FIN2142M Budgeting for Business Exam (TCA)
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# FIN2142M Budgeting for Business Exam (TCA)

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Time Constrained Practice Test 3

Question 1

Read the following statements. Discuss which of them are true or false. Explain or provide the correct statement if it is false.

(10 Marks)

1. i) The direct material cost is £100, direct labour cost is £80, and factory overhead is £120, so the conversion cost is £200.

TRUE/FALSE

1. ii) Operating profit under absorption costing is contribution less fixed costs.

TRUE/FALSE

iii) At the end of the accounting period Susan Corporation reports operating income of \$30,000 and the fixed overhead cost rate is \$20 per unit. Under absorption costing, if this company now produces an additional 100 units of inventory, then operating income will not be affected.

TRUE/FALSE

1. iv) A limitation of zero-based budget is that the budget may carry forward existing inefficiencies

TRUE/FALSE

1. v) A contract would require 2,000 kg of material A. There are 1,500 kg of material A in inventory, but because of a decision taken several weeks ago, material A is no longer in regular use by the company. The 1,500 kg originally cost £14,400, and have a scrap value of £3,400. New purchases of material Y would cost £13 per kg. So, the relevant cost of material A for the contract is £6,500.

TRUE/FALSE

1. vi) Under marginal costing, given total fixed overhead spending, under-absorption may occur when the production volume variance is adverse.

TRUE/FALSE

vii) The higher proportion of variable cost, the higher the operating risk

TRUE/FALSE

viii) The variable cost is expected be \$45 per unit. During the month, 800 units were actually sold. There is an adverse flexible budget variance related to variable cost of \$4,000. The actual variable cost is \$4,000.

TRUE/FALSE

Question 2

AB Company manufactures and sells a single product. The selling price per unit is £60. The information of product cost is as follows.

 Year Production units Total Product costs £’s 2011 16,000 610,000 2012 18,500 639,600 2013 24,000 904,800 2014 26,000 990,000 2015 25,500 979,600 2016 25,000 912,000

The forecast production of this product is 25,000 units and the forecast sales units of the product are 23,000.  Fixed selling cost £72,000 per year and Fixed Administration cost £350,000 per year. There was no opening inventory at the start of the year.

Required:

1. a) Use the High-Low technique to estimate the unit variable product cost and the total fixed product cost.

5 marks

1. b) Calculate the unit product cost and profit using both absorption costing and marginal costing and explain the difference

10 marks

Total 15 marks

Question 3

Raines Company manufactures three sizes of kitchen appliances: small, medium, and large.  Product information is provided below:

 Small Medium Large £’s £’s £’s Selling price per unit 150 250 500 Variable product cost per unit (60) (120) (200) Variable period cost per unit (30) (30) (30) Fixed cost per unit (40) (50) (120) Profit per unit 20 50 150 Demand in units 100 120 100 Machine-hours per unit 20 40 100

The maximum machine-hours available are 6,000 per week.

Required:

1. a) Calculate the product mixed that could maximise the profit.

1. b) Discuss whether the product mix is ‘optimum’ in the long-run and discuss the potential solutions to the problem of the scarce resource with examples.

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