🧮 Management and Governmental Accounting

1. Which of the following statements about management accounting information is correct?

1. It must follow IFRS as endorsed in KSA and be audited each year
2. It is limited to past transactions already recorded in the ledger
3. It is filed with ZATCA together with the annual zakat return
4. It serves internal decision makers and may include forecasts

Management accounting supplies information for internal planning, control and decision making, so it can include budgets and forecasts. It is not bound by IFRS as endorsed in KSA, which governs published financial statements, and it is not audited as such. It is not filed with ZATCA, which receives tax and zakat returns, and it is not restricted to historical ledger data.

2. An opportunity cost is best defined as:

1. The benefit forgone by choosing one course over the next best one
2. A past cost that cannot be recovered whatever the decision taken
3. A cost that varies in direct proportion to the level of output
4. A cost that can be traced directly to a single product or job

An opportunity cost is the benefit forgone when one course of action is chosen instead of the next best alternative. A past cost that cannot be recovered is a sunk cost, a cost that moves in proportion to output is a variable cost, and a cost traceable to one product is a direct cost.

3. Which of the following is NOT a product cost under absorption costing?

1. Salary of the factory supervisor
2. Wages of assembly-line workers
3. Depreciation of factory machinery
4. Commission paid to sales staff

Under absorption costing, product costs are direct materials, direct labour and manufacturing overhead, whether variable or fixed. Assembly-line wages are direct labour, factory machine depreciation and the factory supervisor's salary are manufacturing overhead, so all three are inventoried. Sales commission is a selling expense, a period cost charged to profit or loss when incurred.

4. Company X applies factory overhead using a predetermined rate based on direct labour hours. For the year: - Budgeted overhead: SAR 396,000 - Budgeted direct labour hours: 33,000; budgeted machine hours: 18,000 - Actual overhead incurred: SAR 421,400 - Actual direct labour hours: 34,250; actual machine hours: 18,600 At year end, factory overhead is under-applied by:

1. SAR 10,400
2. SAR 12,200
3. SAR 15,000
4. SAR 25,400

The predetermined rate is 396,000 / 33,000 = SAR 12 per direct labour hour, so overhead applied is 12 x 34,250 = SAR 411,000, which is SAR 10,400 below the actual SAR 421,400. SAR 12,200 applies a machine-hour rate (SAR 22) although the base is labour hours, SAR 15,000 compares applied with budgeted overhead, and SAR 25,400 compares actual with budgeted overhead.

5. Company X produced 5,400 units and sold 6,900 units in the year. Net income under absorption costing was SAR 183,600. Fixed manufacturing overhead is SAR 37,800 per year, applied on a base of 5,400 units, and the opening inventory was costed at the same fixed rate. Net income under variable costing was:

1. SAR 173,100
2. SAR 183,600
3. SAR 194,100
4. SAR 231,900

The fixed rate is 37,800 / 5,400 = SAR 7 per unit. Sales exceeded production by 1,500 units, so absorption costing released 1,500 x 7 = SAR 10,500 of fixed overhead from opening inventory, which lowers its income; variable costing income is therefore 183,600 + 10,500 = SAR 194,100. SAR 173,100 subtracts the difference, SAR 183,600 assumes no difference, and SAR 231,900 adds 6,900 x 7 for all units sold.

6. Company X uses job order costing for Job 205: - Direct materials: SAR 18,000 - Direct labour: 120 hours at SAR 40 per hour - Overhead applied: SAR 25 per direct labour hour Jobs are priced at total manufacturing cost plus a 25% mark-up on cost. The price quoted for Job 205 is:

1. SAR 25,800
2. SAR 28,500
3. SAR 32,250
4. SAR 34,400

Manufacturing cost is 18,000 + (120 x 40) + (120 x 25) = 18,000 + 4,800 + 3,000 = SAR 25,800, and a mark-up of 25% on cost gives 25,800 x 1.25 = SAR 32,250. SAR 25,800 omits the mark-up, SAR 28,500 leaves out applied overhead, and SAR 34,400 treats 25% as a margin on the selling price (25,800 / 0.75).

