ACCA MA · Chapter 9
Service costing and alternative costing principles MCQs with Answers
11 multiple-choice questions on Service costing and alternative costing principles for ACCA MA Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is the most appropriate composite cost unit for a bus company?
- A) Bus
- B) Driver hour
- C) Passenger-kilometre
- D) Litre of fuel
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Answer: C) Passenger-kilometre
Service businesses often use a composite cost unit that combines two measures of activity. For a bus company, cost per passenger-kilometre reflects both the number of passengers carried and the distance travelled.
Question 2
A haulage lorry made three journeys in a week: 12 tonnes carried 150 km, 8 tonnes carried 200 km and 15 tonnes carried 80 km. Total costs for the week were $6,440. What is the cost per tonne-kilometre?
- A) $0.43
- B) $1.40
- C) $14.98
- D) $184.00
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Answer: B) $1.40
Tonne-km = (12 x 150) + (8 x 200) + (15 x 80) = 1,800 + 1,600 + 1,200 = 4,600. Cost per tonne-km = 6,440 / 4,600 = $1.40. Multiplying total tonnes (35) by total km (430) gives 15,050, which is wrong because each load travelled a different distance.
Question 3
Which characteristic of services means that a service cannot be stored for future use?
- A) Perishability
- B) Intangibility
- C) Heterogeneity (variability)
- D) Simultaneity (inseparability)
Show answer & explanation
Answer: A) Perishability
Perishability means a service cannot be stored: an empty seat on today's flight cannot be sold tomorrow. Intangibility means a service has no physical form, heterogeneity means quality can vary each time, and simultaneity means it is produced and consumed at the same time.
Question 4
In activity based costing, which is the most appropriate cost driver for machine set-up costs?
- A) Number of units produced
- B) Direct labour hours
- C) Floor area of the factory
- D) Number of set-ups
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Answer: D) Number of set-ups
A cost driver is the factor that causes the cost of an activity. Set-up costs depend on how many times machines are set up (usually once per batch), not on the number of units in each batch.
Question 5
A company uses activity based costing. Annual overheads are: machining $90,000 (driver: 30,000 machine hours) and set-ups $48,000 (driver: 120 set-ups). Product Z has annual output of 2,000 units, uses 1,000 machine hours and needs 20 set-ups. What is the overhead cost per unit of Z?
- A) $2.30
- B) $4.00
- C) $5.50
- D) $1.50
Show answer & explanation
Answer: C) $5.50
Cost driver rates: machining 90,000 / 30,000 = $3 per machine hour; set-ups 48,000 / 120 = $400 per set-up. Overheads for Z = (1,000 x 3) + (20 x 400) = 3,000 + 8,000 = $11,000. Per unit = 11,000 / 2,000 = $5.50. A traditional machine hour rate of 138,000 / 30,000 = $4.60 would give only 0.5 x 4.60 = $2.30, which understates the cost of this small-batch product.
Question 6
A new product will have a market selling price of $80. The company requires a profit margin of 25% of the selling price. The current estimated cost of the product is $66. What is the cost gap?
- A) $6
- B) $2
- C) $14
- D) $20
Show answer & explanation
Answer: A) $6
Target cost = selling price - required profit = 80 - (25% x 80) = $60. Cost gap = estimated cost - target cost = 66 - 60 = $6. Treating the 25% as a mark-up on cost would give a target cost of 80 / 1.25 = $64 and a gap of $2.
Question 7
Which of the following best describes life-cycle costing?
- A) Calculating the cost of a product based only on the production costs of the current year
- B) Setting a cost by deducting a required profit from a market-based price
- C) Charging overheads to products based on the activities that cause them
- D) Recording and monitoring all the costs of a product over its whole life, from design and development through to withdrawal from the market
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Answer: D) Recording and monitoring all the costs of a product over its whole life, from design and development through to withdrawal from the market
Life-cycle costing tracks costs over a product's entire life, including pre-production costs such as research and design, and end-of-life costs such as decommissioning. The other options describe traditional annual costing, target costing and activity based costing.
Question 8
Under a total quality management approach, how is the cost of inspecting raw materials when they arrive classified?
- A) Prevention cost
- B) Internal failure cost
- C) Appraisal cost
- D) External failure cost
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Answer: C) Appraisal cost
Appraisal costs are incurred to check whether output and inputs meet quality standards, for example inspection and testing. Prevention costs stop defects happening in the first place (such as training). Failure costs arise after a defect has occurred, either before delivery (internal) or after (external).
Question 9
Which of the following is a key principle of total quality management (TQM)?
- A) Accepting a planned level of defects as normal
- B) Making the quality control department solely responsible for quality
- C) Continuous improvement, with the aim of getting things right first time
- D) Relying mainly on inspection of finished goods to find defects
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Answer: C) Continuous improvement, with the aim of getting things right first time
TQM aims for zero defects through continuous improvement and getting it right first time. Quality is the responsibility of every employee, and the focus is on prevention rather than finding defects by inspection after they have occurred.
Question 10
In which situation is activity based costing most likely to produce product costs that are very different from those under traditional absorption costing?
- A) Overheads are a large proportion of total cost, and products differ greatly in their use of support activities such as set-ups
- B) Overheads are small, and all products are made in similar batch sizes
- C) The company makes only one product
- D) Overheads vary mainly with direct labour hours
Show answer & explanation
Answer: A) Overheads are a large proportion of total cost, and products differ greatly in their use of support activities such as set-ups
ABC gives very different results when overheads are significant and are driven by factors other than volume, for example set-ups, orders or inspections. Products that use these activities differently, such as small-batch versus large-batch products, then receive very different overhead charges. With a single product or volume-driven overheads, both methods give similar results.
Question 11
A product is expected to sell 100,000 units over its life. Expected costs are: design and development $400,000, variable production cost $12 per unit, marketing $150,000 and decommissioning $50,000. What is the life-cycle cost per unit?
- A) $12.00
- B) $14.00
- C) $17.50
- D) $18.00
Show answer & explanation
Answer: D) $18.00
Total life-cycle cost = 400,000 + (100,000 x 12) + 150,000 + 50,000 = $1,800,000. Per unit = 1,800,000 / 100,000 = $18.00. Leaving out the design costs gives $14.00, and leaving out decommissioning gives $17.50.