Q1. Which working capital funding policy uses long-term funds for all permanent current assets and part of fluctuating current assets? Correct

A) Aggressive
B) Matching
C) Any funding is equivalent
D) Conservative

Your answer: D  |  Correct answer: D

A conservative policy uses long-term funding beyond the permanent base, reducing risk but increasing cost. An aggressive policy uses short-term funds for part of the permanent base, and a matching policy aligns maturity with asset life. If you chose any funding you ignored the risk and cost trade-off.

Working capital: financing policy

Q2. Budgeted profit is CU 202,200. The variances are: sales volume CU 13,480 F, sales price 12,800 A, material price 2,290 A, material usage 4,100 A, labour rate 4,620 A, idle time 3,750 A, labour efficiency 3,250 F, variable overhead expenditure 2,100 A, variable overhead efficiency 1,040 F, fixed overhead expenditure 3,500 A, fixed overhead volume 7,200 F. What is the actual profit? Incorrect

A) CU 202,200
B) CU 194,010
C) CU 186,810
D) CU 215,680

Your answer: C  |  Correct answer: B

Start with the budgeted profit and add favourable and subtract adverse variances. Favourable total = 13,480 + 3,250 + 1,040 + 7,200 = 24,970. Adverse total = 12,800 + 2,290 + 4,100 + 4,620 + 3,750 + 2,100 + 3,500 = 33,160. Actual profit = 202,200 + 24,970 - 33,160 = CU 194,010. If you answered CU 202,200 you gave the budget. If you answered CU 186,810 you omitted the fixed overhead volume variance. If you answered CU 215,680 you gave the standard profit on actual sales, before the other variances.

Variance analysis: operating statement

Q3. Using the same data (X: CU 18, 3 hours; Y: CU 24, 5 hours; Z: CU 14, 2 hours; 7,600 hours; demand 1,000, 800 and 1,500 units), what is the shadow price of a machine hour? Correct

A) CU 4.80
B) CU 6.00
C) CU 7.00
D) CU 24.00

Your answer: A  |  Correct answer: A

Product Y is the marginal product made. One extra hour would produce 1/5 of a unit of Y, worth 24 / 5 = CU 4.80. If you answered CU 6.00 or CU 7.00 you used the contribution per hour of a product that is already made in full. If you answered CU 24.00 you gave the contribution per unit of Y.

Limiting factor: shadow price

Q4. Fixed costs are CU 87,500 and variable cost is CU 12.50 a unit. What is the average cost per unit at 14,000 units? Incorrect

A) CU 12.50
B) CU 18.75
C) CU 6.25
D) CU 25.00

Your answer: A  |  Correct answer: B

Total cost = 87,500 + 175,000 = 262,500. Average cost = 262,500 / 14,000 = CU 18.75. If you answered CU 12.50 you gave variable cost only. If you answered CU 6.25 you gave fixed cost per unit only. If you answered CU 25.00 you used 7,000 units for the fixed cost per unit.

Cost behaviour: average cost

Q5. Alder Ltd makes a component for CU 22 variable cost a unit, plus avoidable fixed costs of CU 60,000 a year. It needs 10,000 units a year. A supplier offers the component at CU 27 a unit. Question 1 of 3: What is the annual saving from buying instead of making? Incorrect

A) CU 50,000
B) CU 60,000
C) CU 10,000 cost increase
D) CU 10,000

Your answer: A  |  Correct answer: D

Working: Make = 220,000 + 60,000 = 280,000. Buy = 270,000. Buying saves 10,000. Correct answer: CU 10,000. Why the other options are wrong: 'CU 50,000': if you chose this, you compared the buying price with variable cost only. 'CU 60,000': if you chose this, you gave the avoidable fixed costs as the saving. 'CU 10,000 cost increase': if you chose this, you reversed the direction.

Make or buy

Q6. Alder Ltd makes a component for CU 22 variable cost a unit, plus avoidable fixed costs of CU 60,000 a year. It needs 10,000 units a year. A supplier offers the component at CU 27 a unit. Question 2 of 3: At what annual volume are the make and buy costs equal? Correct

A) 12,000 units
B) 10,000 units
C) 2,222 units
D) 2,727 units

Your answer: A  |  Correct answer: A

Working: 22x + 60,000 = 27x, so x = 60,000 / 5. Correct answer: 12,000 units. Why the other options are wrong: '10,000 units': if you chose this, you used the current volume. '2,222 units': if you chose this, you divided fixed costs by the buying price. '2,727 units': if you chose this, you divided fixed costs by the variable cost.