7. Company X uses weighted-average process costing in its Assembly department. Materials are added at the start and conversion costs are incurred evenly. Data for the month: - Units: beginning work in process 2,000 (60% complete for conversion); started 18,000; completed and transferred 17,000; ending work in process 3,000 (40% complete for conversion) - Beginning work in process cost: materials SAR 8,600; conversion SAR 3,820 - Current cost: materials SAR 86,400; conversion SAR 79,900 The cost assigned to ending work in process is:

1. SAR 14,250
2. SAR 19,770
3. SAR 20,040
4. SAR 28,050

Equivalent units are 20,000 for materials and 17,000 + (3,000 x 40%) = 18,200 for conversion. Costs per equivalent unit are 95,000 / 20,000 = SAR 4.75 and 83,720 / 18,200 = SAR 4.60, so ending work in process costs (3,000 x 4.75) + (1,200 x 4.60) = SAR 19,770. SAR 20,040 applies first-in, first-out unit costs (SAR 4.80 and SAR 4.70), SAR 14,250 counts materials only, and SAR 28,050 treats the units as fully converted.

8. Company Y uses first-in, first-out process costing. Conversion cost data for the month: - Beginning work in process: 3,600 units, 35% complete - Started in the month: 24,400 units - Completed and transferred out: 23,000 units - Ending work in process: 5,000 units, 55% complete - Conversion cost added this month: SAR 159,185 The conversion cost per equivalent unit is:

1. SAR 5.89
2. SAR 6.18
3. SAR 6.50
4. SAR 7.19

First-in, first-out equivalent units for conversion are the 2,340 needed to finish beginning work in process (3,600 x 65%), 19,400 units started and completed, and 2,750 in ending work in process (5,000 x 55%), a total of 24,490. Cost per equivalent unit is 159,185 / 24,490 = SAR 6.50. SAR 6.18 divides current cost by the 25,750 weighted-average equivalent units, SAR 7.19 deducts all 3,600 beginning units from that total instead of their 1,260 equivalent units (22,150), and SAR 5.89 adds the 1,260 opening equivalent units to it instead of deducting them (27,010).

9. In a process, 12,500 kg of material were put in and the total cost was SAR 96,600. The normal loss is 8% of input and has no scrap value. Good output was 10,900 kg, so there was an abnormal loss. To the nearest riyal, the cost of the abnormal loss charged to profit or loss is:

1. SAR 4,637
2. SAR 5,040
3. SAR 8,400
4. SAR 13,440

Normal loss is 1,000 kg, so the expected good output is 11,500 kg and the cost per expected good kg is 96,600 / 11,500 = SAR 8.40. The abnormal loss is 12,500 - 1,000 - 10,900 = 600 kg, valued at 600 x 8.40 = SAR 5,040 and written off, as paragraph 16 of IAS 2 excludes abnormal waste from inventory cost. SAR 4,637 spreads cost over all input, SAR 8,400 values the normal loss, and SAR 13,440 values the whole loss of 1,600 kg.

10. Company Y builds a bridge under a contract priced at SAR 2,860,000. Costs incurred to date are SAR 1,210,000 and the estimated further cost to complete is SAR 990,000. Progress is measured by the cost incurred as a proportion of total estimated cost. To the nearest riyal, the profit recognised to date is:

1. SAR 279,231
2. SAR 297,000
3. SAR 363,000
4. SAR 660,000

Total estimated cost is 1,210,000 + 990,000 = SAR 2,200,000, so the expected profit is SAR 660,000 and progress is 1,210,000 / 2,200,000 = 55%. The profit recognised to date is 55% x 660,000 = SAR 363,000. SAR 660,000 is the whole expected profit, SAR 279,231 measures progress against the contract price (42.3%), and SAR 297,000 applies the 45% still to be done.

