Financial Management Quiz

A special contract requires 640 units of component T. The inventory of 280 units of component T cost $0.20 per unit but the component is not currently used by the company. The current market price of component T is $0.24 per unit but the inventory could be sold for $0.15 per unit. The relevant cost of the units of component T required for the special contract is:

• $100.40

• $128.40

• $142.40

• $153.60

Answer explanation

The relevant cost is calculated as (640 units * $0.24) - (280 units * $0.20) = $153.60 - $56 = $97.60. However, the inventory can be sold for $0.15 per unit, so the net relevant cost is $97.60 + (280 units * $0.15) = $128.40.

Which of the following statements about expected value is NOT correct?

• True

• False

Answer explanation

The correct answer is False because all statements about expected value are correct.

A company's initial budget for month 3 includes sales of $100,000, a contribution to sales (C/S) ratio of 40% and fixed costs of $20,000. If the budgeted sales volume in month 3 is reduced by 5% but contribution per unit, total fixed costs and sales mix are unchanged, which of the following statements, about the change to the budgeted profit or contribution in month 3 is true?

• A. The revised budgeted profit would be lower by less than 5%.

• B. The revised budgeted profit would be lower by more than 5%.

• C. The revised budgeted contribution would be lower by less than 5%.

Answer explanation

The correct choice is A because when the sales volume is reduced by 5%, the profit would decrease by less than 5% due to the fixed costs remaining the same and the contribution per unit unchanged.

Which of the following would lead to a favourable variance?

• The standard material price was set too low.

• The standard material usage was set too low.

• Actual labour cost was higher than standard.

• Labour hours worked were lower than standard.

Answer explanation

Labour hours worked being lower than standard would lead to a favourable variance as it means less labour cost incurred than expected.

FGH used to manufacture components that required raw material Q. Currently there are 80 kg of material Q in inventory. The company has no use for the material in the foreseeable future and intends to sell it for scrap. A potential new customer has asked for a price for a large order. This order would require 100 kg of material Q. The company management has decided to quote a price for this work on a relevant cost basis. What would be the relevant cost of Material Q to use in this order?

• $230

• $198

• $110

Answer explanation

The relevant cost of Material Q for the order is the cost of the additional 20 kg needed, which is $198 ($9.90 per kg x 20 kg).

Which THREE of the following are never relevant costs for short-term decision making?

• Depreciation costs

• Incremental costs

• Sunk costs

• Variable overhead costs

• Committed costs

Answer explanation

Depreciation costs, sunk costs, and committed costs are never relevant for short-term decision making as they cannot be changed or avoided in the short term.

How would the cost of recycling scrap be classified in an environmental costing system?

• Environmental internal failure cost

• Environmental appraisal cost

• Environmental prevention cost

• Environmental external failure cost

Answer explanation

The cost of recycling scrap would be classified as an Environmental internal failure cost in an environmental costing system.

What is the fixed production overhead efficiency variance?

• A. $3000F

• B. $2000F

• C. $4000F

• D. $5000F

Answer explanation

The fixed production overhead efficiency variance is calculated as Actual Hours x (Standard Rate - Actual Rate), which results in $3000F based on the given information.

Which THREE of the following statements about different costing systems are correct?

• A. Contribution per unit is the selling price per unit minus the variable costs per unit.

• B. In a period during which finished goods inventory levels fall, profit using marginal costing will be higher than if absorption costing is used.

• C. When valuing inventory using throughput costing, the direct labour cost is excluded.

• D. Over-absorption of fixed production overhead is caused by actual sales exceeding budgeted sales.

• E. Finished goods inventory will be assigned a higher value using throughput costing than absorption costing.

Answer explanation

The correct statements are A, B, and C. These choices accurately describe different costing systems and their implications.

The probability of a contribution of $68,000 is equal to the probability of a contribution of $75,000. Fixed costs are $70,000. What is the probability of a contribution of $68,000?

• A. 0.1

• B. 0.2

• C. 0.3

• D. 0.4

Answer explanation

The probability of a contribution of $68,000 is 0.4 since it is equal to the probability of a contribution of $75,000, with fixed costs of $70,000.