Chapter 3: Calculating unit costs (Part 2)

1 C Functions or locations for which costs are ascertained and related to cost units for
control purposes
Units of a product or service for which costs are ascertained is a description of a cost
unit.
Amounts of expenditure attributable to various activities is a description of overheads.
A section of an organisation for which budgets are prepared and control is exercised is
a description of a budget centre.
2 C To attribute overhead costs to cost units
'To attribute overhead costs to cost centres' describes overhead allocation and
apportionment.
'To reduce the total overhead expenditure below a predetermined level' and 'To
ensure that the total overhead expenditure does not exceed budgeted levels' are
more concerned with cost planning and control than with the costing of individual
products or services.
3 B Overhead apportionment
Overhead absorption is the final process of absorbing the total cost centre overheads
into product costs.
Overhead allocation is the allotment of whole items of overhead costs to a particular
cost centre or cost unit.
Overhead analysis is the general term used to describe all of the tasks of processing
overhead cost data.
4 D Common costs are shared among cost centres
'Costs may be controlled' is not correct because costs are controlled using budgets
and other management information.
'Cost units gather overheads as they pass through cost centres' describes overhead
absorption, not overhead apportionment.
'Whole items of cost can be charged to cost centres' describes overhead allocation,
not overhead apportionment.
5 D £18,300
The overheads of the canteen department are reapportioned on the basis of the
number of staff working in the production departments only.
Reapportionment of canteen overheads
To machining department = (30/50)  £5,500 = £3,300
Machining department total overheads = £15,000 + £3,300
= £18,300
If you answered £3,300 you calculated the correct amount of canteen costs to be
apportioned to machining. However, you then forgot to add on the original budgeted
overheads of £15,000.
If you answered £17,750 you simply apportioned the canteen costs evenly to the two
production cost centres. Since we know the number of staff in each cost centre, this is
likely to be a more equitable apportionment basis. It is probable that a cost centre with
more staff would place a greater burden on the canteen facilities.

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 189

 The answer of £18,000 bases the apportionment of the canteen costs on all 55
employees. However, the canteen cannot give itself a charge and the correct
apportionment basis is the 50 employees in the production cost centres only.
6 A Works manager = Allocated to factory
D Logistics manager = Apportioned to factory
The whole of the works manager's salary can be allocated to the factory since the
manager is fully occupied in the factory cost centre.
Part of the logistics manager's salary must be apportioned to the factory since some
time is spent on production tasks.
7 D £10,160
Number of employees in packing department = 2 direct + 1 indirect = 3
Number of employees in all production departments = 15 direct + 6 indirect
= 21
Packing department overhead
£8,400
Canteen cost apportioned to packing department = 3
21
= £1,200
Original overhead allocated and apportioned = £8,960

Total overhead after apportionment of canteen costs = £10,160

If you selected £1,200 you forgot to include the original overhead allocated and
apportioned to the packing department.
If you selected £9,968 you included the four canteen employees in your calculation,
but the question states that the basis for apportionment is the number of employees in
each production cost centre.
If you selected £10,080 you based your calculation on the direct employees only.
8 A Costs can be allocated where it is possible to identify which department caused them.
C Costs need to be apportioned where they are shared by more than one department.
D There is no need for a single product company to allocate and apportion overheads in
order to determine overhead cost per unit.
Although supervisors' salaries might be apportioned over more than one department
or cost centre, it is more likely that a supervisor would work in a single cost centre.
Therefore, supervisors' salaries are likely to be allocated rather than apportioned.
The process of apportioning overhead costs is arbitrary. There is no single 'correct'
result.
9 B Volume of space occupied in cubic metres
From the four options available, a basis relating to space occupied would seem to be
most appropriate. This eliminates the number of employees and labour hours worked.
Since heating is required to warm the whole of the space occupied, from floor to
ceiling, the volume of space is more appropriate than the floor space occupied.

