27 Division J manufactures product K incurring a total cost of £50 per unit.

Product K is sold to
external customers in a perfectly competitive market at a price of £57, which represents a
mark up of 90% on marginal cost.
Division J also transfers product K to division R. If transfers are made internally then division
J does not incur variable selling costs which amount to 5% of the total variable cost.
Assuming that the total demand for product K exceeds the capacity of division J, the
optimum transfer price per unit between division J and division R is
A £54.50
B £55.50
C £56.72
D £57.00 LO 1f

28 In a contract to sell a commodity the selling price is agreed between the supplier and the
buyer to be the actual costs incurred by the supplier plus a profit mark-up using a fixed
percentage on actual costs. No credit period is offered by the supplier.
Which of the following best describes how the risk caused by inflation will be allocated
between the supplier and the buyer?
A The supplier and the buyer will each bear some of the inflation risk but not necessarily
equally
B Only the supplier will bear the inflation risk
C Only the buyer will bear the inflation risk
D The supplier and the buyer will each bear equal amounts of the inflation risk LO 1e

29 F and G are two divisions of a company. Division F manufactures one product, Rex. Unit
production cost and the market price are as follows:
£
Variable materials 24
Labour 16
Variable fixed overhead 8
48
Prevailing market price £64

Product Rex is sold outside the company in a perfectly competitive market and also to
division G. If sold outside the company, Rex incurs variable selling costs of £8 per unit.
Assuming that the total demand for Rex is more than sufficient for division F to manufacture
to capacity, what is the price per unit (in round £s) at which the company would prefer
division F to transfer Rex to division G?
A £64
B £56
C £40
D £48 LO 1f

54 Management Information: Question Bank ICAEW 2019

 30 A company estimates indirect costs to be 40% of direct costs and it sets its selling prices to
recover the full cost plus 50%.
What percentage represents the mark-up on direct costs that would give rise to the same
selling price as using the method described above?
A 90%
B 110%
C 190%
D 210% LO 1e

31 The master budget for Serse Ltd, a single-product firm, for the current year is as follows:
£ £
Sales 480,000

Variable materials (20,000 tonnes at £10 per tonne) 200,000

Variable labour 96,000
Variable overhead 48,000
Fixed overhead 72,000
Total cost (416,000)
Budgeted net profit 64,000

Serse Ltd has substantial excess production capacity. A sales enquiry has been received,
late in the year, which will increase sales and production for the year by 25% over budget.
The extra requirement for 5,000 tonnes of material will enable the firm to purchase 7,000
tonnes at a discount of 5% on its normal buying price. The additional 2,000 tonnes will be
used to complete the year's budgeted production.
What price should Serse Ltd charge for the special order in order to earn the same
budgeted net profit for the year of £64,000?
A £83,500
B £100,500
C £82,500
D £101,500 LO 1e

ICAEW 2019 Chapter 5: Pricing calculations 55

 32 Gabba sets up in business to clean carpets. She will charge £30 per carpet cleaned and
estimates the direct variable and fixed costs per carpet cleaned to be £9 and £6
respectively. She also estimates her variable and fixed advertising costs per carpet cleaned
to be £2 and £3 respectively.
What is the contribution per carpet cleaned and the mark up on total costs?
Contribution Mark-up
£ %
A 21 50
B 19 100
C 10 100
D 19 50 LO 1e

33 Next month's budget for a single product company is shown below.

£ £
Sales of 1,200 units 600,000
Manufacturing costs:
Variable 216,000
Fixed 60,000
Selling costs:
Variable 132,000
Fixed 78,000
Administration costs (fixed) 36,000
(522,000)
Net profit 78,000

The company's variable manufacturing cost per unit is now expected to increase by 10%,
but all other costs remain unchanged.
Assuming an unchanged volume of sales, calculate the selling price per unit that would
maintain the contribution ratio.
A £531
B £733
C £550
D £518 LO 1e

34 Delta and Gamma are two divisions of a company. Delta manufactures two products X and
Y. X is sold outside the company. Y is sold only to division Gamma at a unit transfer price of
£176. Unit costs for product Y are:
£
Variable materials 60
Variable labour 40
Variable overhead 40
Fixed overhead 20
160

