33 Which of the following would not normally result from the adoption of a JIT purchasing

system?
A Closer relationship with the suppliers
B Lower levels of inventory
C Lower levels of receivables
D Better quality supplies obtained LO 1d

34 Select the costing method that would be appropriate in each of the following industries.
Brewing Motorway construction
A Process D Job
B Job E Batch
C Batch F Contract
Plumbing repairs Shoe manufacture
G Process J Process
H Job K Job
I Contract L Batch LO 1d

35 Which two of the following statements are correct?

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.
B In process and job costing the cost per unit of output is found directly by accumulating
costs for each unit.
C Costing is irrelevant because the same level of detailed information can be extracted
from the financial accounts.
D The procedures used to calculate unit costs in manufacturing industries can equally be
applied to service industries. LO 1d

36 Which two of the following items used in costing batches are normally contained in a typical
batch cost?
A Actual material cost
B Actual manufacturing overheads
C Absorbed manufacturing overheads
D Budgeted labour cost LO 1d

34 Management Information: Question Bank ICAEW 2019

 37 Which of the following industries would not normally use process costing?
A The brewing industry
B The oil industry
C The steel industry
D The construction industry LO 1d

38 Which of the following statements about contract costing are correct?

(1) Work is undertaken to customer's special requirements
(2) Work is usually undertaken on the contractor's premises
(3) Work is usually of a relatively long duration
A (1) and (2) only
B (1) and (3) only
C (2) and (3) only
D (1), (2) and (3) LO 1d

39 A firm makes special assemblies to customers' orders and uses job costing, with overheads
being absorbed based on direct labour cost.
The data for a period are:
Job A Job B Job C
£ £ £
Opening work in progress 26,800 42,790 0
Material added in period 17,275 0 18,500
Labour for period 14,500 3,500 24,600
Job B was completed during the period, during which actual overheads were the same as
the budgeted figure of £126,000.
What was the approximate value of closing work-in progress at the end of the period?
A £58,575
B £101,675
C £217,323
D £227,675 LO 1d

ICAEW 2019 Chapter 3: Calculating unit costs (Part 2) 35

 40 Job number 352 requires 270 hours of active labour. It is expected that 10% of labour's
total time will be idle time. The wage rate is £8 per hour.
What is the labour cost for the job?
A £300
B £2,160
C £2,376
D £2,400 LO 1d

41 For each of the following industries select the appropriate method to establish the cost of
products.
Oil refining Clothing Car repairs
A Process D Process G Process
B Job/contract E Job/contract H Job/contract
C Batch F Batch I Batch LO 1d

36 Management Information: Question Bank ICAEW 2019

Chapter 4: Marginal costing and absorption costing
1 The following cost details relate to one unit of product MC.
£ per unit
Variable materials 9.80
Variable labour 8.70
Production overheads
Variable 1.35
Fixed 9.36
Selling and distribution overheads
Variable 7.49
Fixed 3.40
Total cost 40.10

In a marginal costing system the value of a closing inventory of 4,300 units of product MC
will be
A £85,355
B £117,562
C £125,603
D £172,430 LO 1c

2 A company manufactures product S and product T.

The following information relates to the latest period.
Product S Product T
Variable labour cost per unit £60 £48
Other variable production costs per unit £70 £50
Budgeted production units 3,400 4,000
Labour hours 17,000 16,000
Variable labour is paid at £12 per hour.
Fixed production overhead incurred of £214,500 was the same as budgeted for the period.
Fixed production overhead is absorbed on the basis of labour hours.
Fixed production overhead absorption rate = £214,500/(17,000 + 16,000)
= £6.50 per labour hour
The value of the closing inventory of product S using absorption costing was £65,000.
If marginal costing had been used the value of this inventory would have been
A £52,000
B £53,150
C £260,000
D £442,000 LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 37

