absorption costing is unnecessary. The unit cost will always be the same.
B) Absorption costing is necessary for stock valuation, although unit cost will vary with production.
C) As there is only one product, absorption costing is unnecessary. The total cost will always be the same.
D) Absorption costing is necessary for stock valuation, but the unit cost will always be the same.