Make or buy

Q7. Alder Ltd makes a component for CU 22 variable cost a unit, plus avoidable fixed costs of CU 60,000 a year. It needs 10,000 units a year. A supplier offers the component at CU 27 a unit. Question 3 of 3: Which THREE are relevant non-financial points for this decision? (Select THREE.) Incorrect

Multiple response
A) Apportioned head office overhead
B) The supplier's reliability and quality
C) Effects on employees if production stops
D) Alternative use of the freed capacity
E) The original cost of the machine

Your answer: A  |  Correct answer: B, C, D

Correct answers: B, C, D. A is wrong: it is not avoidable. B is correct: failure to deliver would disrupt production. C is correct: there may be redundancy and morale effects. D is correct: spare capacity could earn contribution. E is wrong: it is a sunk cost.

Make or buy

Q8. Inventory records: 300 units at CU 4.00 on hand. Purchases: 200 units at CU 5.00 (day 2) and 400 units at CU 5.50 (day 9). Issues: 250 units (day 5) and 500 units (day 12). Using perpetual weighted average cost, what is the value of closing inventory, to the nearest CU? Correct

A) CU 733
B) CU 762
C) CU 825
D) CU 660

Your answer: B  |  Correct answer: B

After day 2: 500 units at CU 4.40. After the day 5 issue: 250 units, 1,100. After day 9: 650 units, 3,300, average CU 5.0769. After the day 12 issue 150 units remain = CU 762. If you answered CU 733 you used a single periodic average (4,400 / 900). If you answered CU 825 you used FIFO. If you answered CU 660 you kept the average from day 2 and did not recalculate after day 9.

IAS 2: cost formulas

Q9. Which TWO statements are correct? (1) The margin of safety is budgeted sales less breakeven sales. (2) The C/S ratio is contribution per unit divided by selling price per unit. (3) The breakeven point is unaffected by the selling price. (4) Units needed for a target profit equal the target profit divided by contribution per unit. Incorrect

A) (1) and (3) only
B) (2) and (4) only
C) (1) and (2) only
D) (3) and (4) only

Your answer: B  |  Correct answer: C

The selling price affects contribution and so the breakeven point. For a target profit, fixed costs must also be covered, so units = (fixed costs + target profit) / contribution per unit. If you chose (3) you ignored the effect of price. If you chose (4) you left out the fixed costs.

Breakeven: statements

Q10. Which TWO of the following are correct? (1) Penetration pricing sets a low initial price to gain market share. (2) Price skimming sets a high initial price for a new product when buyers are not very price sensitive. (3) Cost-plus pricing takes full account of customer demand. (4) Marginal cost pricing always recovers fixed costs. Correct

A) (1) and (3) only
B) (1) and (2) only
C) (2) and (4) only
D) (3) and (4) only

Your answer: B  |  Correct answer: B

Penetration and skimming are the two standard strategies for new products. Cost-plus starts from cost, not demand, and marginal cost pricing covers fixed costs only if volume is high enough. If you chose (3) you credited cost-plus with demand analysis. If you chose (4) you assumed a price above marginal cost always recovers fixed costs.

Pricing strategies

Q11. A contract needs 25 hours of skilled labour paid CU 20 an hour. The workers would otherwise make a product earning contribution of CU 32 an hour after deducting their pay. What is the relevant cost of the labour? Incorrect

A) CU 500
B) CU 800
C) CU 1,300
D) CU 300

Your answer: B  |  Correct answer: C

Relevant cost per hour = pay 20 + contribution lost 32 = CU 52. For 25 hours that is CU 1,300. If you answered CU 500 you used pay only. If you answered CU 800 you used the lost contribution only. If you answered CU 300 you deducted pay from the contribution.

Relevant costing: labour

Q12. Variable cost is CU 30 per unit and the price is set at variable cost plus an 80% mark-up. Fixed costs are CU 168,000 and sales are 12,000 units. What is the profit? Incorrect

A) CU 168,000
B) CU 288,000
C) CU 120,000
D) CU 648,000

Your answer: B  |  Correct answer: C

Price = 30 x 1.8 = CU 54, so contribution = CU 24 per unit. Profit = 12,000 x 24 - 168,000 = CU 120,000. If you answered CU 288,000 you gave total contribution. If you answered CU 168,000 you gave the fixed costs. If you answered CU 648,000 you gave total revenue.

