Question 1

A master budget comprises the...

Accepted Answer

A)  budgeted income statement and budgeted cash flow statement only. 
B)  budgeted income statement and budgeted balance sheet only. 
C)  budgeted income statement and budgeted capital expenditure only 
D)  budgeted income statement, budgeted balance sheet and budgeted cash flow statement only. 
A)  budgeted income statement and budgeted cash flow statement only. 
B)  budgeted income statement and budgeted balance sheet only. 
C)  budgeted income statement and budgeted capital expenditure only 
D)  budgeted income statement, budgeted balance sheet and budgeted cash flow statement only. D

Question 2

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning. The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management. Select ALL the benefits for the company that could occur following the introduction of an activity based budgeting system.

Accepted Answer

A)  Under an activity based budgeting system, resource allocation is linked to the strategic plan is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget. 
B)  Under an activity based budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under a traditional budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included. 
C)  Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities. 
D)  ABB systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred. 
E)  The approach under an activity based system is to make arbitrary cuts in order to meet overall financial targets.
F) Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization. 
A)  Under an activity based budgeting system, resource allocation is linked to the strategic plan is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget. 
B)  Under an activity based budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under a traditional budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included. 
C)  Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities. 
D)  ABB systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred. 
E)  The approach under an activity based system is to make arbitrary cuts in order to meet overall financial targets.
F) Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization. A,C,D,F

Question 3

'A zero-based budgeting system involves establishing decision packages that are then ranked in order of their relative importance in meeting the organization's objectives'.  Which of the following is true regarding he difficulties that a not-for-profit organization may experience when trying to rank decision packages. Select ALL true statements.

Accepted Answer

A)  The activities that are being proposed in a budget are described in variable packages. There will often be more less than one decision package proposed for an activity. 
B)  The activities that are being proposed in a budget are described in decision packages. There will often be more than one decision package proposed for an activity. 
C)  Some of these packages will be inclusive and will require operations to select the best solution to the issue involved. 
D)  Some of these packages will be mutually inclusive and will require management to select the best solution to the issue involved. 
E)  Each decision package is evaluated. Its costs are compared to its benefits and net present values or other measures calculated.
F) Management may decide to reject packages even though the activity was done last year. In this way the organization is said to be starting from a zero base with each package given due consideration.
G) Management may decide to accept packages even though the activity was done last year. In this way the organization is said to be starting from a 100% cost base with each package given due consideration.
H) In a public sector body, for example, decision packages will relate profit making activities.
I) In a public sector body, for example, decision packages will relate to very disparate activities. 
A)  The activities that are being proposed in a budget are described in variable packages. There will often be more less than one decision package proposed for an activity. 
B)  The activities that are being proposed in a budget are described in decision packages. There will often be more than one decision package proposed for an activity. 
C)  Some of these packages will be inclusive and will require operations to select the best solution to the issue involved. 
D)  Some of these packages will be mutually inclusive and will require management to select the best solution to the issue involved. 
E)  Each decision package is evaluated. Its costs are compared to its benefits and net present values or other measures calculated.
F) Management may decide to reject packages even though the activity was done last year. In this way the organization is said to be starting from a zero base with each package given due consideration.
G) Management may decide to accept packages even though the activity was done last year. In this way the organization is said to be starting from a 100% cost base with each package given due consideration.
H) In a public sector body, for example, decision packages will relate profit making activities.
I) In a public sector body, for example, decision packages will relate to very disparate activities. B,D,E,F,I

Question 4

A marketing manager is trying to decide which of four potential selling prices to charge for a new product. The state of the economy is uncertain and may show signs of recession, growth or boom. The manager has prepared a regret matrix showing the regret for each of the possible outcomes depending on the decision made.   If the manager applies the minimax regret criterion to make decisions, which selling price would be chosen?

Accepted Answer

A)  $40 
B)  $45 
C)  $50 
D)  $55 
A)  $40 
B)  $45 
C)  $50 
D)  $55

Question 5

JL is preparing its cash budget for the next three quarters. The following data have been extracted from the operational budgets:   Additional information is available as follows: • JL sells 20% of its goods for cash. Of the remaining sales value, 70% is received within the same quarter as sale and 30% is received in the following quarter. It is estimated that trade receivables will be $125,000 at the beginning of Quarter 1. No bad debts are anticipated. • 50% of payments for direct material purchases are made in the quarter of purchase, with the remaining 50% in the quarter following purchase. It is estimated that the amount owing for direct material purchases will be $60,000 at the beginning of Quarter 1. • JL pays labour and overhead costs when they are incurred. It has been estimated that labour and overhead costs in total will be $303,600 per quarter. This figure includes depreciation of $19,600. • JL expects to repay a loan of $100,000 in Quarter 3. • The cash balance at the beginning of Quarter 1 is estimated to be $49,400 positive. Required: Prepare a cash budget for each of the THREE quarters. What will the closing balance of cash flows in quarter THREE be?

