AAT Level 3 - Advanced Diploma in Accounting Management Accounting (Costing) 2 — Questions and Answers
Question 1: Budgeted sales for a period are 8,000 units and the break-even point is 5,600 units. What is the margin of safety, expressed as a percentage of budgeted sales?
- 30% (Correct answer)
- 43%
- 70%
- 25%
Correct answer: 30%
Margin of safety = (Budgeted sales − Break-even sales) ÷ Budgeted sales × 100 = (8,000 − 5,600) ÷ 8,000 × 100 = 2,400 ÷ 8,000 = 30%. It measures how far sales can fall before a loss is made.
Question 2: When closing inventory is higher than opening inventory in a period, which costing method will report the higher net profit?
- Marginal costing
- Absorption costing (Correct answer)
- Both methods always report identical profits
- It depends solely on the selling price
Correct answer: Absorption costing
Under absorption costing, fixed production overheads are carried in closing inventory rather than charged fully to the income statement. This defers some overhead to the next period, producing a higher profit than marginal costing when inventory levels rise.
Question 3: Using the high-low method, a company records total costs of £44,000 at 8,000 units of output and £32,000 at 5,000 units. What is the variable cost per unit?
- £4.00 (Correct answer)
- £5.50
- £4.25
- £6.40
Correct answer: £4.00
Variable cost per unit = Change in total cost ÷ Change in activity = (£44,000 − £32,000) ÷ (8,000 − 5,000) = £12,000 ÷ 3,000 = £4.00. The high-low method isolates the variable element by examining the difference between the highest and lowest activity levels.
Question 4: A company manufactures products P and Q. Product P yields a contribution of £30 and requires 6 machine hours. Product Q yields a contribution of £20 and requires 2 machine hours. Machine hours are the binding constraint. Which product should be prioritised?
- Product P, because it has the higher contribution per unit
- Product Q, because it generates more contribution per machine hour (Correct answer)
- Both products are equally profitable per machine hour
- Product P, because it uses more machine hours
Correct answer: Product Q, because it generates more contribution per machine hour
When a resource is scarce, products are ranked by contribution per unit of limiting factor. P = £30 ÷ 6 = £5 per machine hour; Q = £20 ÷ 2 = £10 per machine hour. Product Q makes better use of the scarce resource and should be prioritised.
Question 5: Which of the following is correctly classified as a direct cost?
- Monthly factory rent
- Depreciation of production equipment
- Wages paid to an operative for time worked on a specific job (Correct answer)
- The production manager's annual salary
Correct answer: Wages paid to an operative for time worked on a specific job
A direct cost is one that can be specifically and exclusively identified with a particular cost unit. Wages paid to an operative for time spent on a specific job are direct labour and are therefore a direct cost. Factory rent, depreciation, and a manager's salary are indirect (overhead) costs shared across many cost units.
Question 6: A factory produces 4,000 units in a period. Direct materials are £10 per unit, direct labour £6 per unit, variable production overheads £2 per unit, and total fixed production overheads are £20,000. What is the total absorption cost per unit?
- £18
- £23 (Correct answer)
- £21
- £25
Correct answer: £23
Fixed overhead per unit = £20,000 ÷ 4,000 = £5. Total absorption cost = Direct materials £10 + Direct labour £6 + Variable overheads £2 + Fixed overheads £5 = £23 per unit. Absorption costing includes all production overheads, both variable and fixed, in the unit cost.
AAT Level 3 - Advanced Diploma in Accounting Management Accounting (Costing) 2
Budgeted sales for a period are 8,000 units and the break-even point is 5,600 units.
What is the margin of safety, expressed as a percentage of budgeted sales?