Cost-plus pricing

Q13. A company judges a call centre by answering most calls within 20 seconds. Which type of measure is this, and what limitation does it have? Incorrect

A) A service-quality measure that does not show whether the caller's problem was solved
B) A financial measure that shows the cost of each call
C) A cost measure that shows the efficiency of staff
D) A sustainability measure that shows environmental impact

Your answer: C  |  Correct answer: A

Speed of answering is a non-financial service-quality measure. It does not say whether the call was handled well, so it can encourage staff to answer quickly and then end calls without resolving the query.

Performance measurement

Q14. Consider the following statements about types of standard. For each statement, select Yes if it is correct and No if it is not. Incorrect

(1) Yes: it is perfect efficiency. (2) No: it stays unchanged for long periods. (3) Yes: it is based on current methods and prices. (4) Yes: it can be reached with effort. (5) No: they give unrealistic figures.

Types of standard

Q15. Standard card (per unit): materials 4 kg at CU 6.50; labour 2.5 hours at CU 14; variable overhead CU 5.60 per labour hour; fixed overhead CU 210,000 budgeted on 7,000 units (CU 30 a unit); selling price CU 140. Actual output and sales: 7,600 units. Labour: 20,000 hours paid at CU 14.40, of which 500 hours were idle. What is the labour rate variance? Correct

A) CU 8,000 favourable
B) CU 7,800 adverse
C) CU 8,000 adverse
D) CU 7,000 adverse

Your answer: C  |  Correct answer: C

Rate variance is based on hours paid: 20,000 x (14.00 - 14.40) = CU 8,000 adverse. If you answered favourable you reversed the sign. If you answered CU 7,800 you used hours worked of 19,500. If you answered CU 7,000 you gave the idle time or efficiency variance.

Labour rate variance

Q16. A manufacturer's cost is CU 48 and it requires a 25% margin on its selling price. The retailer needs a 30% margin on the retail price. What is the retail price, to the nearest cent? Incorrect

A) CU 64.00
B) CU 91.43
C) CU 78.00
D) CU 83.20

Your answer: C  |  Correct answer: B

Manufacturer's price = 48 / 0.75 = CU 64. Retail price = 64 / 0.70 = CU 91.43. If you answered CU 64 you gave the manufacturer's price. If you answered CU 78 you applied mark-ups of 25% and 30%. If you answered CU 83.20 you applied a 30% mark-up to the wholesale price.

Pricing: margins

Q17. Opening inventory 350 units at CU 6.00. Purchases: 450 units at CU 6.50 (day 2) and 300 units at CU 7.00 (day 7). Issues: 600 units (day 4) and 400 units (day 9). Using perpetual FIFO, what is the total cost of issues? Correct

A) CU 6,477
B) CU 2,700
C) CU 6,425
D) CU 700

Your answer: C  |  Correct answer: C

Day 4: 350 x 6.00 + 250 x 6.50 = 3,725. Day 9: 200 x 6.50 + 200 x 7.00 = 2,700. Total = CU 6,425. If you answered CU 6,477 you used a periodic average cost. If you answered CU 2,700 you gave the second issue only. If you answered CU 700 you gave the closing inventory.

IAS 2: cost formulas

Q18. A direct worker is paid CU 16 an hour for a 40-hour week and time and a half for overtime. Last week she worked 46 hours because of general pressure of work, not for any particular job. What overtime premium is treated as production overhead? Correct

A) CU 144
B) CU 96
C) CU 784
D) CU 48

Your answer: D  |  Correct answer: D

The premium is the extra half-rate on the overtime hours: 6 x 16 x 0.5 = CU 48. The basic rate is direct labour as the hours are worked on production. If you answered CU 144 you included the basic pay for the overtime hours. If you answered CU 96 you took the overtime hours at basic rate only. If you answered CU 784 you gave the total pay for the week.

Labour: overtime

Q19. Quality costs for a period were: prevention CU 80,000, appraisal CU 60,000, internal failure CU 110,000 and external failure CU 150,000. What is the cost of non-conformance? Correct

A) CU 140,000
B) CU 150,000
C) CU 400,000
D) CU 260,000

Your answer: D  |  Correct answer: D

Costs of non-conformance are the failure costs: 110,000 + 150,000 = CU 260,000. If you answered CU 140,000 you gave the cost of conformance (prevention and appraisal). If you answered CU 150,000 you included external failure only. If you answered CU 400,000 you gave the total cost of quality.