11. A joint process costing SAR 345,000 yields product X (8,000 kg) and product Y (17,000 kg). Product X is processed further at SAR 42,000 and sold for SAR 210,000. Product Y is sold at the split-off point for SAR 252,000. Using the net realisable value method, the joint cost allocated to product X is:

1. SAR 110,400
2. SAR 138,000
3. SAR 156,818
4. SAR 172,500

The net realisable value of X is 210,000 - 42,000 = SAR 168,000 and that of Y is SAR 252,000, so X bears 168,000 / 420,000 = 40% of SAR 345,000 = SAR 138,000. SAR 110,400 follows physical units, SAR 156,818 uses final sales values without deducting the separable cost, and SAR 172,500 splits the joint cost equally.

12. Company X uses backflush costing with the trigger point at the completion of finished goods. The standard cost is SAR 190 per unit (materials SAR 120; conversion SAR 70). During the month 5,000 units were completed and 4,800 units were sold, and actual conversion cost was SAR 340,000. The conversion cost variance is closed to cost of goods sold. Cost of goods sold after this adjustment is:

1. SAR 902,000
2. SAR 912,000
3. SAR 922,000
4. SAR 950,000

Conversion allocated at completion is 5,000 x 70 = SAR 350,000 against actual SAR 340,000, so SAR 10,000 is over-allocated. Cost of goods sold at standard is 4,800 x 190 = SAR 912,000, reduced by the over-allocation to SAR 902,000. SAR 912,000 ignores the variance, SAR 922,000 adds it instead of deducting it, and SAR 950,000 values the 5,000 units completed rather than the 4,800 units sold.

13. In process costing, where losses are detected at the end of the process, the cost of a normal loss is treated as:

1. an expense of the period in which the loss occurs
2. a cost held in a separate loss account until later
3. a cost assigned to units still in process at period end
4. a cost added to the cost of the good units completed

A normal loss is expected under efficient operation, so its cost is absorbed by the good units produced and raises their unit cost; paragraph 16 of IAS 2 excludes abnormal waste, not normal waste, from the cost of inventories. Writing the cost off as a period expense is the treatment of an abnormal loss. Holding it in a separate account has no support in costing practice, and units still in process have not reached the end-of-process point where the loss is detected, so they bear none of it.

14. Which of the following statements about an abnormal loss in a process is NOT correct?

1. It is valued at the same unit cost as the good output
2. It arises beyond the loss expected under efficient operation
3. Its cost is charged to profit or loss for the period
4. Its cost is spread over the good units as product cost

An abnormal loss exceeds the loss expected in efficient operation and is valued at the same unit cost as good output. Paragraph 16 of IAS 2 excludes abnormal waste from inventory cost, so its cost is charged to profit or loss and is not spread over the good units. The statement that it becomes part of product cost is therefore the incorrect one.

15. Company X's joint process yields product M. M can be sold at split-off for SAR 40 per kg, or processed further at a cost of SAR 12 per kg and sold for SAR 58 per kg. The joint cost allocated to M is SAR 30 per kg. In deciding whether to process M further, the amount that should be ignored is:

1. the further processing cost of SAR 12
2. the allocated joint cost of SAR 30
3. the split-off value of SAR 40
4. the final selling price of SAR 58

The joint cost is incurred whichever choice is made, so it is a sunk cost and irrelevant to the decision. The relevant comparison is the incremental revenue of 58 - 40 = SAR 18 against the incremental cost of SAR 12, which favours further processing. The processing cost, the split-off value and the final price all differ between the two alternatives.

16. Company Y has adopted just-in-time production and backflush costing, with the trigger point set at the completion of finished goods. Which of the following describes its accounting?

1. Every purchase is tracked through a separate work-in-process account
2. Large raw material stocks are kept to protect against supply delays
3. Production costs are first recorded when the finished goods are sold
4. Standard costs move to finished goods when the units are completed

With a completion trigger, backflush costing records the standard cost of finished units when they are completed, and no work-in-process account follows each stage of production. Large raw material stocks contradict just-in-time purchasing, which keeps stocks minimal. Recording production costs for the first time when the goods are sold is the treatment where the trigger point is the sale, not the completion, of finished goods.

