1

Mr Moritz owns a firm manufacturing a water resistant wrist brace. He wants to

know why he needs a Management Accounting system, when he already
employs an accountant to prepare Financial Accounting statements for the
shareholders and potential investors.

A Management Accounting system:

A. focuses only on historical data.

B. is governed by International Accounting Standards .

C. focuses primarily on the needs of personnel within the

organization.

D. provides information for parties external to the organization.

E. focuses on financial statements and other financial reports.

2
Sarvar Corporation, which manufactures a reusable water bottle that is 100%
BPA free, reported the following data for the month of December:

£
Direct Materials 71,000
Direct Labour 38,000
Manufacturing Overhead 69,000
Selling Expense 24,000
Administrative Expense 42,000

The prime cost for December was:

A. £109,000

B. £111,000

C. £107,000

D. £66,000

Prime cost = Direct materials + Direct labour

= £71,000 + £38,000
= £109,000
3 Hsin Lighting manufactures a range of smart lightbulbs which adjust the
brightness to the time of day, mimicking natural light. During the month of
September, direct labour cost totalled £110,000 and direct labour cost was 40%
of prime cost. If total manufacturing costs during September were £730,000, the
manufacturing overhead was:

A. £165,000

B. £275,000

C. £620,000

D. £455,000

Need to find total prime cost (direct cost), and then deduct this from
total manufacturing cost to find total manufacturing overhead
(indirect costs)

Direct labour cost = £110,000

Direct labour cost = 0.40 × Prime cost
Total manufacturing cost = £730,000

Direct labour cost = 0.40 × Prime cost

Prime cost = Direct labour cost ÷ 0.40
Prime cost = £110,000 ÷ 0.40 = £275,000

Total manufacturing cost = Prime cost + Manufacturing overhead

cost
£730,000 = £275,000 + Manufacturing overhead cost
Manufacturing overhead cost = £455,000
 4 The nursing station on the fourth floor of Central Hospital is responsible for the
care of orthopaedic surgery patients. The costs of prescription drugs
administered by the nursing station to patients should be classified as:

A. direct patient costs.

B. indirect patient costs.

C. overhead costs of the nursing station.

D. period costs of the hospital.

The medicine can be traced to individual patients

5
The costs of the Accounting Department at Central Hospital would
be considered by the Surgery Department to be:

A. direct costs.

B. indirect costs.

C. variable costs.

D. material costs.

The Accounting costs cannot be traced to individual patients

 6
In a manufacturing company, direct labour costs combined with direct materials
costs are known as:

A. period costs.

B. conversion costs.

C. prime costs.

D. opportunity costs.

Also known as direct costs

7
Andreas Ltd manufactures tables using 95% recycled wood and plastic. They
also use earth friendly manufacturing processes, such as reclaiming factory
waste and eliminating the use of harmful chemicals. Which of the following
would most likely be included as part of manufacturing overhead in the
production of a wooden table?

A. The amount paid to the individual who assembles the table.

B. The commission paid to the salesperson who sold the table.

C. The cost of glue used in the table.

D. The cost of the wood used in the table.

The sales commission is not a manufacturing cost. The labour and materials are both
examples of direct costs. If you cannot trace the cost of glue to specific levels of
output, in other words, the glue was bought for general use in production, it would be
considered an indirect cost or an overhead.
 8
Abbott Company's manufacturing overhead is 20% of its total conversion
costs. If direct labour is £38,000 and if direct materials are £23,000, the
manufacturing overhead is:

A. £9,500

B. £152,000

C. £5,750

D. £15,250

Manufacturing overhead = 0.20 × Conversion cost

Direct labour = £38,000

Conversion cost = direct labour + manufacturing overhead.

if manufacturing overhead equals 20% of conversion cost, then direct labour must equal the
remaining 80%

The labour cost is therefore 4 times bigger than the manufacturing overhead

Manufacturing overhead = £38,000 x 20/80 = £9,500

9
Which of the following should NOT be included as part of manufacturing
overhead at a company that makes office furniture?

sheet steel in a file cabinet made by the

A. company.

B. manufacturing equipment repairs.

C. Salary of the factory supervisor.

D. rent on a factory building.

The sheet steel can be traced to individual products and is a direct cost

10
Blore Corporation, which manufactures ergonomically designed furniture,
reports that at an activity level of 7,300 units, its total variable cost is
£511,803 and its total fixed cost is £76,650. What would be the total cost,
both fixed and variable, at an activity level of 7,500 units? Assume that this
level of activity is within the relevant range.

A. £604,575

B. £602,475

C. £596,514

D. £588,453

Variable cost per unit = £511,803 ÷ 7,300 units = £70.11 unit

Total cost = Total fixed cost + Total variable cost
= £76,650 + £70.11 per unit × 7,500 units
= £76,650 + £525,825
= £602,475

11 As the level of activity increases:

A. fixed cost per unit increases.

B. variable cost per unit increases.

C. variable cost per unit decreases.

D. fixed cost per unit decreases.

e.g. If fixed costs were £20,000 and production was 10,000 units. The fixed costs per
unit = £2. If production then increases to 20,000 units, the fixed cost, by definition is
unaffected. The fixed cost per unit becomes £20,000 / 20,000 units = £1 / unit