Performance: cost of quality

Q20. 1,000 units remain in inventory at the year end. Their production cost is CU 18 each, but CU 3 per unit of administration overhead was wrongly included. What is the effect on profit? Correct

A) Understated by CU 3,000
B) Overstated by CU 18,000
C) Overstated by CU 21,000
D) Overstated by CU 3,000

Your answer: D  |  Correct answer: D

Administration costs are period costs. Including them in inventory defers CU 3,000 of expense, so profit is overstated by CU 3,000. If you answered 'understated' you reversed the direction. If you answered CU 18,000 you gave the production cost of the inventory. If you answered CU 21,000 you gave the inventory value as misstated.

IAS 2.16(c)

Q21. Process 2 receives 4,000 units costing CU 40,000 from Process 1 and adds CU 20,800 of conversion costs. Normal loss is 5% of input and has no value. Output is 3,700 units. What is the value of the good output? Correct

A) CU 60,800
B) CU 56,240
C) CU 57,600
D) CU 59,200

Your answer: D  |  Correct answer: D

Expected output = 4,000 - 200 = 3,800 units. Cost per unit = 60,800 / 3,800 = CU 16. Good output = 3,700 x 16 = CU 59,200 (the abnormal loss of 100 units, CU 1,600, goes to profit or loss). If you answered CU 60,800 you included the abnormal loss in the output value. If you answered CU 56,240 you ignored the normal loss in the unit cost (60,800 / 4,000). If you answered CU 57,600 you used 3,600 units.

Process costing

Q22. Falcon Ltd's staff clicked a link in a phishing email. A ransomware program then encrypted the shared drive. The firm had backups but they were held on a server connected to the same network, and these were also encrypted. Operations stopped for four days. Question 1 of 3: Which TWO controls would most have reduced the damage? (Select TWO.) Incorrect

Multiple response
A) Offline or off-site backups that are separate from the network
B) Paying the ransom as soon as it is demanded
C) Regular staff training on phishing
D) Giving all staff administrator access
E) Switching off the antivirus to improve speed

Your answer: E  |  Correct answer: A, C

Correct answers: A, C. A is correct: the backups could have been used for recovery. B is wrong: it funds crime and gives no guarantee of recovery. C is correct: it lowers the chance that the link is opened. D is wrong: it increases the spread of malware. E is wrong: it reduces protection.

Cyber security

Q23. Falcon Ltd's staff clicked a link in a phishing email. A ransomware program then encrypted the shared drive. The firm had backups but they were held on a server connected to the same network, and these were also encrypted. Operations stopped for four days. Question 2 of 3: Which element of the confidentiality, integrity and availability triad was most directly lost? Incorrect

A) Confidentiality
B) Integrity
C) Availability
D) Non-repudiation

Your answer: A  |  Correct answer: C

Working: Operations stopped for four days because files could not be accessed. Correct answer: Availability. Why the other options are wrong: 'Confidentiality': if you chose this, you assumed the data was disclosed, but the scenario shows loss of access. 'Integrity': if you chose this, you assumed the data was altered, but the issue was access. 'Non-repudiation': if you chose this, you chose a different security objective.

Cyber security

Q24. Falcon Ltd's staff clicked a link in a phishing email. A ransomware program then encrypted the shared drive. The firm had backups but they were held on a server connected to the same network, and these were also encrypted. Operations stopped for four days. Question 3 of 3: Consider the following statements about cyber security. For each statement, select Yes if it is correct and No if it is not. Incorrect

(1) Yes: a second factor is needed. (2) Yes: attackers exploit unpatched systems. (3) No: people are a major route for attacks. (4) Yes: roles and steps are agreed in advance. (5) No: malware can reach connected storage.

Cyber security

Q25. Inventory records: 400 units at CU 3.00 on hand. Purchases: 600 units at CU 3.50 (day 2) and 500 units at CU 3.90 (day 9). Issues: 700 units (day 5) and 450 units (day 12). Using perpetual weighted average cost, what is the value of closing inventory, to the nearest CU? Incorrect

A) CU 1,225
B) CU 1,365
C) CU 1,286
D) CU 1,155

Your answer: A  |  Correct answer: C

After day 2: 1,000 units at CU 3.30. After the day 5 issue: 300 units, 990. After day 9: 800 units, 2,940, average CU 3.675. After the day 12 issue 350 units remain = CU 1,286. If you answered CU 1,225 you used a single periodic average (5,250 / 1,500). If you answered CU 1,365 you used FIFO. If you answered CU 1,155 you kept the average from day 2 and did not recalculate after day 9.

