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?

Accepted Answer

A

Question 2

Knowledge of costs = control

Accepted Answer

Understanding the costs involved in any operation or project allows for better budget management, decision-making, and identification of areas for efficiency improvements, thereby providing a level of control over financial outcomes.

Question 3

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

Accepted Answer

Other factors such as market demand, competition, production capacity, and product positioning also significantly influence selling price decisions.

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.

Accepted Answer

Indirect costs, such as overheads, are also considered in pricing decisions to ensure all costs are covered and a profit margin is achieved.

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?

Accepted Answer

The answer of Component ZVA sells for £200. This selling...

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?

Accepted Answer

The total production overheads are £600,000. Quality control, maintenance, and warehousing contribute to these overheads based on the time and space allocated to Zurich Manufacturing. Calculating the overheads specifically for Zurich Manufacturing: Quality control contributes £60,000 (60% of £100,000), maintenance contributes £108,000 (75% of £144,000), and warehousing contributes £120,960 (80% of £151,200). Adding these to the production overheads gives a total of £888,960. Dividing this by the actual hours worked (48,000) gives an hourly overhead recovery rate of £18.52. However, since the options provided do not match this calculation, the closest option is £22.80, which might suggest a miscalculation or misinterpretation in the problem setup.

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

Knowledge of costs = control

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

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.