17. Equivalent units of production are best described as:

1. the whole units equal to the work done on partly completed units
2. the units started in the period, whether or not they are finished
3. the units finished in the period and moved to the next department
4. the units left in ending work in process, valued at their cost

Equivalent units express partly completed work as the number of whole units that the same effort would have produced, for example 3,000 units 40% complete equal 1,200 units. Units started count physical units regardless of stage, units transferred out are only the completed units, and valuing ending work in process is the next step that uses equivalent units.

18. A process yields a main product and a by-product of low sales value. Which of the following is an accepted accounting treatment of the by-product?

1. Its share of joint cost is allocated on physical units
2. It is valued at the selling price of the main product
3. Its net realisable value is deducted from the joint cost
4. It carries the full production cost of the main product

A by-product has a low value compared with the main product, so it is not allocated a share of joint cost. One accepted treatment deducts its net realisable value from the joint cost of the main product; the other recognises it as other income when it is sold. Allocating joint cost on physical units is a joint product method, and valuing the by-product at the main product's selling price or at its full production cost overstates its worth.

19. Company X buys a component with annual demand of 14,400 units, an ordering cost of SAR 50 per order and a holding cost of SAR 4 per unit per year. The economic order quantity (EOQ) is:

1. 424 units
2. 600 units
3. 849 units
4. 1,200 units

The EOQ is the square root of (2 x demand x ordering cost / holding cost) = square root of (2 x 14,400 x 50 / 4) = square root of 360,000 = 600 units. 424 omits the factor 2, 849 halves the holding cost, and 1,200 leaves the holding cost out of the denominator.

20. Company Y budgets 3 kg of material per unit at a standard price of SAR 8 per kg. It made 5,000 units, bought 16,000 kg at SAR 8.25 per kg and used 15,600 kg. The direct materials usage variance is:

1. SAR 3,900 unfavourable
2. SAR 4,000 unfavourable
3. SAR 4,800 unfavourable
4. SAR 4,950 unfavourable

Standard usage for 5,000 units is 15,000 kg, so 600 kg were used in excess and the variance is valued at the standard price: 600 x 8 = SAR 4,800 unfavourable. SAR 4,950 values the excess at the actual price, while SAR 3,900 and SAR 4,000 are price variances on the quantity used and the quantity bought.

21. Company X sells products A and B in a constant mix of 3 units of A for each unit of B. Fixed costs are SAR 355,200. Product A sells for SAR 64 with a variable cost of SAR 41; product B sells for SAR 112 with a variable cost of SAR 70. To the nearest unit, the total break-even point is:

1. 8,457 units
2. 9,600 units
3. 10,929 units
4. 12,800 units

One package of 3 A and 1 B has a contribution margin of (3 x 23) + 42 = SAR 111, so break-even is 355,200 / 111 = 3,200 packages, or 9,600 units of A and 3,200 of B, a total of 12,800 units. 10,929 uses the simple average margin of SAR 32.50, 8,457 uses product B alone, and 9,600 counts just the units of A.

22. Company X makes 36,000 units of a component each year at a variable cost of SAR 27 per unit. Fixed overhead of SAR 11 per unit is allocated to it, and SAR 144,000 of that fixed overhead would be avoided if production stopped. A supplier offers the component at SAR 30 per unit. If the company buys instead of making, annual profit will increase by:

1. SAR 36,000
2. SAR 108,000
3. SAR 144,000
4. SAR 288,000

The relevant cost of making is the variable cost plus the avoidable fixed overhead: (27 x 36,000) + 144,000 = SAR 1,116,000, against a purchase cost of 30 x 36,000 = SAR 1,080,000, so buying adds SAR 36,000 to profit. SAR 108,000 is the purchase premium over variable cost, which ignores the avoidable fixed overhead, SAR 288,000 compares with the full cost of SAR 38, and SAR 144,000 counts the fixed saving without the higher purchase price.

23. Company Y uses 40 units of an item per day. The lead time is 12 days and the safety stock is 150 units. The reorder point is:

1. 190 units
2. 330 units
3. 480 units
4. 630 units

The reorder point is usage during lead time plus safety stock: (40 x 12) + 150 = 630 units. 480 units omits the safety stock, 330 subtracts it, and 190 adds daily usage to the safety stock without applying the lead time.

