P2 Advanced Management Accounting Questions and Answers

In accordance with a just-in-time (JIT) philosophy, which of the following is regarded as a value added activity?

How does beyond budgeting NOT help to resolve the weaknesses of traditional budgeting? Select ALL that apply.

The performance of an investment centre manager is assessed by return on investment (ROI) alone. At present, his expected ROI for next year is 15%. The manager must now decide whether to invest in a new project that is expected to yield an ROI of 14%. The cost of capital is 12%.

Indicate whether each of the following statements is true or false.

The directors of a company wish to evaluate two mutually exclusive capital investment projects. Both projects have conventional cash flows: an initial outflow followed by a series of annual cash inflows.

The directors are aware of the following three investment appraisal methods: internal rate of return (IRR), net present value (NPV) and accounting rate of return (ARR).

The directors have asked for your advice about which method should be used to evaluate these two projects.

Which of the following is valid advice to give to the directors?

A product requires one each of three different components.

Faulty components are identified only at the end of the manufacturing process.

The following average fault rates have been identified:

Component A – 1 in 100

Component B – 1 in 20

Component C – 1 in 10

The probability that a unit of finished product contains no faulty components is:

An airline company has operated passenger flights with low ticket prices to various airports from a busy airport for several years. It now faces increased competition on a number of its routes and has decided to use the balanced scorecard to monitor its performance.

Which of the following statements are correct?

Select ALL that apply.

A company is investing $150,000 in a project which will yield an annual cash inflow of $40,000 for eight years. The company ' s cost of capital is 10%.

To the nearest $100, what is the project ' s equivalent annual net present value?

A project has a positive net present value (NPV) when discounted at a company ' s weighted average cost of capital (WACC). The project has also been evaluated using a range of other investment appraisal techniques.

It has now been recognized that the project is of much higher risk than the average risk of the company ' s existing portfolio of projects. It has therefore been decided that the discount rate to be used when evaluating this project should be the WACC adjusted for risk.

As the result of changing the discount rate as described, which of following statements are correct?

Select ALL that apply.

The following cost of quality report has been prepared for the latest period.

What is the difference between the cost of conformance and the cost of non-conformance?

A Balanced Scorecard is being prepared for a coach passenger transport company. Place the correct perspective of the Balanced Scorecard against each performance measure.

The starting point for developing a balanced scorecard for an organization should be:

Which basis of transfer pricing retains the full autonomy of divisional managers?

Which TWO of the following are examples of management information made possible by the availability of big data?

Place each performance measure against the correct perspective of the Balanced Scorecard for a company that operates a chain of hotels.

Company TTM has the opportunity to invest $60,000 in a project. The project is anticipated to produce annual returns of $12,500 each year for 8 years. The cost of capital is 12%.

What is the net present value of the project? Give your answer to the nearest whole number.

The following cash flows are forecast for a potential investment project.

The cost of capital for the project is 12% per year and the company uses a straight line depreciation policy.

What is the modified internal rate of return (MIRR) of the project?

Give your answer to the nearest whole percentage.

Which THREE of the following are advantages of changing from a ' top-down ' to a ' bottom-up ' (participative) style of budgeting?

$30.328 million is to be invested in a project that will yield annual net cash inflows of $8 million for 5 years.

What is the project ' s internal rate of return (IRR)?

Give your answer to the nearest whole percentage.

A division of a company transfers all its output to other divisions in the same company.

For this division, which of the following measures is NOT affected by the transfer price that the division uses?

Which of the following are TRUE about the theory of constraints? Select ALL that apply.

A company is determining the selling price for its new product.

At a selling price of $16 per unit there will be zero demand but for every $1 reduction in the price, demand will increase by 100 units per period.

Production must be in batches of 100 units. The variable cost per unit will be $8 if 400 units are produced in a period. For each additional batch produced in a period the variable cost per unit will increase by $1 per unit for the additional batch only.

No inventories will be held.

Which of the following sales and production volumes will generate the highest contribution per period?

Which of the following statements is correct?

An 80% learning curve will apply to the production of a new product. The first unit will require 120 labor hours. The labor rate is $11 per hour.

To the nearest $1, the expected total labor cost for the first 4 units is:

Company D is about to launch an innovative and unique product which may face direct competition within three years. The company needs to achieve a rapid payback on all investments because it has limited access to external finance.

Which is the most appropriate pricing strategy for company D ' s new product, and for what reason?

Beyond Budgeting is essentially an approach that places modern management practices within a cultural framework. Analyze the following statements:

1. The organization structure should have clear principles and boundaries.

2. Managers should be given a high degree of freedom to make decisions.

3. Frontline managers should be made responsible for relationships with customers.

4. Information system should be transparent and ethical.

Which of the above statements relate to Beyond Budgeting?

