MA1-ICAEW-Mid term test 1

The best definition of a cost centre is:

• a unit of product or service for which costs can be ascertained

• any object that consumes activities within an organisation

• a sub-division, location or part of an organisation for which costs can be determined

• a sub-division, location or part of an organisation for which costs and revenues can be determined

Which one of the following groups of workers would be classified as indirect labour?

• Machinists in an organisation manufacturing clothes

• Bricklayers in a house building company

• Maintenance workers in a shoe factory

• Assembly workers in a vehicle manufacturing business

A manufacturer of tinned peas has three production departments. Each department is located in a different building on the same manufacturing site. In the cooking department, peas are mixed and cooked in large vats. The peas are then moved on to the finishing department, where a variety of different seasonings are added. In the third department, the canning department, the peas are then poured into half-litre tins and then sent for packing and despatch.

The following statements relate to this manufacturer.

(i)      The cooking department is a cost centre.

(ii)     A suitable cost unit for the seasoning department is a one-half litre tin of peas.

(iii)    The canning department is a profit centre.

Which of the statements is/are correct?

• (i) only

• (i) and (ii) only

• (i) and (iii) only

• (ii) and(iii) only

An organisation manufactures a single product. The total cost of making 4,000 units is $20,000 and the total cost of making 20,000 units is $40,000. Within this range of activity the total fixed costs remain unchanged.

What is the variable cost per unit of the product?

A company has the following total costs at three activity levels.

Units of activity 16,000 --> cost: 612,000

Unit of activity 24,000 --> cost: 750,000

Unit of activity 30,000 --> cost: 822,000

The variable cost per unit is constant at all levels of activity, but there is a step increase of 10% in fixed costs when the activity level is more than 22,000 units.

What is the total cost at an activity level of 20,000 units?

The purchase price of an inventory item is $25 per unit. In each three-month period the usage of the item is 20,000 units. The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is $20.

What is the Economic Order quantity for the inventory item to the nearest whole unit?

A company uses the Economic Order Quantity (EOQ) model to establish reorder quantities. The following information relates to the forthcoming period:

Order costs = $25 per order

Holding costs — 10% of purchase price — $4/unit

Annual demand -20,000 units

Purchase price — $40 per unit

EOQ = 500 units

No safety inventory is held.

What are the total annual costs of inventory (i.e. the total purchase cost plus total order cost plus total holding cost)?

A company determines its order quantity for a raw material by using the Economic Order Quantity (EOQ) model.

What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material?

EOQ -- Total annual holding cost

• Higher -- Lower

• Higher-- Higher

• Lower-- Higher

• Lower-- Lower

Data relating to a particular stores item is as follows:

Average daily usage 400 units

Maximum daily usage 520 units

Minimum daily usage 180 units

Lead lime for replenishment of inventory 10 to 15 days

Reorder quantity 8,000 units

What is the reorder level (in units) which avoids stock-outs?

A company is experiencing a very busy period in the build up to its peak sales period.

Its direct production workers are booking lots of overtime hours with their supervisors. The company pays an hourly premium of 50% on overtime hours over the normal rate.

How should these hours be treated?

• All of the overtime cost as a direct cost

• None of the overtime cost as a direct cost

• All of the normal rate as direct cost and the premium as production overhead

• All of the normal rate as direct cost and the premium as administration overhead