 3 Ticktock Ltd makes clocks with a selling price of £50 per clock. Budgeted production and
sales volume is 1,000 clocks per month. During September 1,000 clocks were made and
800 clocks were sold. There was no opening inventory.
The variable cost per clock is £25. Fixed costs in September were, as budgeted, £5,000.
Using marginal costing the contribution and profit for September would be calculated as
A Contribution: £25,000, Profit: £20,000
B Contribution: £20,000, Profit: £15,000
C Contribution: £20,000, Profit: £16,000
D Contribution: £25,000, Profit: £16,000 LO 1c

4 Which three of the following statements concerning marginal costing are true?
A Marginal costing is an alternative method of costing to absorption costing.
B Contribution is calculated as sales revenue minus fixed cost of sales.
C Closing inventories are valued at full production cost.
D Fixed costs are treated as a period cost and are charged in full to the income statement
of the accounting period in which they are incurred.
E Marginal cost is the cost of a unit which would not be incurred if that unit were not
produced. LO 1c

5 Which two of the following statements concerning marginal costing systems are true?
A Such systems value finished goods at the variable cost of production.
B Such systems incorporate fixed overheads into the value of closing inventory.
C Such systems necessitate the calculation of under- and over-absorbed overheads.
D Such systems write off fixed overheads to the income statement in the period in which
they were incurred. LO 1c

6 A company budgets during its first year of operations to produce and sell 15,900 units per
quarter of its product at a selling price of £24 per unit.
Budgeted costs are as follows:
£ per unit
Variable production costs 8.50
Fixed production costs 2.50
Variable selling costs 6.00
In the first quarter the unit selling price, variable unit cost and expenditure on fixed
production costs were as budgeted. The sales volume was 16,000 units and closing
inventory was 400 units.

38 Management Information: Question Bank ICAEW 2019

 The absorption costing profit for the quarter was
A £110,750
B £112,000
C £112,250
D £113,250 LO 1c

7 Which of the following statements about profit measurement under absorption and
marginal costing is true (assuming unit variable and fixed costs are constant)?
A Profits measured using absorption costing will be higher than profits measured using
marginal costing.
B Profits measured using absorption costing will be lower than profits measured using
marginal costing.
C Profits measured using absorption costing will be either lower or higher than profits
measured using marginal costing.
D Profits measured using absorption costing may be the same as, or lower than, or
higher than profits measured using marginal costing. LO 1c

8 If the number of units of finished goods inventory at the end of a period is greater than that
at the beginning, marginal costing inventory will result in (assuming unit variable and fixed
costs are constant)
A less operating profit than the absorption costing method
B the same operating profit as the absorption costing method
C more operating profit than the absorption costing method
D more or less operating profit than the absorption costing method depending on the
ratio of fixed to variable costs LO 1c

9 Adams Ltd's budget for its first month of trading, during which 1,000 units are expected to
be produced and 800 units sold, is as follows:
£
Variable production costs 95,500
Fixed production costs 25,800
Selling price is £250 per unit

The profit calculated on the absorption cost basis compared with the profit calculated on
the marginal cost basis is
A £24,260 lower
B £5,160 higher
C £5,160 lower
D £24,260 higher LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 39

 10 Bright makes and sells boats. The budget for Bright's first month of trading showed the
following:
£
Variable production cost of boats 45,000
Fixed production costs 30,000
Production cost of 750 boats 75,000
Closing inventory of 250 boats (25,000)
Production costs of 500 boats sold 50,000
Sales revenue 90,000
Production cost of boats sold (50,000)
Variable selling costs (5,000)
Fixed selling costs (25,000)
Profit 10,000

The budget has been produced using an absorption costing system. If a marginal costing
system were used, the budgeted profit would be
A £22,500 lower
B £10,000 lower
C £10,000 higher
D £22,500 higher LO 1c

11 A company produces a single product for which cost and selling price details are as follows:
£ per unit £ per unit
Selling price 28
Variable material 10
Variable labour 4
Variable overhead 2
Fixed overhead 5
21
Profit per unit 7

Last period, 8,000 units were produced and 8,500 units were sold. The opening inventory
was 3,000 units and profits reported using marginal costing were £60,000.

