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Question # 1
A company currently absorbs production overheads based on labor hours. The overheads
absorbed by the two products that are made, L and M, are $4 per unit and $10 per unit
respectively. These were based on the budgeted overheads of $7,000 and budgeted labor hours of
1,750. The budgeted output was 500 units of each product.The company is investigating the use of activity based costing (ABC). Analysis has shown that
the total production overheads of $7,000 are made up of $4,000 for set up costs and $3,000 for
inspection costs. The cost driver for set up costs is the number of set ups and for inspection costs
it is the number of inspections. The cost driver rate for set ups is $160 per set up. Product L would need 5 production runs. Both
types of product would need 1 set up for each production run.
Product L would need 2 inspections for each production run. Product M would need 1 inspection
per production run. The products are made in the same department and use the same equipment and staff but they are
produced separately. Which of the following statements are correct?
Select ALL that apply.
A. The current production overhead absorption rate is $4.00 per hour.
B. The current production overhead absorption rate is $500 per hour.
C. If ABC was used, set up costs per unit of Product L would be $1.60.
D. If ABC was used, set up costs per unit of Product M would be $4.00.
E. If ABC was used, inspection costs per unit of Product L would be $4.00.
F. If ABC was used, inspection costs per unit of Product M would be $4.00.
Question # 2
If transfer prices are set at variable costs, the supplying division does not cover its fixed costs.
Which of the following does NOT resolve this problem?
A. Each division can be given a share of the overall contribution earned by the organization.
B. A system of dual pricing can be adopted.
C. Reduce the level of fixed costs.
D. Central management can impose a range within which the transfer price should fall.
Question # 3
Which TWO of the following are reasons why cost-based approaches to transfer pricing are often
used in practice?
A. The buying division will want to maximize its profits.
B. The transferring division will want to maximize its profits.
C. Because the external market is imperfect.
D. Because there is often no external market for the product that is being transferred.
E. The approach allows the organization to cover all the costs.
Question # 4
Which TWO of the following expressions are correct?
A. 1 + money rate = (1 + real rate) x (1 + inflation rate)
B. 1 + real rate = (1 + money rate) / (1 + inflation rate)
C. 1 + real rate = (1 + inflation rate) / (1 + money rate)
D. 1 + money rate = (1 + inflation rate) / (1 + real rate)
E. 1 + inflation rate = (1 + money rate) x (1 + real rate)
Question # 5
A company has a 31 December year end and pays corporation tax at a rate of 30%. Corporation
tax is payable 12 months after the end of the year to which the cash flows relate. The company
can claim tax allowable depreciation at a rate of 25% reducing balance. It pays $1 million for a
machine on 31 December 20X4. The company's cost of capital is 10%.
What is the present value of the benefit of the first portion of tax allowable depreciation?
A. $250,000
B. $227,500
C. $75,000
D. $68,175
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