Accepted Answer

A)  $100 200 
B)  $170 400 
C)  $145 000 
D)  $150 200 
E)  $130 200
F) $160 690
G) $184 900 
A)  $100 200 
B)  $170 400 
C)  $145 000 
D)  $150 200 
E)  $130 200
F) $160 690
G) $184 900

Question 6

A company uses a standard costing system. The company's sales budget for the latest period includes 1,500 units of a product with a selling price of $400 per unit. The product has a budgeted contribution to sales ratio of 30%. Actual sales for the period were 1,630 units at a selling price of $390 per unit. The actual contribution to sales ratio was 28%. The sales volume contribution variance for the product for the latest period is:

Accepted Answer

A)  $15, 600 F 
B)  $17, 800 F 
C)  $55, 600 F 
D)  $32, 900 F 
A)  $15, 600 F 
B)  $17, 800 F 
C)  $55, 600 F 
D)  $32, 900 F

Question 7

Select the benefits to a company of using sensitivity analysis in investment appraisal. (Select all the true statements.)

Accepted Answer

A)  Sensitivity analysis enables a company to determine the effect of changes to variables on the planned outcome. 
B)  Sensitivity analysis enables a company to assess the risk associated with a project. 
C)  Sensitivity analysis enables identification of fixed costs that are of special significance. 
D)  Sensitivity analysis enables risk management strategies to be put in place to focus on those variables of special significance. 
A)  Sensitivity analysis enables a company to determine the effect of changes to variables on the planned outcome. 
B)  Sensitivity analysis enables a company to assess the risk associated with a project. 
C)  Sensitivity analysis enables identification of fixed costs that are of special significance. 
D)  Sensitivity analysis enables risk management strategies to be put in place to focus on those variables of special significance.

Question 8

A flexible budget is a budget that is:

Accepted Answer

A)  set prior to the control period and not subsequently changed in response to changes in activity period has expired 
B)  continuously updated by adding a further accounting period when the earliest accounting period has expired 
C)  changed in response to changes in the level of activity 
D)  changed in response to changes in costs 
A)  set prior to the control period and not subsequently changed in response to changes in activity period has expired 
B)  continuously updated by adding a further accounting period when the earliest accounting period has expired 
C)  changed in response to changes in the level of activity 
D)  changed in response to changes in costs

Question 9

CDF is a manufacturing company within the DF group. CDF has been asked to provide a quotation for a contract for a new customer and is aware that this could lead to further orders. As a consequence, CDF will produce the quotation by using relevant costing instead of its usual method of full cost plus pricing. The following information has been obtained in relation to the contract: Material D 40 tons of material D would be required. This material is in regular use by CDF and has a current purchase price of $38 per ton. Currently, there are 5 tons in inventory which cost $35 per ton. The resale value of the material in inventory is $24 per ton. Components 4,000 components would be required. These could be bought externally for $15 each or alternatively they could be supplied by RDF, another company within the DF manufacturing group. The variable cost of the component if it were manufactured by RDF would be $8 per unit, and RDF adds 30% to its variable cost to contribute to its fixed costs plus a further 20% to this total cost in order to set its internal transfer price. RDF has sufficient capacity to produce 2,500 components without affecting its ability to satisfy its own external customers. However, in order to make the extra 1,500 components required by CDF, RDF would have to forgo other external sales of $50,000 which have a contribution to sales ratio of 40%. Labour hours 850 direct labour hours would be required. All direct labour within CDF is paid on an hourly basis with no guaranteed wage agreement. The grade of labour required is currently paid $10 per hour, but department W is already working at 100% capacity. Possible ways of overcoming this problem are: • Use workers in department Z, because it has sufficient capacity. These workers are paid $15 per hour. • Arrange for sub-contract workers to undertake some of the other work that is performed in department W. The sub-contract workers would cost $13 per hour. Specialist machine The contract would require a specialist machine. The machine could be hired for $15,000 or it could be bought for $50,000. At the end of the contract if the machine were bought, it could be sold for $30,000.  Alternatively, it could be modified at a cost of $5,000 and then used on other contracts instead of buying another essential machine that would cost $45,000. The operating costs of the machine are payable by CDF whether it hires or buys the machine. These costs would total $12,000 in respect of the new contract. Supervisor The contract would be supervised by an existing manager who is paid an annual salary of $50,000 and has sufficient capacity to carry out this supervision.  The manager would receive a bonus of $500 for the additional work. Development time 15 hours of development time at a cost of $3,000 have already been worked in determining the resource requirements of the contract. Fixed overhead absorption rate CDF uses an absorption rate of $20 per direct labour hour to recover its general fixed overhead costs. This includes $5 per hour for depreciation. Calculate the relevant cost of the contract to CDF. You must present your answer in a schedule that clearly shows the relevant cost value for each of the items identified above. You should also explain each relevant cost value you have included in your schedule and why any values you have excluded are not relevant. Ignore taxation and the time value of money. Select all the true statements.