IAS 2: cost formulas

Q26. Total cost is CU 140,000 for 4,000 units. A mark-up of 30% is added to full cost. What is the price per unit? Incorrect

A) CU 50.00
B) CU 35.00
C) CU 45.50
D) CU 10.50

Your answer: A  |  Correct answer: C

Full cost per unit = 35. Price = 35 x 1.30 = CU 45.50. If you answered CU 50 you treated 30% as a margin on price (35 / 0.7). If you answered CU 35 you gave cost. If you answered CU 10.50 you gave the mark-up only.

Pricing: cost-plus

Q27. Standard card (per unit): materials 4 kg at CU 6.50; labour 2.5 hours at CU 14; variable overhead CU 5.60 per labour hour; fixed overhead CU 210,000 budgeted on 7,000 units (CU 30 a unit); selling price CU 140. Actual output and sales: 7,600 units. Hours worked were 19,500 and variable overhead is absorbed on hours worked. What is the variable overhead efficiency variance? Correct

A) CU 2,800 adverse
B) CU 2,800 favourable
C) CU 5,600 adverse
D) CU 7,000 adverse

Your answer: A  |  Correct answer: A

Excess hours = 19,500 - 19,000 = 500 x 5.60 = CU 2,800 adverse. If you answered favourable you reversed the sign. If you answered CU 5,600 you used 1,000 hours. If you answered CU 7,000 you used the labour rate of 14.

Variable overhead efficiency variance

Q28. A product has a variable cost of CU 24 and a fixed cost of CU 14 a unit, so the full cost is CU 38. The company adds a mark-up of 25% on full cost. What is the selling price? Correct

A) CU 50.67
B) CU 47.50
C) CU 30.00
D) CU 9.50

Your answer: B  |  Correct answer: B

Working: Price = 38 x 1.25 = 47.50. A mark-up is a percentage of cost; a margin is a percentage of price. Correct answer: CU 47.50. Why the other options are wrong: 'CU 50.67': if you chose this, you treated 25% as a margin on the selling price (38 / 0.75). 'CU 30.00': if you chose this, you marked up the variable cost only. 'CU 9.50': if you chose this, you gave the mark-up and left out the cost.

Cost-plus pricing

Q29. Products X, Y and Z give contributions of CU 30, 36 and 20 per unit and use 4, 6 and 2 kg of a scarce material. Maximum demand is 2,000, 1,500 and 3,000 units. 18,000 kg of material are available. What is the maximum premium per extra kg of material that is worth paying? Correct

A) CU 7.50
B) CU 6
C) CU 10
D) CU 36

Your answer: B  |  Correct answer: B

Extra material would make more Y, earning CU 36 / 6 = CU 6 per kg. If you answered CU 7.50 or CU 10 you used X's or Z's contribution per kg, but both are already at maximum demand. If you answered CU 36 you gave Y's contribution per unit.

Limiting factor analysis

Q30. Consider the following statements about inventory valuation. For each statement, select Yes if it is correct and No if it is not. Incorrect

(1) Yes: the oldest items are assumed to be issued first. (2) Yes: older, cheaper costs go to cost of sales. (3) No: it uses an average of the cost of the items held. (4) No: IAS 2 prohibits LIFO. (5) Yes: that is the IAS 2 rule.

Inventory valuation

Q31. Item A: cost 18,500, selling price 21,000, costs to complete 1,800, selling costs 900. Item B: cost 12,400, selling price 13,500, selling costs 1,600. Item C: cost 9,000, selling price 8,200, selling costs 450. All figures in CU. At what total value should the three items be stated, item by item? Correct

A) CU 39,900
B) CU 39,100
C) CU 37,950
D) CU 38,150

Your answer: C  |  Correct answer: C

NRV: A = 21,000 - 1,800 - 900 = 18,300; B = 13,500 - 1,600 = 11,900; C = 8,200 - 450 = 7,750. Each is lower than cost, so the total is CU 37,950. If you answered CU 39,900 you used cost for all items. If you answered CU 39,100 you valued A and B at cost and ignored the selling costs of C (8,200). If you answered CU 38,150 you ignored the completion costs of A.

IAS 2: net realisable value

Q32. Contribution is CU 12 a unit and sales exceed breakeven by 7,000 units. The selling price is CU 30. What is the profit? Correct

A) CU 210,000
B) CU 84,000
C) CU 7,000
D) CU 126,000

Your answer: B  |  Correct answer: B

Profit = margin of safety x contribution per unit = 7,000 x 12 = CU 84,000. If you answered CU 210,000 you used the revenue of the margin of safety. If you answered CU 7,000 you gave the units. If you answered CU 126,000 you used the variable cost per unit (CU 18) instead of the contribution.