190 Management Information: Question Bank ICAEW 2019

 10 C £7.20
Total labour hours = (1,000  4) + (2,000  6) + (3,000  3) = 25,000 hours
Overhead per labour hour = £30,000/25,000 = £1.20 per hour
Overhead content per unit of Product B = £1.20  6 = £7.20
If you selected £1.20 you calculated the correct absorption rate per labour hour.
However, you should then have applied this rate to the number of labour hours per
unit of product B.
A fixed overhead cost of £5 per unit is incorrect because it is calculated by simply
determining a single rate per unit for all 6,000 units produced. However, the different
number of labour hours for each unit of product indicates that each places a different
burden on resources. This is reflected in the absorption of overheads on the basis of
labour hours.
If you selected £30 you calculated the simple rate of £5 per unit as described above.
However, you then went on to take account of the six hours worked on product B and
so created a 'hybrid' absorption method which mixes two bases.
11 D £0.60 per machine hour
Department 1 appears to undertake primarily machine-based work, therefore a
machine-hour rate would be most appropriate.
£27,000
= £0.60 per machine hour
45,000

A rate of 40% of direct material cost is not the most appropriate because it is not time-
based, and most items of overhead expenditure tend to increase with time.
The two rates based on direct labour are not the most appropriate because labour
activity is relatively insignificant in department 1, compared with machine activity.
12 C £0.72 per direct labour hour
Department 2 appears to be labour-intensive therefore a direct labour-hour rate would
be most appropriate.
£18,000
= £0.72 per direct labour hour
25,000

The rate of 18% of direct labour cost is based on labour therefore it could be suitable.
However, differential wage rates exist and this could lead to inequitable overhead
absorption. The machine hour rate is not suitable because machine activity is not
significant in department 2.
13 A £89.10
Fixed overhead absorption rate = budgeted overheads/budgeted machine hours
= £(95,580 + 64,800)/1,800
= £89.10
The rate of £100 per machine hour is the actual rate for the period. However, a
predetermined rate, based on the budget data both for the overhead expenditure and
the activity level, is used to absorb overheads.
14 D £20.91
Overhead absorption rate = £460,000/22,000 = £20.91 per hour
Remember overhead absorption rates are based on budgeted information.

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 191

 15 A (1) and (2) only
Overhead absorption rates are usually determined in advance for each period, usually
based on budgeted data. Therefore statement (1) is correct and statement (3) is
incorrect. Overhead absorption rates are used in the final stage of overhead analysis,
to absorb overheads into product costs. Therefore, statement (2) is correct. Statement
(4) is not correct because overheads are controlled using budgets and other
management information.
16 C £102.90
£
Direct labour £5.25  4 hours 21.00
Direct expenses 53.50
Total direct cost 74.50
Overhead absorbed
£7.10  4 hours 28.40
Total production cost 102.90

The answer of £81.90 does not include a direct labour cost. The direct cost is not
affected by the basis chosen for the absorption of overheads.
If you selected £91.10 you based the overhead absorption on the rate per welding
machine hour, rather than using the direct labour hour basis as requested.
The answer of £119.50 includes too much overhead cost. It uses both bases of
absorption together, but only one basis of overhead absorption can be used.
17 B £4,462.50
Apportionment of budgeted overhead costs £
Rent and rates (area) £3,000  (700/8,000) 262.50
Plant insurance and depreciation (value of machinery)
£11,000  (80/400) 2,200.00
Factory manager's salary (employee numbers) £7,000  (20/70) 2,000.00
4,462.50

The option of £1,837.50 apportions all of the costs on the basis of area. More
appropriate apportionment bases are available for some of the costs.
Similarly, the option of £6,000 apportions all of the costs on the basis of the number of
employees, and suffers from the same inadequacy.
If you selected £7,000 you simply apportioned the overhead costs evenly between the
departments. More appropriate apportionment bases are available.