A division of company XYZ has reported an operating profit of $350,000 and its residual income (RI) has been calculated as $60,000. The company ' s cost of capital is 12%.

The division ' s return on investment (ROI) is:

An organization has a decentralized structure in which division A supplies division B with an intermediate product for which there is no external market. Division B carries out further processing and then sells the final product on the external market. Due to organizational policy the current transfer pricing basis is variable cost.

The manager of division A has stated, " The current transfer price is unfair because it does not enable us to recoup our costs " .

The manager of division B has stated, " The current transfer pricing system enables us to quote competitive prices for the finished product " .

The Chief Executive of the organization is considering imposing a transfer pricing policy that uses dual pricing.

Dual pricing would:

The manager of Ice Sculpting Co. believes that too much material is being wasted during downtime. She researched, and found throughput accounting to be an adequate alternative. However, she wasn ' t sure if all that

she read was accurate.

Which of the following statements are TRUE when using Throughput Accounting? Select ALL that apply.

A company has invested $500,000 in developing a new product and requires a return of 12% on this investment.

The company has researched the market and has set the selling price for the new product at $300 per unit. At this price, sales volume for next year is forecast to be 500 units. The forecast unit cost is $210.

What is the target cost gap per unit for the coming year?

Give your answer to the nearest whole $.

A company makes three products, E, F and G. Total overheads for the year are expected to be $1.2 million, with the following split between cost pools:

Cost driver information has been estimated as follows:

The company plans to make 10,000 units of product E in the year, with an expected direct cost of $0.60 per unit. This annual production of product E is expected to require 20 quality inspections, 28 purchase requisitions, and 400 kilogrammes of materials.

What is the overhead cost per unit of product E?

A company has recently developed a new lawnmower with an estimated market life of 5 years. Production and sale of the lawnmower will require investment in new production equipment costing $750,000. It is expected that this equipment could be sold back to the original vendor for $50,000 at the end of five years.

Purchase of the equipment would be financed by a 5 year fixed rate bank loan at an interest rate of 6%.

A manager already employed by the company would be moved from their current position to manage production of the new lawnmower. Their original position would be filled by a new recruit on a fixed annual salary of $35,000.

Which of the following statements is NOT correct?

The Chief Executive of a large manufacturing company has made the following comment.

" All of our competitors are using both just-in-time(JIT) and Total Quality Management (TQM) whereas we have never used either. Consequently we are lagging behind our competitors because their levels of inventory and quality costs are significantly below ours. I want to see JIT fully implemented, both for purchasing and for production, in 4 weeks ' time and TQM fully implemented 4 weeks after that. "

Which of the following provide appropriate advice to the Chief Executive?

Select ALL that apply.

Which of the following activities are included within activity based management (ABM)?

1. Cost reduction

2. Product design decisions

3. Variance analysis

4. Operational control

5. Performance evaluation

An investment centre is appraising a potential project that is expected to yield a Return on Investment (ROI) of 12%.

Without the project the investment centre expects to earn an ROI of 14%. The cost of capital is 10%.

What would be the impact on the investment centre ' s performance measures if the project is accepted?

A machine requires an initial investment of $500,000. The net present value (NPV) of the investment in the machine is $36,500.

Which of the following statements is correct in relation to the sensitivity of the investment?

The following forecast data relate to the first three years of a five year project.

The project will require an initial investment of $30,000 in non-current assets.

All revenue will be received in the year it is earned and all operating costs will be paid in the year they are incurred. Tax will be paid in the following year.

Tax depreciation will be 25% per annum of the reducing balance.

The taxation rate will be 30% of taxable profits.

What is the forecast after tax cash flow for year 3 (to the nearest $10)?

An investment centre manager is considering the purchase of a new machine. If purchased, the new machine would replace an existing one that is used to manufacture one of the investment centre ' s existing products.

The new machine would incur $800 per month additional running costs; this includes $300 per month of additional depreciation.

The new machine would save on direct labor time. This means that the fixed production overhead absorbed by the product on the basis of direct labor hours would reduce by $100 per month.

What is the total cost of the above that is relevant to the decision to purchase the machine?

When considering a capital investment, relevant costs for decision making have which THREE of the following features?

Which of the following statements regarding multinational transfer pricing is INCORRECT?

The following data are available for an investment centre for the latest period. Where appropriate the data have been adjusted to reflect economic values.

What cost of capital has been used to calculate the EVA?

Give your answer to the nearest percentage.

