Deck 11: Absorption and Activity-Based Costing

Question 1

Which definition best describes direct costs?

A) Direct costs are those costs which are directly controlled by a manager.
B) Direct costs are always variable.
C) directly associated with a product or service.
D) Direct costs are those costs which are directly charged to a department.

Answer 1

C

Question 2

Absorption costing is a management accounting technique where:

A) Indirect manufacturing costs are spread fairly across the range of products.
B) Products include a share of all the costs of the business.
C) Fixed costs are spread fairly across a range of products.
D) Indirect expenses are charged to all departments.

Answer 2

A

Question 3

What would happen to a blanket rate if production volumes were reduced?

A) The fixed cost per unit of the product would decrease.
B) The unit cost of a product would increase.
C) The unit cost of a product would decrease.
D) The direct cost per unit of a product would increase.

Answer 3

B

Question 4

A highly automated process is used to make tins of paint. It has a budgeted overhead of £40,000, taking 1,250 machine hours and 500 direct labour hours. Each can of paint uses £12 of direct materials, 0.1 labour hours at £4 per hour and 0.2 machine hours. The most appropriate calculation of the total cost of each tin of paint would be:

A) £15.60
B) £28.40
C) £18.80
D) £20.40

Question 5

Why is the absorption rate based on an estimate and not actual overhead costs?

A) Absorption rates are used only for budgeting purposes
B) Using actual rates is too late for many decisions, such as pricing products.
C) Calculation of actual rates is too time-consuming.
D) Absorption costing is a management accounting technique, not a financial accounting one.

Question 6

A business absorbs overheads on a machine hour basis, which were budgeted at 12,250 machine hours with overheads of £147,000. Actual results were 9,870 hours with actual overheads of £154,645. Calculate the over or under recovery.

A) Over recovery of £36,205
B) Over recovery of £7,645
C) Under recovery of £7,645
D) Under recovery of £36,205

Question 7

A company had an under recovery of £200,000 with a budgeted overhead of £1,000,000. If its estimated overhead hours were 20,000 and its actual overhead hours were 22,000, calculate the actual overhead cost.

A) £1,300,000
B) £800,000
C) £1,200,000
D) £1,100,000

Question 8

In absorption costing, what are the re-apportioned costs?

A) The apportionment of an over or under spend of a department at the end of the period.
B) The spreading of manufacturing department costs to products.
C) he apportionment of indirect costs of a service department to manufacturing departments.
D) The allocation of non-manufacturing costs to production departments.

Question 9

An activity-based costing system suits a company that has:

A) A diverse product range.
B) A highly automated process with uniform products.
C) Low fixed costs.
D) High levels of direct costs.