CVP: margin of safety

Q33. A project needs working capital of CU 30,000 at the start, recovered in full at the end of year 4. The cost of capital is 10% and the year 4 factor is 0.683. What is the net present value effect of the working capital? Incorrect

A) CU 9,510 negative
B) CU 30,000 negative
C) CU 20,490 positive
D) CU 20,490 negative

Your answer: C  |  Correct answer: A

Outflow of 30,000 at time 0. Recovery of 30,000 x 0.683 = 20,490 at year 4. Net effect = 20,490 - 30,000 = CU 9,510 negative. If you answered CU 30,000 negative you ignored the recovery. If you answered CU 20,490 positive you counted only the recovery. If you answered CU 20,490 negative you discounted the initial outlay.

Investment appraisal: working capital

Q34. Standard cost per unit of Product P: materials 4 kg at CU 7.50; labour 2.5 hours at CU 12; variable overhead 2.5 hours at CU 4; fixed overhead 2.5 hours at CU 6 (budget 6,000 units, fixed overhead CU 90,000). Selling price is CU 95. Actual production was 6,400 units. 26,900 kg of material were used, costing CU 7.60 a kg. What is the material usage variance? Incorrect

A) CU 9,750 adverse
B) CU 9,880 adverse
C) CU 21,750 adverse
D) CU 9,750 favourable

Your answer: B  |  Correct answer: A

Standard usage for 6,400 units = 25,600 kg. Excess usage = 1,300 kg at the standard price of CU 7.50 = CU 9,750 adverse. If you answered CU 9,880 you valued the excess at the actual price. If you answered CU 21,750 you compared usage with the budget of 6,000 units (24,000 kg), not the flexed 6,400 units. If you answered favourable you reversed the sign.

Standard costing: material variances

Q35. A division has revenue of CU 900,000, variable costs of CU 400,000, controllable fixed costs of CU 150,000 and allocated head office costs of CU 100,000. What is the controllable profit? Incorrect

A) CU 350,000
B) CU 250,000
C) CU 500,000
D) CU 450,000

Your answer: B  |  Correct answer: A

Working: Controllable profit = 900,000 - 400,000 - 150,000. Allocated costs are not controllable by the divisional manager. Correct answer: CU 350,000. Why the other options are wrong: 'CU 250,000': if you chose this, you deducted the allocated head office costs. 'CU 500,000': if you chose this, you gave the contribution only. 'CU 450,000': if you chose this, you deducted the allocated costs and not the controllable fixed costs.

Controllable profit

Q36. Which of the following is a leading indicator of future sales revenue? Correct

A) Revenue for last quarter
B) The number of qualified sales enquiries received this month
C) Gross margin for last year
D) Cash collected from debtors this month

Your answer: B  |  Correct answer: B

Working: Leading indicators predict future results. Enquiries now should turn into sales later; the other items report on the past. Correct answer: The number of qualified sales enquiries received this month. Why the other options are wrong: 'Revenue for last quarter': if you chose this, you chose a lagging indicator. 'Gross margin for last year': if you chose this, you chose a lagging indicator. 'Cash collected from debtors this month': if you chose this, you chose a measure of past sales.

Leading and lagging indicators

Q37. A hospital costs each operation separately. Which of the following are direct costs of a knee operation? (1) The implant fitted (2) Cleaning of the operating theatre block (3) A specialist hired for that operation only Incorrect

A) (1) and (2) only
B) (1) and (3) only
C) (2) and (3) only
D) (1), (2) and (3)

Your answer: C  |  Correct answer: B

The implant and the specialist hired for that operation can be identified wholly with the cost unit, so they are direct. Cleaning of the theatre block serves many operations and is an indirect cost.

IFAC IES 4

Q38. A firm discounts invoices of CU 750,000 with an 80% advance. Interest is 10% a year on the advance for an average of 45 days, and the fee is 0.5% of invoice value. What is the total cost of the finance (365-day year)? Incorrect

A) CU 11,147
B) CU 7,397
C) CU 12,997
D) CU 3,750

Your answer: C  |  Correct answer: A

Advance = 600,000. Interest = 600,000 x 10% x 45 / 365 = 7,397. Fee = 3,750. Total = CU 11,147. If you answered CU 7,397 you omitted the fee. If you answered CU 12,997 you charged interest on the full invoice value. If you answered CU 3,750 you gave the fee only.

