Deck 2: Product Costing: Absorption Costing, and Relevant Costs, Marginal Costing and Short-Term Decision Making

Question 1

David Limited can sell as much production as it can make of each of its products. The company is currently facing a shortage of input materials for its products and has to decide which product to produce in the next three months in order to maximise its profits. Each kilogram of input material used in all four products costs £5. The company produces four products, A, B, C and D. The selling prices and cost information relating to these four products is as follows:
$\begin{array}{|c|c|c|c|}\hline \text { Product } & \begin{array}{c}\text { Selling price } \\\text { per unit of } \\\text { production }\end{array} & \begin{array}{c}\text { Kilograms of } \\\text { material used } \\\text { in one unit of } \\\text { production }\end{array} & \begin{array}{c}\text { Other variable } \\\text { costs per unit } \\\text { of production }\end{array} \\\hline & £ & \text { Kgs } & £ \\\hline \text { A } & 50 & 2 & 20 \\\hline \text { B } & 80 & 4 & 30 \\\hline \text { C } & 60 & 3 & 21 \\\hline \text { D } & 100 & 8 & 20 \\\hline\end{array}$
Which product should David Limited produce and sell in order to maximise profits over the next three months?

A) A
B) B
C) C
D) D

Answer 1

A

Question 2

Knowledge of costs = control

Answer 2

True

Question 3

The costs of an organization are the only factor to consider when making selling price decisions.

Answer 3

False

Question 4

Only the direct costs of providing a service or producing a product are taken into account when making decisions on the selling price to charge to customers.

Question 5

Component ZVA sells for £200. This selling price is calculated by adding 25% to the total absorption cost of each component. Direct costs of production make up 60% of the total absorption cost of Component ZVA. Overhead is absorbed into each Component ZVA at the rate of £8 per labour hour. How many labour hours does each Component ZVA take to produce?

A) 7.5
B) 8
C) 10
D) 12

Question 6

Production overheads at Zurich Manufacturing total up to £600,000. There are three support departments for the business, quality control, maintenance and warehousing. Quality control's total overheads are £100,000 per annum. 60% of quality control's time is spent on assessing the quality of Zurich Manufacturing's own production. The other 40% of quality control's time is spent on assessing the quality of production at other small businesses in the local area. Maintenance overheads total up to £144,000 per annum. 75% of the maintenance department's time is spent on servicing production machinery, 20% on servicing warehousing's fork lift trucks and 5% on servicing equipment used by the administration department. 80% of warehousing space is allocated to storing raw materials and finished goods for Zurich Manufacturing with the other 20% being rented out to other local businesses in the area. Warehousing costs total up to £151,200 for the year. Production department employees' normal working hours are 40,000 each year. During the current financial year, actual hours worked were 48,000. What is the hourly overhead recovery rate (correct to two decimal places) that will be applied to products produced in the production department?

A) £19.00
B) £22.22
C) £22.80
D) £24.88