P1 Chapter 2 Review Test 2

Over-/under absorption
Question 1

A company absorbs production overheads using a machine hour basis. In order to calculate
any over or under absorbed overheads which of the following would be needed, in addition
to the pre-determined machine hour rate?

A Budgeted overheads and actual overheads incurred

B Budgeted overheads and actual hours worked

C Actual overheads incurred and budgeted hours

D Actual overheads incurred and actual hours worked

Question 2

Direct labour hours are used as the basis for overhead absorption in a production cost centre.
The following data are available for a period:

Actual direct labour hours worked 9,760

Actual overheads incurred $86,920

Overhead under-absorption $2,496

Budgeted direct labour hours 10,000

What was the overhead absorption rate in the period?

A $8.65

B $9.16

C $8.44

D $8.94

Question 3

A company has two production cost centres, Cutting and Finishing.

The overheads and operating hours for the two cost centres are:

Cutting: $210,000 60,000 machine hours 4,000 labour hours

Finishing: $200,000 5,000 machine hours 14,000 labour hours

From the information given what should be the basis for overhead absorption?

A Both cost centres should be based on machine hours

B Both cost centres should be based on labour hours

C Based on machine hours for Cutting and labour hours for Finishing

D Based on labour hours for Cutting and machine hours for Finishing
Question 4

A company planned to produce 4,000 units of Product X during a particular year and budgeted its
fixed production overheads for the year at $20,000. During the year it actually produced 4,200
units of Product X and it incurred fixed production overheads of $21,840. A predetermined fixed
production overhead absorption rate per unit is applied.

Which of the following statements is true?

A Fixed overheads were under-absorbed by $840

B Fixed overheads were over-absorbed by $840

C Fixed overheads were over-absorbed by $1,000

D Fixed overheads were under-absorbed by $1,840

Absorption and Marginal costing

Question 5

Which of the following are practical reasons for using absorption costing?

(i) To establish the profitability of different products

(ii) To aid decision making by focusing on product contribution

(iii) To encourage management to produce more goods in order to absorb all allocated overheads

(iv) To value closing inventory in accordance with accounting principles

A (i) and (iii)

B (ii) and (iv)

C (i) and (iv)

D (ii) and (iii)

Question 6

A product has direct material costs of $7.15 per unit and direct labour costs of $8.25 per unit.
Each unit spends 3 machine hours in the assembly cost centre and 1.5 labour hours in the
finishing cost centre. Production overhead absorption rates are as follows.

Assembly $1.76 per machine hour

Finishing $3.28 per labour hour

What is the full production cost per unit?

A $25.60

B $27.88

C $15.40

D $20.44
Question 7

Question 8

A company manufactures a single product which is sold for $70.00 per unit. Unit costs are

$/Unit

Variable production 29.50

Fixed production 21.00

Variable selling 4.80

Fixed selling 9.00

20,000 units of the product were manufactured in a period during which 19,700 units were sold.

Using marginal costing, what was the total contribution made in the period?

A $703,290

B $714,000

C $384,150

D $390,000

Question 9

A company manufactures a single product. Unit costs are:

$/Unit

Variable production 14.75

Fixed production 8.10

Variable selling 2.40

Fixed selling 5.35

400,000 units of the product were manufactured in a period, during which 394,000 units were
sold.

There was no inventory of the product at the beginning of the period.

Using marginal costing, what is the total value of the finished goods inventory at the
end of the period?

A $88,500

B $102,900

C $137,100
D $183,600

Question 10

E operates a marginal costing system. For the forthcoming year, variable costs are budgeted to
be 60% of sales value and fixed costs are budgeted to be 10% of sales value. If E were to
increase the selling price by 10% and all other costs and production and sales volumes
were to remain the same what would be the effect on E’s contribution?

A a decrease of 2%

B an increase of 5%

C an increase of 10%

D an increase of 25%

Before change After change

Selling price 100 110

Variable cost (60) (60)

____ ____

Contribution 40 50

% of change = (After – before) / before x 100

= (50 – 40) / 40 x 100 = 25%

Difference in profit

Question 11

The fixed production overhead absorption rate for product Y is $2.50 per direct labour hour. Each
unit of Y requires 3 direct labour hours. Inventory of product Y at the beginning of the month was
200 units and at the end of the month was 250 units.

What is the difference in the profits reported for the month using absorption costing compared
with marginal costing?

A The absorption costing profit would be $375 less.

B The absorption costing profit would be $125 greater.

C The absorption costing profit would be $375 greater.

D The absorption costing profit would be $1,875 greater.

Question 13

Question 14
Question 15

A product has the following costs:

$/unit

Variable production costs 4.80

Total production costs 7.50

Total variable costs 5.90

Total costs 10.00

11,400 units of the product were manufactured in a period during which 11,200 units were sold.

What is the profit difference using absorption costing rather than marginal costing?

A The profit for the period is $540 lower.

B The profit for the period is $540 higher.

C The profit for the period is $820 lower.

D The profit for the period is $820 higher.

Question 16

A company sells more than it manufactures in a period.

Which of the following explains the difference in profit between absorption and marginal costing
in the above situation?

A Absorption costing profit is higher because of the difference in inventory levels.

B Absorption costing profit is lower because of the difference in inventory levels.

C Absorption costing profit is higher because of overhead over-absorption.

D Absorption costing profit is lower because of overhead under-absorption.