Working capital: invoice discounting

Q39. SCENARIO: Karim Metals has two production departments (Cutting, Finishing) and two service departments (Canteen, Maintenance). Allocated overheads: Cutting CU 80,000; Finishing CU 60,000; Canteen CU 20,000; Maintenance CU 30,000. Service costs are apportioned directly to the production departments only: Canteen by employees (Cutting 40, Finishing 20) and Maintenance by machine hours (Cutting 5,000, Finishing 4,000). Budgeted activity: Cutting 11,000 machine hours; Finishing 16,000 labour hours. QUESTION: What is the total overhead for the Cutting department after apportionment? Incorrect

A) CU 93,333
B) CU 110,000
C) CU 96,667
D) CU 130,000

Your answer: C  |  Correct answer: B

Canteen: 20,000 x 40/60 = CU 13,333. Maintenance: 30,000 x 5,000/9,000 = CU 16,667. Cutting = 80,000 + 13,333 + 16,667 = CU 110,000. If you answered CU 93,333 you omitted maintenance. If you answered CU 96,667 you omitted the canteen. If you answered CU 130,000 you gave all service costs to Cutting.

IAS 2.12

Q40. A company funds part of its permanent working capital with a bank overdraft. Which policy is this? Incorrect

A) Conservative, because short-term funding is more flexible
B) Aggressive, because long-term needs are financed with short-term sources, increasing refinancing risk
C) Matching, because working capital is always short-term
D) Conservative, because overdrafts carry lower interest rates than loans

Your answer: C  |  Correct answer: B

A matching policy funds permanent assets with long-term finance and fluctuating assets with short-term finance. Funding permanent needs with an overdraft is aggressive, because the overdraft may be withdrawn or repriced.

Working capital financing

Q41. Twenty-five workers are paid for a 38-hour week but are productive for 32 hours at CU 15 an hour. How should the idle time be treated and what is its weekly cost? Correct

A) CU 2,250, charged to the jobs worked on in the week
B) CU 14,250, treated as a production overhead
C) CU 2,250, treated as a production overhead
D) CU 12,000, treated as a production overhead

Your answer: C  |  Correct answer: C

Working: Idle hours = 38 - 32 = 6 per worker. Cost = 25 x 6 x 15 = 2,250, treated as overhead because it is not caused by a particular job. Correct answer: CU 2,250, treated as a production overhead. Why the other options are wrong: 'CU 2,250, charged to the jobs worked on in the week': if you chose this, you charged idle time to the jobs; abnormal idle time is an overhead, not a direct job cost. 'CU 14,250, treated as a production overhead': if you chose this, you used all paid hours (25 x 38 x 15), not the idle hours. 'CU 12,000, treated as a production overhead': if you chose this, you used the productive hours (25 x 32 x 15), which are the direct labour.

Idle time

Q42. Which TWO statements about relevant cash flows are correct? (1) Tax payments caused by the project are included. (2) Sunk costs are excluded. (3) Depreciation is included as an outflow. (4) Interest paid on the project's finance is included. Incorrect

A) (1) and (2) only
B) (1) and (3) only
C) (2) and (4) only
D) (3) and (4) only

Your answer: C  |  Correct answer: A

Relevant cash flows are future, incremental cash flows. Depreciation is not a cash flow, and financing is reflected in the discount rate, so including interest would double count. If you chose (3) you included a non-cash charge. If you chose (4) you double counted financing.

Investment appraisal: relevant cash flows

Q43. Products X, Y and Z have contributions of CU 24, CU 30 and CU 20 per unit and use 4, 6 and 2 machine hours per unit. Maximum demand is 2,000, 1,500 and 3,000 units. Machine hours available are 16,000. The company could obtain extra machine hours. What is the maximum extra price per hour (above the normal cost already deducted in contribution) it should pay? Correct

A) CU 6
B) CU 10
C) CU 30
D) CU 5

Your answer: D  |  Correct answer: D

With the plan above, the marginal use of an extra hour is to make more of Y, earning CU 30 / 6 = CU 5 per hour. If you answered CU 6 you used X's contribution per hour. If you answered CU 10 you used Z's contribution per hour (already at maximum demand). If you answered CU 30 you used Y's contribution per unit.

Limiting factor analysis

Q44. A project costs CU 340,000 now and returns net cash inflows of CU 110,000, CU 120,000, CU 140,000 and CU 100,000 at the end of years 1 to 4. The cost of capital is 10% (discount factors 0.909, 0.826, 0.751, 0.683 for years 1 to 4). There is no residual value. What is the net present value? Incorrect

A) CU 372,550
B) CU 32,550
C) CU 130,000
D) CU 99,990

Your answer: D  |  Correct answer: B

PV of inflows = 99,990 + 99,120 + 105,140 + 68,300 = 372,550. NPV = 372,550 - 340,000 = CU 32,550. If you answered CU 372,550 you did not deduct the outlay. If you answered CU 130,000 you did not discount. If you answered CU 99,990 you gave the year 1 present value.