56 Management Information: Question Bank ICAEW 2019

 Division Gamma has received an offer from another company to supply a substitute for Y
for £152 per unit.
Assuming division Delta is only operating at 80% of capacity, if Gamma accepts the offer
the effect on profits will be
Division Overall
Delta company
profit profit
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease Decrease LO 1f

35 Delta and Gamma are two divisions of a company. Delta manufactures two products X and
Y. X is sold outside the company. Y is sold only to division Gamma at a unit transfer price of
£176. Unit costs for product Y are:
£
Variable materials 60
Variable labour 40
Variable overhead 40
Fixed overhead 20
160

Division Gamma has received an offer from another company to supply a substitute for Y for
£152 per unit.
Assuming division Delta can sell as much of Product X as it can produce and the unit
profitability of X and Y are equal, what will be the effect on profits if Gamma accepts the
offer?
Division Overall
Delta company
profit profit
A No change Decrease
B Decrease No change
C No change Increase
D Increase No change LO 1f

36 A company currently sets its selling price at £10, which achieves a 25% mark-up on variable
cost. Annual production and sales volume is 100,000 units and annual fixed costs are
£80,000.
By how much would the selling price need to be increased in order to double profit if costs,
production and sales volume remain unchanged?
A 12%
B 17%
C 20%
D 25% LO 1e

ICAEW 2019 Chapter 5: Pricing calculations 57

58 Management Information: Question Bank ICAEW 2019
Chapter 6: Budgeting
1 Which of the following are considered to be objectives of budgeting?
(1) Authorisation
(2) Expansion
(3) Performance evaluation
(4) Resource allocation

A (4) only
B (1), (2) and (4) only
C (1), (3) and (4) only
D (1), (2) and (3) only LO 2d

2 Which of the following is not one of the main purposes of a budget?

A To compel planning
B To communicate targets to the managers responsible for achieving the budget
C To inform shareholders of performance in meeting targets
D To establish a system of control by comparing budgeted and actual results LO 2d

3 Which two of the following statements relating to budgets are correct?

A A budget covers periods longer than one year and is used for strategic planning.
B The budget committee coordinates the preparation and administration of budgets.
C The budget committee is responsible for the preparation of functional budgets.
D A budget manual will contain instructions governing the preparation of budgets.
E A budget is usually prepared by the shareholders of a company. LO 2d

4 When preparing the master budget, which of the following tasks would normally be carried
out first?
A Calculate the overhead absorption rate
B Establish the organisation's long-term objectives
C Identify the principal budget factor
D Prepare the sales budget LO 2c

ICAEW 2019 Chapter 6: Budgeting 59

 5 Which three of the following are steps in the preparation of a budget?
A Arrange overdraft facilities
B Identify the principal budget factor
C Prepare a budgeted income statement
D Budget the resources for production
E Complete the audit of the prior year's results LO 2c

6 Which of the following is a principal budget factor?

A The highest value item of cost
B A factor which limits the activities of an undertaking
C A factor common to all budget centres
D A factor controllable by the manager of the budget centre LO 2c

7 Which of the following could be principal budget factors?

(1) Sales demand
(2) Machine capacity
(3) Key raw materials
(4) Cash flow
A (1) and (2) only
B (1), (2), (3) and (4)
C (1), (2) and (3) only
D (1), (2) and (4) only LO 2c

8 Which of the following is not a functional budget?

A Purchases budget
B Cash budget
C Sales budget
D Marketing cost budget LO 2c

60 Management Information: Question Bank ICAEW 2019

 9 For a company that does not have any production resource limitations, which of the
following sets out the correct sequence for budget preparation?
A Production budget, finished goods inventory budget, sales budget, then materials
usage budget
B Sales budget, finished goods inventory budget, production budget, then materials
usage budget
C Sales budget, production budget, finished goods inventory budget, then materials
usage budget
D Sales budget, finished goods inventory budget, materials usage budget, then
production budget LO 2c

10 Which two of the statements below correctly complete the following sentence?
The master budget
A will include a budgeted balance sheet and a budgeted income statement prepared on
the accruals basis
B will include a cash budget
C is usually prepared before the functional budgets
D details the timetable for the preparation of the various budgets
E includes the instructions for the completion of the budget forms and the
responsibilities of the personnel involved LO 2d