A firm of accountants uses an activity-based costing system. The firm ' s costing system permits staff to indicate specific tasks undertaken for clients, such as requesting missing information. The amount charged for a request for missing information is based on the following analysis.

Each request takes an average of 15 minutes of professional staff time. Professional staff are charged out at $100 per hour.

Administrators then process the information request and prepare a standard letter. The average time administration staff spend on each information request is 20 minutes. The cost of administration staff at the firm is $75,600 per year. Administration staff work for a total of 6,000 hours per year. The cost of printing and posting a letter is $1.

Calculate the cost of an information request.

Give your answer to 2 decimal places.

Which of the following is a key objective when agreeing a basis for setting transfer prices?

A supermarket group has experienced operational problems during recent years, including a shortage of warehousing space due to increasing turnover and poor inventory management. The product portfolio has expanded considerably. Although this has led to increased sales volume, marketing and logistics costs have increased disproportionately. Non product-specific costs have also increased significantly.

Management is now considering using Direct Product Profitability (DPP).

Which of the following statements are valid in respect of the possible implementation of DPP within the supermarket group?

Select ALL that apply.

A company classifies its main factory as an investment centre. Categorise each of the following costs as either controllable or uncontrollable by the investment centre manager.

A company is investing in a huge diversification project. The plan is to develop and sell a whole new product line that they have never sold before. They ' ve already started a massive marketing campaign for this new

product line and they are getting good feedback in their market research.

They ' ve had to use debt funding in order to finance the project, but they hope that the returns will be worth the investment and restructuring. If they are successful they will be a step ahead of all their competitors and offer

something none of them can.

What is the risk appetite of this company?

An organization employs a dual pricing basis for the transfer of components between its divisions. This means that:

Place each method of analysing risk and uncertainty against the statement that describes it correctly.

An organization wishes to achieve cost reductions for a product it already has in production without affecting the customer ' s perception of the product.

It has decided to carry out a systematic examination of the factors affecting the cost of the product in order to identify ways of achieving the specified purpose at lower cost while maintaining the required standard and quality.

Which of the following correctly identifies the activity that the organization is undertaking?

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.

Under the absorption costing system, which simply allocates our entire amount of production overheads based on machine hours, we have found that out of our 4 products, 2 are profitable, 1 breaks even and 1 is

making a loss.

Model D the most recent addition to the range is making a large loss after the price of a major component rose dramatically. Model A is only just breaking now too as costs have risen. The only two products making profit

are Models B and C. These two require the least about of machine hours so this makes sense.

However, the management have a few reservations. They cannot understand how B is so profitable. It requires several more stages of production than the other models and a whole day longer to be customised by an

expert.

Select the correct answer from the list below that can help to explain this situation.

Which of the following statements is NOT correct?

Transfer prices between responsibility centers should be set at a level that:

A company is considering four mutually exclusive projects. There are three possible future demand conditions but the company has no idea of the probability of each of these demand conditions occurring. The forecast net present values (NPVs) of each of the four projects, under each of the three possible future demand conditions, are as follows.

Which investment would be selected using the maximin criterion?

A company operates a divisional structure. The manager of division D receives a bonus based on the division ' s annual return on capital employed (ROCE).

A minimum ROCE of 20% must be achieved to receive any bonus and thereafter the bonus increases in line with increases in ROCE.

This year division D achieved a ROCE of 24% and the divisional manager received a large bonus.

The manager is considering an investment in a new machine for next year. The incremental ROCE earned by the machine is expected to be 19% although the ROCE for the division as a whole with the machine is expected to be 22%. Without the machine, ROCE is likely to be stable at 24%.

The cost of capital for the company as a whole is 18% per year.

Which of the following statements is correct?

GHY has two subsidiaries. GHY-Motor manufactures car engines and GHY-Build designs and assembles cars. In the car industry it is common for manufacturers to buy parts, including engines, from other manufacturers.

GHY has granted GHY-Motor and GHY-Build full autonomy. GHY-Build is considering using an engine from another company for a new model that it is designing. GYY-Motor has a suitable engine, but it charges more than GHY-Build ' s preferred supplier.

Which of the following statements is correct? Select ALL that apply.

Which of the following statements are correct with regard to responsibility centres?

Select ALL that apply.

Product WB currently sells for $13 per unit. Annual demand at that price is 20,000 units. If the price increases to $15, the annual demand falls by 500 units.

What is the formula for the demand curve?

A large supermarket is applying direct product profitability analysis to establish the profit earned by each of the products it sells.

Data for product P are as follows.

The shelf is stacked each time that all units are sold and there are no units of product P left unsold at the end of each day.

What is the direct product profit per unit of product P?

Give your answer to the nearest $0.01.