24. Company X applies activity-based costing to products P and Q. Setup costs are SAR 138,000 (driver: 46 setups) and inspection costs are SAR 76,500 (driver: 850 inspection hours). Product Q uses 28 setups and 340 inspection hours, and 9,550 units are made. Machine hours are 3,300 for P and 5,200 for Q. The overhead per unit of Q under activity-based costing is:

1. SAR 8.80
2. SAR 12.00
3. SAR 13.74
4. SAR 22.46

The rates are 138,000 / 46 = SAR 3,000 per setup and 76,500 / 850 = SAR 90 per inspection hour. Q receives (28 x 3,000) + (340 x 90) = SAR 114,600, or SAR 12.00 per unit. SAR 8.80 charges only the setup cost (84,000 / 9,550) and omits the inspection pool, SAR 13.74 allocates all SAR 214,500 by machine hours as a traditional plant-wide rate would, and SAR 22.46 spreads all overhead over the units of Q.

25. Under target costing, the target cost of a new product is set by:

1. adding a mark-up to the expected full cost of the product
2. deducting the profit required from the target price
3. using last year's standard cost plus an inflation factor
4. dividing budgeted overhead by the expected output units

Target costing starts from the price the market will accept and deducts the required profit, which gives the cost the product must achieve. Adding a mark-up to expected cost is cost-plus pricing, and the other approaches start from internal costs rather than from the market price.

26. In an activity-based costing hierarchy, the cost of setting up machines for each production run is classified as:

1. a facility-sustaining cost
2. a unit-level production cost
3. a product-sustaining cost
4. a batch-level activity cost

Setup cost is incurred each time a batch is run and varies with the number of batches, so it is a batch-level cost. Unit-level costs vary with each unit made, product-sustaining costs support a product line such as design, and facility-sustaining costs support the whole site, such as building rent.

27. Division A of Company X has idle capacity. It makes an intermediate product with a variable cost of SAR 30 per unit and fixed overhead of SAR 12 per unit. The market price is SAR 50 per unit and Division B wants to buy internally. The minimum transfer price that Division A should accept is:

1. SAR 12
2. SAR 30
3. SAR 42
4. SAR 50

The minimum transfer price is the variable cost plus any contribution lost by supplying internally. With idle capacity no outside sale is given up, so the minimum is the variable cost of SAR 30. SAR 42 is the full cost, SAR 50 is the market price that applies when capacity is fully used, and SAR 12 is merely the fixed overhead per unit.

28. Company X is deciding whether to accept a special order that uses spare capacity. Which of the following is NOT relevant to the decision?

1. Direct materials consumed by the order
2. Extra supervision hired for this order
3. Existing factory rent allocated to it
4. Additional delivery cost for the order

Relevant costs are future cash flows that differ between accepting and rejecting the order. Direct materials, extra supervision and delivery cost are all incurred because of the order. Factory rent already exists and does not change with the order, so its allocation is irrelevant.

29. Najd Logistics Company is evaluating a machine that costs SAR 520,000 and will produce net cash inflows of SAR 220,000 at the end of each of the next 3 years, with no salvage value. The required rate of return is 10% (present value of an annuity of SAR 1 for 3 years at 10% = 2.4869). The net present value, to the nearest riyal, is:

1. SAR 27,118
2. SAR 81,830
3. SAR 140,000
4. SAR 547,118

The net present value is the present value of the inflows less the initial outlay: 220,000 x 2.4869 = SAR 547,118, and 547,118 - 520,000 = SAR 27,118, so the project earns more than the required 10%. SAR 547,118 forgets to deduct the outlay; SAR 140,000 is the undiscounted surplus (660,000 - 520,000), which ignores the time value of money; SAR 81,830 treats the inflows as received at the start of each year (547,118 x 1.10 = 601,830) instead of at the end.

