ACCA F5 Certification Exam: Trivia Quiz

Number of inspections
The number of inspections per product is likely to be the main driver of quality control costs. The number of set ups is unlikely to have an effect on the quality control costs. Some product lines may require more inspections than others, therefore, number of units produced is not sufficient to use as the cost driver. Labour hours will not reflect the quality control aspect of individual products.

Throughput per unit of Product X = $(40 – 10) = $30
Throughput per bottleneck hour = $30/0.01 hours = $3,000
Factory costs per year = $2,920,000 + (50,000 × $12) = $3,520,000
Factory cost per bottleneck hour = $3,520,000/4,000 hours = $880
Throughput accounting ratio = $3,000/$880 = 3.41

A product's life cycle costs are incurred from its design stage through development to market launch, production and sales, and finally to its eventual decline and withdrawal from the market.

The US Environment Protection Agency in 1998 suggested classifying environmental costs into four types: conventional costs, hidden costs (costs hidden because they are included in general overheads and not identified separately), contingent costs and image and relationship costs.

The cost driver for quality inspection costs is likely to be either the number of units produced or the number of batches produced, depending on whether quality inspection is linked to batches produced or total production output. The batch size is not a factor that drives total inspection costs. Some costs of activities may vary with the volume of the activity, but other costs of the activity will be fixed costs. A cost driver is not the cost itself; it is a measure of the volume or quantity of an activity.

'The majority of environmental costs are already captured within a typical organisation's accounting system. The difficulty lies in identifying them' is true. ' Input/output analysis divides material flows within an organisation into three categories: material flows; system flows; and delivery and disposal flows' is false.

Statement 2 refers to flow cost accounting rather than input/output analysis. Under the flow cost accounting technique, material flows within an organisation are divided into three categories: material
flows; system flows; and delivery and disposal flows.

Variable costs $
Year 1: $(30 + 6 + 4) × 25,000 1,000,000
Year 2: $(25 + 5 + 3) × 100,000 3,300,000
Year 3: $(20 + 4 + 2) × 75,000 1,950,000
R&D costs 940,000
Other fixed costs 3,000,000
Total life cycle costs 10,190,000
Total units made and sold 200,000
Average life cycle cost per unit $50.95

ABC can be used for cost-plus pricing. Traditional absorption costing tends to allocate insufficient overhead costs to low volume products that use up a disproportionate amount of time for order handling, production runs and set-ups. ABC is expensive and time consuming to implement. It is therefore important to assess whether the benefits will outweigh the costs before implementing ABC.

The correct answer is: More accurate costs per unit.
Distractors:
There will not be a reduction in overhead costs as a result of the adoption of ABC. However, management of Jola Publishing Co may benefit from improved decision making regarding cost control, if they understand the cost drivers better. ABC tends to be a more expensive approach to absorption costing ABC is a more complex form of costing

The correct answer is $92

The correct answer is: 500 units.

Reducing material costs or increasing the sales price will increase throughput per machine hour. Reducing factory costs will reduce the factory cost per machine hour. These will increase the TA ratio. Reducing the machine time per unit will increase throughput per hour and factory cost per hour by the same proportion, leaving the TA ratio unchanged.

The aim should be to improve the output capacity of the binding constraint. This can be done by achieving more output per unit of binding resource (improving efficiency) or obtaining more of the resource that is the binding constraint. By increasing output through the binding constraint, a point will eventually be reached where it ceases to be the binding constraint, and another resource becomes the binding constraint.

Identify major activities within each department which create cost 4
Create a cost centre/cost pool for each activity – 'the activity cost pool' 5
Determine what causes the cost of each activity – the 'cost driver' 3
Calculate the absorption rate for each 'cost driver' 2
Calculate the overhead cost per unit of CB and TJ 1

The correct answer is:

The return per factory hour is measured using the bottleneck resource as a measure of factory hours.

Return = Throughput

Return per machine hour = $(30 – 10)/0.25 hours = $80.

The correct answers are:
ABC recognises the complexity of modern manufacturing by the use of multiple cost drivers
ABC establishes separate cost pools for support activities

The correct answer is: ABC improves pricing decisions
It is ABC which gives a better indication of where cost savings can be made. BBB uses cost plus pricing and so more accurate costs will lead to better pricing decisions. ABC is expensive to implement and BBB currently has an absorption costing system set up. ABC does not eliminate the need for cost apportionment. It may still be required at the cost pool stage for shred items such as rent.

Financial returns can be improved over the life cycle of a product by minimising the breakeven time,
minimising the time to get a new product to market and maximising the length of the product life
cycle.

The correct answer is $3,000
Overhead absorption rate is calculated as $400,000/40,000hrs = $10/hr
A GC takes 300 labour hours to complete - 300 × $10/hr = $3,000

1 only
Statement 1 is true. ABC leads to more competitive pricing of the GC because it is allocated a fairer proportion of the total overheads. This will reflect the reality of the overheads that the GC is actually generating. Traditional absorption costing is more arbitrary which can lead to uncompetitive pricing.
Statement 2 is false. Total overhead costs will be the same no matter which method of allocation is used.

The correct answers are:
1. Labour costs are a relatively minor proportion of total costs
2. Overheads vary with many different measures of activity
That overheads are difficult to predict and cost drivers difficult to identify are not reasons to prefer ABC.

Factory labour costs are always treated as a part of the factory cost/conversion cost of a product. Throughput accounting does not make a distinction between direct and indirect costs. It is also assumed that labour costs are a fixed cost, so if machine time is the bottleneck resource, nothing is gained by improving labour efficiency, because this will not increase throughput.