11 Which of the following expressions is correct?

A Opening inventory + sales – closing inventory = production (in units)
B Opening inventory + sales + closing inventory = production (in units)
C Closing inventory + sales – opening inventory = production (in units)
D Closing inventory – sales – opening inventory = production (in units) LO 2c

12 A company is preparing its production budget for product Z for the forthcoming year.
Budgeted sales of product Z are 1,500 units. Opening inventory is 120 units and the
company wants to reduce inventories at the end of the year by 10%.
The budgeted number of units of product Z to be produced is
A 1,392
B 1,488
C 1,500
D 1,512 LO 2c

ICAEW 2019 Chapter 6: Budgeting 61

 13 Research Ltd purchases a chemical and refines it before onward sale. Budgeted sales of the
refined chemical are as follows.
Litres
January 40,000
February 50,000
March 30,000
(1) The target month-end inventory of unrefined chemical is 30% of the chemical needed
for the following month's budgeted production.
(2) The targeted month-end inventory of refined chemical is 30% of next month's
budgeted sales.
Calculate the budgeted purchases of unrefined chemical for January.
A 56,200 litres
B 49,750 litres
C 48,250 litres
D 43,300 litres LO 2c

14 When preparing a material purchases budget, which of the following is the quantity to be
purchased?
A Materials required for production – opening inventory of materials – closing inventory
of materials
B Materials required for production – opening inventory of materials + closing inventory
of materials
C Opening inventory of materials + closing inventory of materials – materials required for
production
D Opening inventory of materials – materials required for production – closing inventory
of materials LO 2c

15 Barlow plc manufactures two products, Vip and Bip. It intends to produce 2,000 units of
each product in the next year to meet the sales budget.
Each Vip requires 2 kg of material Z and 1 kg of material Y and each Bip requires 3 kg of
material Z and 4 kg of material Y.
At present there are 200 kg of Z and 500 kg of Y in inventory.
Barlow plc intends to increase the inventory levels of these materials by the end of the year
to 600 kg of Z and 800 kg of Y.
Material Z costs £4 per kg and material Y costs £5 per kg.
What is the total materials purchases for the next year?
A £86,900
B £90,000
C £93,100
D £96,400 LO 2c

62 Management Information: Question Bank ICAEW 2019

 16 A retailing company makes a gross profit of 25% on sales. The company plans to increase
inventory by 10% in June. The budgeted sales revenue for June is £25,000. Opening
inventory on 1 June is valued at £5,000.
What are the budgeted inventory purchases for June?
A £18,250
B £19,125
C £19,250
D £25,500 LO 2c

17 Budgeted sales of X for December are 18,000 units. At the end of the production process
for X, 10% of production units are scrapped as defective. Opening inventories of X for
December are budgeted to be 15,000 units and closing inventories will be 11,400 units. All
inventories of finished goods must have successfully passed the quality control check.
The production budget for X for December, in units, is
A 12,960
B 14,400
C 15,840
D 16,000 LO 2c

18 The quantity of material in the material purchases budget is greater than the quantity of
material in the material usage budget.
Which of the following statements can be inferred from this situation?
A Wastage of material occurs in the production process.
B Finished goods inventories are budgeted to increase.
C Raw materials inventories are budgeted to increase.
D Raw materials inventories are budgeted to decrease. LO 2c

19 George has been asked by his bank to produce a budgeted income statement for the six
months ending on 31 March 20X4.
He forecasts that monthly sales will be £3,000 for October, £4,500 for each of November
and December and £5,000 per month from January 20X4 onwards.
Selling price is fixed to generate a margin on sales of 33 1/3%.
Overhead expenses (excluding depreciation) are estimated at £800 per month.
He plans to purchase non-current assets on 1 October costing £5,000, which will be paid for
at the end of December and are expected to have a five-year life, at the end of which they
will possess a nil residual value.
The budgeted net profit for the six months ending 31 March 20X4 is
A £3,200
B £3,700
C £3,950
D £8,200 LO 2c

ICAEW 2019 Chapter 6: Budgeting 63