30. Al-Waha Furnishings budgeted to produce 8,000 units, with variable manufacturing cost of SAR 35 per unit and fixed manufacturing cost of SAR 120,000. It produced 9,500 units; actual variable cost was SAR 345,000 and actual fixed cost SAR 112,000. The static-budget variance for total manufacturing cost is:

1. SAR 4,500 unfavourable
2. SAR 8,000 favourable
3. SAR 52,500 unfavourable
4. SAR 57,000 unfavourable

The static budget is 8,000 x 35 + 120,000 = SAR 400,000 and actual cost is 345,000 + 112,000 = SAR 457,000, so the static-budget variance is SAR 57,000 unfavourable. SAR 4,500 is the flexible-budget variance (457,000 - 452,500), which already adjusts the budget to 9,500 units; SAR 52,500 is the volume effect (452,500 - 400,000) taken alone; SAR 8,000 favourable looks at fixed cost only (112,000 against 120,000).

31. Company X has a bottleneck machine with 3,000 hours available per month. Product P1 sells for SAR 95, has direct materials of SAR 55 and uses 1 bottleneck hour; product P2 sells for SAR 150, has direct materials of SAR 90 and uses 2 bottleneck hours. Monthly demand is 2,000 units of P1 and 900 units of P2. Throughput is sales less direct materials. The maximum total throughput per month is:

1. SAR 80,000
2. SAR 102,000
3. SAR 110,000
4. SAR 134,000

Throughput per bottleneck hour is SAR 40 for P1 (95 - 55) and SAR 30 for P2 ((150 - 90) / 2), so P1 is made first: 2,000 units use 2,000 hours and the remaining 1,000 hours give 500 units of P2, so 2,000 x 40 + 500 x 60 = SAR 110,000. SAR 102,000 ranks by throughput per unit and makes P2 first; SAR 134,000 ignores the bottleneck; SAR 80,000 stops once P1 demand is met and leaves bottleneck capacity unused.

32. Under the balanced scorecard, a measure such as annual hours of employee training belongs to the:

1. Learning and growth perspective
2. Financial performance perspective
3. Customer relationship perspective
4. Internal business process perspective

Training hours measure the capabilities of people and systems, which is the learning and growth perspective of the balanced scorecard. The financial perspective measures results such as profitability; the customer perspective measures satisfaction and retention; the internal business process perspective measures cycle time and defect rates.

33. In preparing a master budget, the budgeted production quantity for a product is equal to:

1. Budgeted sales plus desired ending finished goods less beginning finished goods
2. Budgeted sales plus beginning finished goods less desired ending finished goods
3. Budgeted sales less desired ending finished goods less beginning finished goods
4. Budgeted sales plus desired ending finished goods plus beginning finished goods

The production budget must cover the units to be sold and the units needed to build the desired ending stock, less the units already available in the opening stock. Reversing the two stock figures, deducting both, or adding both gives a quantity that is too low or too high for the sales budget.

34. In a cost-of-quality framework, appraisal costs are the costs of:

1. Training and process design aimed at stopping defects arising
2. Reworking units found to be defective before they ship
3. Inspecting and testing units to detect defects before delivery
4. Warranty repairs and returns after delivery to customers

Appraisal costs are incurred to detect nonconforming units, for example inspection and testing before delivery. Training and process design are prevention costs; rework of units found defective before shipment is an internal failure cost; warranty repairs and returns after delivery are external failure costs.

35. Ms Noura reviews Customer C of Al-Waha Furnishings. Sales to C are SAR 360,000 and the cost of goods sold is SAR 255,000. Order handling and delivery costs traceable to C are SAR 72,000 and would disappear if C were dropped. General overhead of SAR 45,000 is allocated to C and would continue. If Customer C is dropped, operating income will:

1. Increase by SAR 12,000
2. Decrease by SAR 33,000
3. Decrease by SAR 60,000
4. Decrease by SAR 105,000

Only avoidable costs matter: C contributes 360,000 - 255,000 - 72,000 = SAR 33,000 after its traceable costs, so dropping C reduces operating income by that amount. The apparent increase of SAR 12,000 comes from charging the allocated overhead, which continues anyway; SAR 60,000 deducts the allocated overhead instead of the avoidable order handling and delivery costs; SAR 105,000 is the gross margin alone, which ignores the SAR 72,000 that would be saved.