AQA A-Level Accounting: Absorption and activity based costing (7127) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

This set covers section 3.12, Absorption and activity based costing, of the AQA A-level Accounting (7127) specification, version 1.1 (October 2026), for A-level exams from June 2019 onwards. The course is untiered; this section is assessed on Paper 2. All businesses and figures are invented.

See the study guide and revision notes. Course hub: AQA A-level Accounting; checklist: printable checklist; quick check: diagnostics. Related: marginal costing practice.

Questions

1. Which one term describes charging a department’s overheads to products using a predetermined rate? [1]

A. Allocation B. Apportionment C. Absorption D. Attribution

2. Which one is the most suitable cost driver for a materials handling cost pool? [1]

A. Floor area of the stores B. Number of material movements C. Direct labour hours D. Units sold

3. Explain the difference between allocation and apportionment of overheads. [2]

4. Pebworth Plastics has two production departments, Moulding and Finishing. Budgeted overheads for the year:

Overhead	£
Indirect wages: Moulding £41 000, Finishing £26 400	67 400
Rent	72 000
Depreciation of machinery	40 000
Heating and lighting	16 000

	Moulding	Finishing
Floor area (m²)	2 500	1 500
Machinery cost (£)	320 000	80 000
Budgeted machine hours	16 000	2 000
Budgeted direct labour hours	3 000	13 480

(a) Prepare an overhead analysis showing the total budgeted overheads of each department. [5] (b) Calculate a suitable overhead absorption rate for each department. [2] (c) Explain why you chose a different basis for each department. [2]

5. Using your rates from question 4, a storage crate uses £6.30 of materials, 0.75 machine hours in Moulding and 0.5 direct labour hours in Finishing. Direct labour is paid £14 an hour.

(a) Calculate the total cost of one crate. [3] (b) Calculate the selling price using a 25% mark-up on cost. [1] (c) Show that a 20% margin on selling price gives the same price, and explain why. [2]

6. Actual results for Pebworth Plastics: Moulding worked 15 200 machine hours with overheads of £124 500; Finishing worked 14 200 direct labour hours with overheads of £70 300.

(a) Calculate the under- or over-absorption for each department. [4] (b) State the overall effect on profit for the year. [1] (c) Explain the Moulding result using budgeted and actual activity and spending. [2]

7. Corrin Cosmetics makes 20 000 bottles of Lotion and 5 000 bottles of Serum a year. Production overheads are £150 000, currently absorbed at a rate per direct labour hour.

Per bottle	Lotion	Serum
Direct materials	£3.20	£9.50
Direct labour at £16 an hour	0.25 hours	0.5 hours
Machine hours	0.1	0.3

The overheads have been analysed into cost pools:

Cost pool	£	Cost driver	Lotion	Serum
Machine set-ups	48 000	Set-ups	8	24
Quality testing	36 000	Tests	40	80
Purchasing	24 000	Purchase orders	50	70
Machine running	42 000	Machine hours	2 000	1 500

(a) Calculate the total cost per bottle of each product using absorption costing. [3] (b) Calculate the total cost per bottle of each product using activity based costing. [6] (c) Corrin prices at a 50% mark-up on cost. Calculate the price of each product under both methods. [2]

8. Using question 7, evaluate whether Corrin Cosmetics should adopt activity based costing. [6]

9. Hartfell Ltd makes one product. In its first year it made 12 000 units and sold 10 500 at £45. Variable production cost is £19 per unit. Fixed production overheads were £96 000, as budgeted, and are absorbed on a budgeted output of 12 000 units. Selling and administration costs were £70 000.

(a) Prepare a statement of profit for the year using marginal costing. [4] (b) Prepare a statement of profit for the year using absorption costing. [4] (c) Reconcile the two profit figures. [2] (d) Explain why a manager’s bonus based on absorption costing profit may lead to overproduction. [2]

10. A department’s overhead absorption rate is £6.50 per direct labour hour. It worked 8 400 hours and overheads were over-absorbed by £1 250. Calculate the actual overheads. [2]

11. Explain two limitations of using a single factory-wide overhead absorption rate based on direct labour hours. [4]

12. A business absorbs fixed production overheads at £6 per unit in both years. Inventory fell from 900 units to 400 units during the year. Marginal costing profit was £58 000. Calculate the absorption costing profit and explain the difference. [3]

Answers

1. C, Absorption [1] [1] Examiner insight: D (attribution) is the ABC term for charging pools to products; the two are not interchangeable.

2. B, number of material movements [1] [1] Examiner insight: A driver must cause the cost to change; floor area does not change with handling activity.

3. Allocation charges a whole overhead to the one cost centre that caused it [1]; apportionment shares an overhead that several cost centres caused, using a fair basis [1]. [2] Examiner insight: Each mark needs a definition; an example alone is not enough.

4. (a)

£	Moulding	Finishing
Indirect wages (allocated)	41 000	26 400
Rent (2 500 : 1 500)	45 000	27 000
Depreciation (320 000 : 80 000)	32 000	8 000
Heating and lighting (2 500 : 1 500)	10 000	6 000
Total	128 000	67 400

Indirect wages allocated [1]; rent [1]; depreciation [1]; heating and lighting [1]; totals £128 000 and £67 400 (grand total £195 400) [1]. (b) Moulding 128 000 ÷ 16 000 = £8.00 per machine hour [1]; Finishing 67 400 ÷ 13 480 = £5.00 per direct labour hour [1]. (c) Moulding uses far more machine hours than labour hours, so machine time drives its costs [1]; Finishing is labour-intensive, so labour hours reflect its use of resources [1]. [9] Examiner insight: Allow follow-through in (b) from an arithmetic slip in (a), not from a wrong basis.