The profits reported using an absorption costing system would be

A £47,500
B £57,500
C £59,500
D £62,500 LO 1c

40 Management Information: Question Bank ICAEW 2019

 12 Typo Ltd's budget for the year ended 31 December 20X8 is as follows.
Units £
Sales 1,200 24,000
Opening inventory 500
Production 1,000
1,500
Closing inventory (300)
Sold 1,200
Marginal cost per unit £15 (18,000)
Contribution 6,000
Fixed overhead (7,000)
Loss (1,000)

For absorption costing purposes, the fixed overhead absorption rate is set at £7 per unit for
20X8.
If absorption costing were to be used in inventory valuation throughout 20X8, what would
the profit (or loss) be for 20X8?
A £400 loss
B £400 profit
C £2,400 profit
D £2,400 loss LO 1c

13 A company had opening inventory of 48,500 units and closing inventory of 45,500 units.
Profits based on marginal costing were £315,250 and on absorption costing were
£288,250.
What is the fixed overhead absorption rate per unit?
A £5.94
B £6.34
C £6.50
D £9.00 LO 1c

14 In March, a company had a marginal costing profit of £78,000. Opening inventories were
760 units and closing inventories were 320 units. The company is considering changing to
an absorption costing system.
What profit would be reported for March, assuming that the fixed overhead absorption rate
is £5 per unit?
A £74,200
B £75,800
C £76,400
D £80,200 LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 41

 15 When comparing the profits reported under marginal and absorption costing when the
levels of inventories increased (assuming unit variable and fixed costs are constant)
A absorption costing profits will be lower and closing inventory valuations higher than
those under marginal costing
B absorption costing profits will be lower and closing inventory valuations lower than
those under marginal costing
C absorption costing profits will be higher and closing inventory valuations lower than
those under marginal costing
D absorption costing profits will be higher and closing inventory valuations higher than
those under marginal costing LO 1c

16 Which two of the following statements are advantages of marginal costing as compared
with absorption costing?
A It complies with accounting standards
B It ensures the company makes a profit
C It is more appropriate for short-term decision-making
D Fixed costs are treated in accordance with their nature (ie, as period costs)
E It is more appropriate when there are strong seasonal variations in sales demand LO 1c

17 When comparing the profits reported under marginal and absorption costing when the
levels of inventories decreased (assuming unit variable and fixed costs are constant)
A absorption costing profits will be lower and closing inventory valuations higher than
those under marginal costing
B absorption costing profits will be lower and closing inventory valuations lower than
those under marginal costing
C absorption costing profits will be higher and closing inventory valuations lower than
those under marginal costing
D absorption costing profits will be higher and closing inventory valuations higher than
those under marginal costing LO 1c

42 Management Information: Question Bank ICAEW 2019

 18 Which two of the following statements are correct?
A Absorption unit cost information is the most reliable as a basis for pricing decisions.
B A product showing a loss under absorption costing will also make a negative
contribution under marginal costing.
C When closing inventory levels are higher than opening inventory levels and overheads
are constant, absorption costing gives a higher profit than marginal costing.
D In a multi-product company, smaller volume products may cause a disproportionate
amount of set up overhead cost.
E Marginal unit cost information is normally the most useful for external reporting
purposes. LO 1c

19 Iddon Ltd makes two products, Pye and Tan, in a factory divided into two production
departments, Machining and Assembly. Both Pye and Tan need to pass through the
Machining and Assembly departments. In order to find a fixed overhead cost per unit, the
following budgeted data are relevant:
Machining Assembly
Fixed overhead costs £120,000 £72,000
Labour hours per unit: Pye 0.5 hours 0.20 hours
Tan 1.0 hours 0.25 hours
Budgeted production is 4,000 units of Pye and 4,000 units of Tan (8,000 units in all) and
fixed overheads are to be absorbed by reference to labour hours.
What is the budgeted fixed overhead cost of a unit of Pye?
A £18
B £20
C £24
D £28 LO 1c

ICAEW 2019 Chapter 4: Marginal costing and absorption costing 43