192 Management Information: Question Bank ICAEW 2019

 18 D £14.60
Primary Finishing
hours hours
Product J (6,000  36/60) / (6,000  25/60) 3,600 2,500
Product K (7,500  48/60) / (7,500  30/60) 6,000 3,750
Total budgeted direct labour hours 9,600 6,250

Budgeted production overheads £96,000 £82,500

Production overhead absorption rate £10 per £13.20 per
hour hour

Production overhead cost absorbed by product K

£ per unit
Primary cost centre (£10  48/60) 8.00
Finishing cost centre (£13.20  30/60) 6.60
Total budgeted production overhead cost 14.60

If you selected £10.00 or £13.20 you calculated the correct absorption rate but you
should have then applied it to the labour hours worked on product K.
If you selected £14.00 you calculated an absorption rate based on the 13,500 total
budgeted production units. This rate takes no account of the different amounts of time
taken to produce one unit of each product, and hence of the different resources
consumed by each.
19 A (1) and (2) only
Statement (1) is correct because a constant unit absorption rate is used throughout the
period. Statement (2) is correct because 'actual' overhead costs, based on actual
overhead expenditure and actual activity for the period, cannot be determined until
after the end of the period. Statement (3) is incorrect because under/over absorption
of overheads is caused by the use of predetermined overhead absorption rates.
20 D Fixed overheads were under absorbed by £3,000, this being partly the difference
between budgeted and actual expenditure and partly the production shortfall of 1,000
units.
Overhead absorption rate = £150,000/30,000 = £5 per unit
£
Absorbed overhead (29,000 units  £5) 145,000
Actual overheads 148,000
Under-absorbed overhead 3,000

The effect of the production shortfall was partly offset by the difference between
budgeted and actual expenditure.
21 D Budgeted capacity 11,250 hours, absorption rate per hour of £9.20
To calculate budgeted capacity, calculate the budgeted overheads and the overhead
absorption rate. To calculate the overhead absorption rate remember to use the
budgeted data.

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 193

 Department Z £
Actual overhead expenditure (same as budget, £61,500 + 103,500
£42,000)
Under-absorbed overhead (11,500)
Overhead actually absorbed into production costs 92,000
Actual machine hours 10,000 hrs
Absorption rate per hour £9.20

Budgeted capacity = Budgeted overheads/Absorption rate

= £103,500/£9.20 per hr = 11,250 hrs
22 C £2,250.00
When expenditures are as budgeted, but actual and budgeted production activity
levels are different, only fixed overhead can be under or over absorbed.
Over-absorbed overhead = 500 hrs  £4.50
= £2,250
Variable overhead absorbed = (500  £3.00) = £1,500 more than budgeted in the
original budget. However, variable overhead incurred would be £1,500 more as well,
leaving neither under nor over absorbed variable overheads.
23 C Under-absorbed by £205
The overhead absorption rate is the
budgeted overhead cost/budgeted hours = £14,950/3,250
= £4.60 per hour
Absorbed overheads (3,175 hours  £4.60) = £14,605
Actual overheads = £14,810
Under absorbed overheads = £205
The overhead is under absorbed because the actual overhead expenditure exceeded
the amount absorbed.
If you calculated the under or over absorption as £140 you simply determined the
difference between the budgeted and actual overheads. However, the amount of
overhead absorbed will depend on the actual level of activity achieved.
24 D £28.75 per hour
£
Actual overheads incurred 480,000
Over absorbed overheads 95,000
Overheads absorbed 575,000

Overhead absorption rate = £575,000/20,000

= £28.75 per hour
If you selected a rate of £19.25 you deducted the over absorbed overheads from the
actual overheads to derive the amount absorbed. However, if the overhead is over
absorbed then the amount absorbed must be greater than the actual overhead
incurred.