Investment appraisal: NPV

Q45. Gross wages were CU 120,000, employees' deductions CU 24,000 and the employer's social security cost CU 12,000. Indirect labour cost, including the employer's cost, was CU 34,500. What is charged to work in progress as direct labour? Incorrect

A) CU 85,500
B) CU 97,500
C) CU 108,000
D) CU 73,500

Your answer: D  |  Correct answer: B

Total wages cost = 120,000 + 12,000 = 132,000. Direct labour = 132,000 - 34,500 = CU 97,500. If you answered CU 85,500 you omitted the employer's cost. If you answered CU 108,000 you deducted the employees' deductions, which are part of gross pay. If you answered CU 73,500 you deducted the employees' deductions from direct labour.

Labour: wages control

Q46. A product sells for CU 75 with variable cost of CU 45 a unit. Fixed costs are CU 195,000. Budgeted sales are 8,000 units. What is the margin of safety as a percentage of budgeted sales? Incorrect

A) 23.1%
B) 18.8%
C) 81.3%
D) 40.0%

Your answer: D  |  Correct answer: B

Margin of safety = 8,000 - 6,500 = 1,500 units, which is 1,500 / 8,000 = 18.8%. If you answered 23.1% you divided by the breakeven units. If you answered 81.3% you gave breakeven as a percentage of budget. If you answered 40.0% you gave the C/S ratio.

Breakeven: margin of safety

Q47. Machine hours are limited to 2,000. X: contribution CU 15 a unit, 3 hours, maximum demand 400 units. Y: CU 12, 2 hours, demand 500 units. Z: CU 10, 1 hour, demand 600 units. What is the maximum contribution? Incorrect

A) CU 10,800
B) CU 14,000
C) CU 18,000
D) CU 12,000

Your answer: D  |  Correct answer: B

Contribution per hour: Z CU 10, Y CU 6, X CU 5. Make Z 600 (600 hours), Y 500 (1,000 hours) and X with the 400 hours left, 133.3 units. Contribution = 6,000 + 6,000 + 2,000 = CU 14,000. If you answered CU 10,800 you ranked by contribution per unit. If you answered CU 18,000 you ignored the hours limit. If you answered CU 12,000 you omitted X.

Limiting factor analysis

Q48. SCENARIO: Orbit Ltd is considering a CU 140,000 project producing cash flows that are CU 50,000 a year for four years in today's prices. Cash flows will rise with inflation of 5% a year. The real cost of capital is 10%. QUESTION: Which statement is correct? Incorrect

A) Money cash flows should be discounted at the real rate
B) Real cash flows should be discounted at the money rate
C) The rate used does not matter if inflation is constant
D) Money cash flows should be discounted at the money rate, and real cash flows at the real rate

Your answer: A  |  Correct answer: D

Consistency is essential: money flows with the money rate, real flows with the real rate. Mixing them overstates or understates the NPV.

Investment appraisal: inflation

Q49. Division B can sell its final product for CU 110. Further processing costs CU 38 and variable selling costs CU 7 a unit. What is the maximum price B would pay for the component from Division A? Incorrect

A) CU 72
B) CU 103
C) CU 65
D) CU 110

Your answer: A  |  Correct answer: C

The maximum is B's net marginal revenue: 110 - 38 - 7 = CU 65. If you answered CU 72 you ignored selling costs. If you answered CU 103 you ignored processing costs. If you answered CU 110 you gave the final selling price.

Transfer pricing: maximum price

Q50. A project needs working capital of CU 18,000 at the start, recovered at the end of year 4. The cost of capital is 10% (year-4 factor 0.683). What is the net present value effect of the working capital? Incorrect

A) A cost of CU 18,000
B) A net cost of CU 5,706
C) A cost of CU 12,294
D) A benefit of CU 5,706

Your answer: A  |  Correct answer: B

Working: Outflow now 18,000; inflow in year 4 = 18,000 x 0.683 = 12,294. Net = -18,000 + 12,294. Correct answer: A net cost of CU 5,706. Why the other options are wrong: 'A cost of CU 18,000': if you chose this, you ignored the recovery at the end of the project. 'A cost of CU 12,294': if you chose this, you gave the present value of the recovery as if it were a cost. 'A benefit of CU 5,706': if you chose this, you treated the net cost as a benefit.

Working capital in appraisal