In MFCA, a distinction is made between good finished output (positive output) and waste and emissions (negative output). Both types of output are given a cost. Performance can be improved by finding ways to reduce the amount of negative output – and so achieve the same amount of output with less input materials.

The benefits obtained from ABC might not justify the costs.
Some companies find the costs of implementing ABC to be prohibitive. If Triple Co believe that the difference in cost per unit of each product under ABC and traditional based costing systems is not material, they should not adopt ABC.
Distractors:
 ABC can be applied to all overheads, not just production overheads.
 The cost per unit provided under ABC principles will be more accurate.
 ABC costing will provide much better insight into what drives overhead costs.

Products should be discontinued if there is a target cost gap

For services that have a large fixed cost based, other methods of cost control may be more appropriate, such as activity based management, and a key to reducing costs is often increasing sales volumes rather than reducing expenditures. To achieve a target cost, one approach is to remove design features from a product specification that do not add value for customers (so do not affect the price that customers are willing to pay). If there is a target cost gap that cannot be eliminated, management may consider whether or not to continue with the product, since it will not be achieving the required profit margin. However, a decision to discontinue a product on whether to continue making it should not be based on target costs or profit margins alone.

Environmental management accounting measures physical quantities as well as monetary amounts.

'Target costing may be applied to services that are provided free of charge to customers' is false and the others are true.

Cost reduction measures may reduce the perceived value of a product to customers, so that the target selling price becomes unachievable for the sales volume required. The projected cost of a new product may be reduced by simplifying the design (such as using more standard components, fewer components in total and removing design features that do not add value), but simplification of the design should not reduce the value of the product for customers. Overhead costs are usually a large proportion of total costs; therefore it is important to have reliable estimates of sales demand at a given target sales price in order to establish a target cost. Target costing is dependent on identifying a target selling price for an item, so it is not appropriate for costing services provided free of charge. Call centre costs, for example, should be managed using other methods of cost control.

The correct answers are:
Set up costs.
Raw material handling costs.

These two costs are likely to increase, as batch sizes get smaller. Remember, the whole aim of JIT is to hold no inventory. Thus raw material storage costs should fall, not rise. Customer order costs will not be changed by the introduction of JIT.

'Unless output capacity is greater than sales demand, there will always be a binding constraint' and 'The production capacity of a bottleneck resource should determine the production schedule for the organisation as a whole'.

Output from a binding constraint should be used immediately, not built up as inventory, because it is the factor that constrains output and sales. Some inventory may build up before the binding constraint, but the general principle in throughput accounting is that any inventory is undesirable. The production capacity of a bottleneck resource should determine the production schedule for the organisation as a whole. This means inevitably that there will be idle time in other parts of production where capacity is greater.

In throughput accounting, all inventory, including work in progress and finished goods, should be valued at the cost of their materials. They should not include any other costs (labour or overhead costs). The aim should not be to maximise the use of all available resources, because this will simply create unwanted inventory. The aim should be to maximise the use of the bottleneck resource and efficiency is achieved by meeting production schedules and delivery dates to customers.

'Input' costs consist of material costs, waste management costs, energy costs and system costs (labour and overhead costs).

Output costs are allocated between positive products (good finished output) and negative product costs (cost of waste and emissions).

The correct answer is $7000

'An important use of life cycle costing is to decide whether to go ahead with the development of a new product ' and 'Life cycle costing encourages management to find a suitable balance between investment costs and operating expenses'.

A product is usually most profitable during the maturity phase of its life cycle. Life cycle costing is not particularly useful for deciding the selling price for a product, because the appropriate selling price changes over the life of a product. By looking at the costs over the entire life cycle of a product, and comparing these with expected sales revenues, a decision can be taken at an early stage, before too much cost has been committed, about whether to go ahead with developing a new product. Life cycle costing also helps management to consider the merits of investing more money at the design stage for a new product if this will reduce operating costs over the product life cycle.

The correct answer is 9818

The correct answer is:

The correct answer is:

'In a system of ABC, for costs that vary with production levels, the most suitable cost driver is likely to be direct labour hours or machine hours' and 'Activity based costing is a form of absorption costing'

Implementation of ABC is likely to be cost effective when variable production costs are a low proportion of total production costs and overhead costs, traditionally assumed to be fixed costs, are a large proportion of total production costs. At a unit level, the cost driver for production-related overheads is likely to be direct labour hours or machine hours. It is a mistake to associate activity based costs with the variable costs of an activity. Some of the costs may be variable in the short run, but others are not. So ABC costs should not be treated as relevant costs for the purpose of short-term decision making. It is more appropriate to think of ABC as a form of absorption costing, where overheads are allocated to activities and products on a more meaningful basis than with traditional absorption costing.

The correct answer is $362.50

The correct answer is:

A system of environmental management accounting provides environmental information for internal use by management, but not for external reporting. It is distinct from environmental accounting, which is concerned with external reporting (as well as internal reporting). Environmental management accounting systems typically make use of life cycle costing, given that there may be substantial clean-up and disposal costs at the end of the life of an activity or operation.

The correct answer is:

The correct answer is: $2.57 per unit
Number of units produced per year = 1,000,000 + (12 × 10,000) = 1,120,000 units
Overhead absorption rate is calculated as $2,880,000/1,120,000 units = $2.57/unit

Throughput per unit of Product X = $(50 – 14) = $36.
Throughput per bottleneck hour = $36/0.05 hours = $720
Factory costs per year = $1,620,000 + (18,000 × $10) = $1,800,000
Factory cost per bottleneck hour = $1,800,000/6,000 hours = $300
Throughput accounting ratio = $720/$300 = 2.40.