5. (a) Labour 0.5 × 14 = £7.00 [1]; overheads (0.75 × 8.00) + (0.5 × 5.00) = 6.00 + 2.50 = £8.50 [1]; total 6.30 + 7.00 + 8.50 = £21.80 [1]. (b) 21.80 × 1.25 = £27.25 [1] (c) 21.80 ÷ 0.8 = £27.25 [1]. Profit is £5.45 either way: 5.45 is 25% of the £21.80 cost and 20% of the £27.25 price [1]. [6] Examiner insight: Applying each department’s rate to the wrong hours loses the overhead and total marks in (a).

6. (a) Moulding absorbed 15 200 × 8 = £121 600 [1]; 121 600 − 124 500 = £2 900 under-absorbed [1]. Finishing absorbed 14 200 × 5 = £71 000 [1]; 71 000 − 70 300 = £700 over-absorbed [1]. (b) Net under-absorption 2 900 − 700 = £2 200, so profit falls by £2 200 [1]. (c) Machine hours were 800 below budget, so 800 × 8 = £6 400 less was absorbed [1]; spending was £3 500 below the £128 000 budget, offsetting part: 6 400 − 3 500 = £2 900 [1]. [7] Examiner insight: Absorbed overheads must use actual hours; using budgeted hours gives zero difference from the budget and earns no credit.

7. (a) OAR = 150 000 ÷ (20 000 × 0.25 + 5 000 × 0.5) = 150 000 ÷ 7 500 = £20 per hour [1]. Lotion 3.20 + 4.00 + 5.00 = £12.20 [1]; Serum 9.50 + 8.00 + 10.00 = £27.50 [1]. (b) Driver rates: set-ups 48 000 ÷ 32 = £1 500; tests 36 000 ÷ 120 = £300 [1]; orders 24 000 ÷ 120 = £200; machine hours 42 000 ÷ 3 500 = £12 [1]. Lotion: 12 000 + 12 000 + 10 000 + 24 000 = £58 000 [1]; Serum: 36 000 + 24 000 + 14 000 + 18 000 = £92 000 [1]. Per bottle: Lotion 58 000 ÷ 20 000 = £2.90, total £10.10 [1]; Serum 92 000 ÷ 5 000 = £18.40, total £35.90 [1]. (c) Absorption: Lotion £18.30, Serum £41.25 [1]. ABC: Lotion £15.15, Serum £53.85 [1]. [11] Examiner insight: Show each driver rate; without them, one wrong figure loses the method marks too.

8. For ABC: Serum’s cost rises from £27.50 to £35.90, so at £41.25 its margin is much thinner than the absorption figures suggest [1]; Lotion is over-costed by £2.10 and may be over-priced against competitors [1]; managers could cut costs by reducing set-ups and tests on Serum [1]. Against: setting up and running ABC costs time and money [1]; pools and drivers still need judgement, so ABC costs are estimates too [1]. Judgement: adopt ABC, because the gap is large for both products and pricing decisions depend on it [1]. [6] Examiner insight: Evaluation needs points on both sides using Corrin’s figures, then a decision.

9. (a) Marginal costing:

	£
Revenue (10 500 × 45)	472 500
Variable cost of production (12 000 × 19)	228 000
Less closing inventory (1 500 × 19)	(28 500)
Variable cost of sales	199 500
Contribution	273 000
Fixed production overheads	(96 000)
Selling and administration	(70 000)
Profit	107 000

Revenue [1]; closing inventory at £19 [1]; contribution £273 000 [1]; profit £107 000 [1]. (b) OAR 96 000 ÷ 12 000 = £8, full cost £27 [1]. Cost of production 324 000, less closing inventory 1 500 × 27 = 40 500 [1], cost of sales 283 500, gross profit 189 000 [1]; less 70 000 = £119 000 [1]. (c) Inventory rose by 1 500 units, carrying 1 500 × 8 = £12 000 of fixed overheads forward [1]; 107 000 + 12 000 = £119 000 [1]. (d) Every extra unit made but not sold carries £8 of fixed overhead into inventory [1], so profit and the bonus rise without any extra sales [1]. [12] Examiner insight: Charging fixed production overheads again in the absorption statement double-counts them and loses the profit mark.

10. Absorbed 8 400 × 6.50 = £54 600 [1]; over-absorbed means actual was lower: 54 600 − 1 250 = £53 350 [1]. [2] Examiner insight: Adding the £1 250 is the usual sign error: over-absorbed means absorbed exceeded actual.

11. Many overheads, such as set-ups and inspections, are not caused by labour time [1], so products with few labour hours but many batches are under-costed [1]. Departments differ, for example machine- intensive and labour-intensive [1], so one rate misstates costs in both and prices may be wrong [1]. [4] Examiner insight: Each limitation needs a consequence for the product cost or price to earn its second mark.

12. Inventory fell by 500 units [1]; 500 × 6 = £3 000 of fixed overheads brought forward are charged this year, so absorption profit is lower [1]: 58 000 − 3 000 = £55 000 [1]. [3] Examiner insight: The direction matters: falling inventory makes absorption profit lower, and stating it higher loses the final mark.

Where marks are usually lost

• Apportioning on an unsuitable basis, such as rent on machine hours.
• Using budgeted rather than actual activity for overheads absorbed.
• Getting the sign of under- and over-absorption wrong, or its effect on profit.
• Dividing an ABC pool by units made rather than total driver quantity.
• Confusing mark-up (on cost) with margin (on price).
• Charging fixed production overheads twice in an absorption profit statement.
• Evaluations with no decision or no figures from the question.

Next steps

• Revision notes
• Study guide
• AQA A-level Accounting hub
• Printable checklist
• All free 10-minute diagnostics
• Book a free trial class

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards (AQA). Section 3.12 Absorption and activity based costing.