194 Management Information: Question Bank ICAEW 2019

 25 C The company produced fewer units than expected.
£
Overhead absorbed = 4,600 units  £2 9,200
Overhead incurred 9,500
Under absorption 300

The company sold fewer units than it produced is incorrect. It is the levels of
production which bring about under/over absorption.
The company sold fewer units than it produced and spent less than expected on fixed
overheads is incorrect. The company has under absorbed production overheads
because of lower production levels than expected.
Spending less than expected on fixed overheads would, in isolation, lead to over
absorption rather than to the under absorption that occurred.
The company produced fewer units than expected and spent less on fixed overheads
is incorrect. The company has under absorbed overheads because of lower production
levels than expected.
26 A 20,000
Actual overheads = £343,825
Over absorption = £14,025
Absorbed overheads = Actual overheads + over absorbed overheads
= £343,825 + £14,025
= £357,850
If the absorbed overheads = £357,850 then the budgeted overhead absorption rate =
Absorbed overheads/actual labour hours = £357,850/21,050 = £17 per labour hour.
If budgeted overheads for the period were £340,000 and the budgeted overhead
absorption rate is £17 per labour hour, then the budgeted labour hours = budgeted
overheads/overhead absorption rate = £340,000/£17 = 20,000 hours.
If you selected 20,225 hours you calculated the correct absorption rate but then you
divided this into the actual overhead cost. You should have divided it into the
budgeted overhead cost.
If you selected 21,700 hours you subtracted the over absorption to derive the
absorbed overheads. However, if overheads are over absorbed then the amount of
overhead absorbed must be greater than the actual overhead incurred.
27 A £4,000 under-absorbed
When expenditures are as budgeted, but actual and budgeted production activity
levels are different, only fixed overhead can be under or over absorbed.
Under-absorbed overhead = 1,000 hours  £4 = £4,000.
Variable overhead absorbed would be (1,000  £2.50) = £2,500 less than in the
original budget, but variable overhead incurred would be £2,500 less as well, leaving
neither under nor over absorbed variable overheads.
28 C £3,400 under-absorbed
Overhead absorption rate = £54,500/((1,700  2) + (2,500  3))
= £5 per machine hour

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 195

 Overhead absorbed by actual production achieved:
£
Product A 1,900 units produced  £5  2 hours 19,000
Product B 2,200 units produced  £5  3 hours 33,000
52,000
Actual overhead incurred 55,400
Under absorbed overhead 3,400

If you calculated the under or over absorption as £900 you calculated the difference
between the budgeted and actual overheads without taking account of overhead
absorbed by the units produced.
29 C A factor which causes the costs of an activity
The cost driver is the factor which causes the costs of an activity to increase or
decrease. For example, a cost driver for materials handling costs could be the number
of production runs: the higher the number of production runs, the higher will be the
cost of material handling.
'A mechanism for accumulating the costs of an activity' is a description of a cost pool.
'An overhead costs that is caused as a direct consequence of an activity' is a
description of an overhead cost that is attributable to a particular activity.
'A cost relating to more than one product or service' describes a common cost that
must be apportioned.
30 D Activity based costing (ABC) involves tracing resource consumption and costing final
outputs
E Just-in-time (JIT) systems are referred to as 'pull' systems because demand from a
customer pulls products through the production process
JIT purchasing requires that materials are delivered by the supplier, in small quantities
not large quantities, just as they are needed in the production process.
ABC is concerned with all types of overhead cost, including the cost of non factory-
floor activities such as quality control and customer service. It therefore takes cost
accounting beyond its traditional factory floor boundaries.
ABC does not eliminate the need for arbitrary cost apportionment. Some
apportionment may still be required at the pooling stage for items such as rent and
rates.
31 B (1), (2), (3) and (4)
(1) JIT requires close integration of suppliers with the company's manufacturing
process.
(2) To respond immediately to customer requirements, production must be flexible
and in small batch sizes.
(3) JIT systems attempt to reduce set-up times in order to achieve fast throughput.
(4) Each component on a production line is produced only when needed for the next
stage.
32 A When target costing is used, the selling price of a product or service determines its
target cost
B An activity based costing (ABC) system makes some use of volume-related cost drivers
The target cost is derived by deducting the required profit margin from the selling
price.

