AAT LEVEL 4: Decision & control Questions and Answers 2023/2024
What can the costs of producing a unit be used for? ANSW - - setting selling prices
- valuing items of inventory
- identifying ways to reduce costs
- setting cost targets for production staff and managers
- using the cost targets set to review and improve actual performance
What are the 3 ways costs can be classified by? ANSW - Nature, function, behaviour
What is a direct cost? ANSW - Something that is traceable to a specific unit of
production
Give 3 examples of an indirect cost ANSW - - factory rent
- electricity to run machinery
- admin expenses
What is a cost card? ANSW - Summary of the costs involved in producing a unit of a
product
What is a cost unit? ANSW - A cost unit is a product or service for which costs are
being allocated and gathered together in a cost card
What is a cost centre? ANSW - A division or department where costs can be allocated
or gathered together
What is a revenue centre? ANSW - Departments where managers only control
revenues
What is a profit centre? ANSW - Departments where managers control both revenues
and costs and so can be held accountable for the overall profits generated by their
department
What is an investment centre? ANSW - Departments where managers control
revenues, costs and also the level of capital invested and so are responsible for
ensuring a satisfactory return on that investment
What is a variable cost? ANSW - Those costs that vary with the volume of production
Total variable cost (formula) ANSW - Variable cost per unit x budgeted production
volume
What is a fixed cost? ANSW - A cost that does not vary with the volume of production
but stays the same regardless of how many units are produced
, What are stepped fixed costs? ANSW - A cost that will be fixed for a certain level of
activity but then will increase when a certain point is reached
What is a semi-variable cost? ANSW - A cost that has both a fixed element & variable
element
Total cost (semi-variable, formula) ANSW - Fixed cost + (variable cost per unit x
production volume)
What costs do absorption costing take into account? ANSW - Variable & fixed
OAR 'per unit' (formula) ANSW - Production overhead / number of units made
OAR 'per labour hour' ANSW - Production overhead / labour hours worked
OAR 'per machine hour' ANSW - Production overhead / machine hours worked
What costs do marginal costing take into account? ANSW - Variable
Contribution (formula) ANSW - Selling price - variable costs
Give 4 advantages of marginal costing over absorption costing ANSW - - simpler, as
does not involved any under/over absorption issues
- suitable for short term decision making (any activity with a positive contribution should
be undertaken)
- treats fixed costs as they behave; 'period costs' rarher than 'product costs'
- profit is influenced by sales and not by production
Give 3 disadvantages of marginal costing over absorption costing ANSW - - does not
comply with IAS 2 so cannot be used in year-end financial statements
- fixed costs are still incurred by the business, so in the long term they should not be
ignored
- all costs have to be split between fixed and variable elements (perhaps using the high-
low method)
What is activity based costing? ANSW - A form of absorption costing where the
overheads of a particular cost centre are split into groups of overheads that behave in a
similar way
Give advantages of ABC ANSW - - overhead absorption into units is based on their
use of resources
- enables more accurate costing information
- easy to see where high levels of cost occur and their causes which will help to control
them to improve their profit
- encourages improvement in processes by considering how the business can operate
more efficiently
What can the costs of producing a unit be used for? ANSW - - setting selling prices
- valuing items of inventory
- identifying ways to reduce costs
- setting cost targets for production staff and managers
- using the cost targets set to review and improve actual performance
What are the 3 ways costs can be classified by? ANSW - Nature, function, behaviour
What is a direct cost? ANSW - Something that is traceable to a specific unit of
production
Give 3 examples of an indirect cost ANSW - - factory rent
- electricity to run machinery
- admin expenses
What is a cost card? ANSW - Summary of the costs involved in producing a unit of a
product
What is a cost unit? ANSW - A cost unit is a product or service for which costs are
being allocated and gathered together in a cost card
What is a cost centre? ANSW - A division or department where costs can be allocated
or gathered together
What is a revenue centre? ANSW - Departments where managers only control
revenues
What is a profit centre? ANSW - Departments where managers control both revenues
and costs and so can be held accountable for the overall profits generated by their
department
What is an investment centre? ANSW - Departments where managers control
revenues, costs and also the level of capital invested and so are responsible for
ensuring a satisfactory return on that investment
What is a variable cost? ANSW - Those costs that vary with the volume of production
Total variable cost (formula) ANSW - Variable cost per unit x budgeted production
volume
What is a fixed cost? ANSW - A cost that does not vary with the volume of production
but stays the same regardless of how many units are produced
, What are stepped fixed costs? ANSW - A cost that will be fixed for a certain level of
activity but then will increase when a certain point is reached
What is a semi-variable cost? ANSW - A cost that has both a fixed element & variable
element
Total cost (semi-variable, formula) ANSW - Fixed cost + (variable cost per unit x
production volume)
What costs do absorption costing take into account? ANSW - Variable & fixed
OAR 'per unit' (formula) ANSW - Production overhead / number of units made
OAR 'per labour hour' ANSW - Production overhead / labour hours worked
OAR 'per machine hour' ANSW - Production overhead / machine hours worked
What costs do marginal costing take into account? ANSW - Variable
Contribution (formula) ANSW - Selling price - variable costs
Give 4 advantages of marginal costing over absorption costing ANSW - - simpler, as
does not involved any under/over absorption issues
- suitable for short term decision making (any activity with a positive contribution should
be undertaken)
- treats fixed costs as they behave; 'period costs' rarher than 'product costs'
- profit is influenced by sales and not by production
Give 3 disadvantages of marginal costing over absorption costing ANSW - - does not
comply with IAS 2 so cannot be used in year-end financial statements
- fixed costs are still incurred by the business, so in the long term they should not be
ignored
- all costs have to be split between fixed and variable elements (perhaps using the high-
low method)
What is activity based costing? ANSW - A form of absorption costing where the
overheads of a particular cost centre are split into groups of overheads that behave in a
similar way
Give advantages of ABC ANSW - - overhead absorption into units is based on their
use of resources
- enables more accurate costing information
- easy to see where high levels of cost occur and their causes which will help to control
them to improve their profit
- encourages improvement in processes by considering how the business can operate
more efficiently