196 Management Information: Question Bank ICAEW 2019

 An ABC system uses volume-related cost drivers such as machine hours as well as
transaction related cost drivers such as the number of quality control checks.
A JIT system tends to reduce storage costs because lower inventories are held, not
increase them.
Life cycle costing does track costs that are incurred once production has ceased, since
it tracks costs over the whole of a product's life cycle.
A product's target cost is derived from a selling price which is determined by a
consideration of external market conditions.
33 C Lower levels of receivables
A lower level of receivables is not the result of the adoption of a JIT system and is more
to do with credit control procedures.
34 A Brewing = Process
F Motorway construction = Contract
H Plumbing repairs = Job
L Shoe manufacture = Batch
Brewing involves a continuous flow of processes.
Each motorway would be a separately identifiable cost unit of relatively long duration.
Therefore contract costing is appropriate.
Each plumbing repair would be a separately identifiable cost unit of relatively short
duration. Therefore job costing is most appropriate.
In shoe manufacturing a number of identical shoes would be manufactured in
separately identifiable batches.
35 A In process and batch costing the cost per unit of output is found indirectly by dividing
total costs by the number of units produced.
D The procedures used to calculate unit costs in manufacturing industries can equally be
applied to service industries.
It is incorrect to state that in process and job costing the cost per unit of output is found
directly by accumulating costs for each unit. This applies only to job costing since it is
not possible to identify individual units in a process costing environment.
It is incorrect to state that costing is irrelevant. Both financial accounts and cost
accounts use the same basic data. However, the cost accounting analyses the data in a
more detailed way and in a manner that is useful for management planning, decision-
making and control.
36 A Actual material cost
C Absorbed manufacturing overheads
The actual material cost for a batch can be determined from the material recording
system.
Actual manufacturing overheads cannot be determined for a specific batch because of
the need for allocation and apportionment of each item of overhead expenditure, and
the subsequent calculation of a predetermined overhead absorption rate. Therefore
actual manufacturing overheads is incorrect and absorbed manufacturing overheads is
correct.
Budgeted labour costs are irrelevant when considering actual batch costs.

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 197

 37 D The construction industry
The construction industry would be more likely to use contract costing, not process
costing.
The brewing industry, the oil industry and the steel industry would all use process
costing.
38 B (1) and (3) only
Statement (2) is not correct. Contract costing often applies to projects which are based
on sites away from the contractor's premises.
39 C £217,323
Work in progress
(WIP)
Job A £
£(26,800 + 17,275 + 14,500) + £(14,500/42,600  126,000) 101,462
Job C
£(18,500 + 24,600) + £(24,600/42,600  126,000) 115,861
Total WIP cost 217,323

£58,575 is the direct cost of job A, with no addition for overhead. £101,675 is the
direct cost of both jobs in progress, but with no addition for overhead.
£227,675 is the result of charging all of the overhead to the jobs in progress, but some
of the overhead must be absorbed by the completed job B.
SAMPLE PAPER
40 D £2,400
Idle time is 10% of the hours to be paid for. Hours to be paid for are therefore
= 270/0.9 = 300 hours
Therefore labour cost = 300 hours  £8 = £2,400
The answer of 300 is the number of hours to be paid for. This needs to be evaluated at
the hourly rate of £8.
If you selected £2,160 you made no allowance for the extra payment for idle time.
The answer of £2,376 is derived by simply adding 10% to the active hours. However,
the idle time is calculated as a percentage of the total hours paid for, not as a
percentage of the active hours worked.
41 A,F,H
Oil refining involves a continuous manufacturing process of homogeneous output and
therefore is ideally suited to process costing.
Clothing would be manufactured using batches of material, for example of a certain
texture or colour. Production would be halted before the next batch of items of a
particular style is produced. The most appropriate costing method would therefore be
batch costing.
Car repair work would be very varied and each repair would be bespoke. Therefore
neither process nor batch costing would be appropriate but job/contract costing
would be a suitable costing method.
SAMPLE PAPER

198 Management Information: Question Bank ICAEW 2019