Accepted Answer

A)  Machine operating costs is a relevant cost. 
B)  Development Cost is a relevant cost. 
C)  General fixed overhead costs are relevant costs. 
D)  Direct labour cist is a relevant cost 
E)  The total relevant cost was $84 990
F) The total relevant cost was $94 740
G) The total relevant cost was $104 320 
A)  Machine operating costs is a relevant cost. 
B)  Development Cost is a relevant cost. 
C)  General fixed overhead costs are relevant costs. 
D)  Direct labour cist is a relevant cost 
E)  The total relevant cost was $84 990
F) The total relevant cost was $94 740
G) The total relevant cost was $104 320

Question 10

XY, a not-for-profit charity organization which is funded by public donations, is concerned that it is not making the best use of its available funds. It has carried out a review of its budgeting system and is considering replacing the current system with a zero-based budgeting system. Select ALL the potential advantages AND disadvantages for the charity of a zero-based budgeting system.

Accepted Answer

A)  It avoids the complacency inherent in the traditional incremental approach where it is assumed that future activities will be very similar to current ones. 
B)  It discourages a questioning approach by focusing attention not only on the cost of the activity but on the benefits it provides. The charity managers will not articulate the benefits encouraging them to think clearly about the activities. 
C)  Preparation of the decision packages will normally require the environment of many employees. This environment may produce useful ideas and promote job satisfaction. 
D)  The creation of decision packages and their subsequent ranking by top management is very time consuming and costly. The charity will need to assess whether the benefits of the system outweigh the costs involved. 
E)  In an organization like a charity, the decision packages are not very disparate and difficult t compare.
F) In applying traditional budgeting, 'activities' may result in functional departments rather than cross functional activities and thus distract attention from the real cost-reduction issues. 
A)  It avoids the complacency inherent in the traditional incremental approach where it is assumed that future activities will be very similar to current ones. 
B)  It discourages a questioning approach by focusing attention not only on the cost of the activity but on the benefits it provides. The charity managers will not articulate the benefits encouraging them to think clearly about the activities. 
C)  Preparation of the decision packages will normally require the environment of many employees. This environment may produce useful ideas and promote job satisfaction. 
D)  The creation of decision packages and their subsequent ranking by top management is very time consuming and costly. The charity will need to assess whether the benefits of the system outweigh the costs involved. 
E)  In an organization like a charity, the decision packages are not very disparate and difficult t compare.
F) In applying traditional budgeting, 'activities' may result in functional departments rather than cross functional activities and thus distract attention from the real cost-reduction issues.

Question 11

The term 'budgetary slack' refers to the:

Accepted Answer

A)  Lead time between the preparation of the functional budgets and the approval of the master budget by senior management 
B)  Difference between the budgeted output and the actual output 
C)  Difference between budgeted capacity utilization and full capacity 
D)  Intentional over estimation of costs and/or under estimation of revenue in a budget 
A)  Lead time between the preparation of the functional budgets and the approval of the master budget by senior management 
B)  Difference between the budgeted output and the actual output 
C)  Difference between budgeted capacity utilization and full capacity 
D)  Intentional over estimation of costs and/or under estimation of revenue in a budget

Question 12

QR uses an activity based budgeting (ABB) system to budget product costs. It manufactures two products, product Q and product R. The budget details for these two products for the forthcoming period are as follows:   The total budgeted cost of setting up the machines is $74,400. Select TWO potential benefits of using an activity based budgeting system.

Accepted Answer

A)  Activity based budgeting allows the ranking of activities and the determination of how limited resources should be allocated across competing activities. 
B)  Activity based budgeting provides a clear framework for understanding the link between turnover and the level of activity. 
C)  Activity based budgeting is useful for the review of quality systems utilization. 
D)  Activity based budgeting allows the identification of value added and non-value added activity and ensures that any budget cuts are made to non-value added activities. 
A)  Activity based budgeting allows the ranking of activities and the determination of how limited resources should be allocated across competing activities. 
B)  Activity based budgeting provides a clear framework for understanding the link between turnover and the level of activity. 
C)  Activity based budgeting is useful for the review of quality systems utilization. 
D)  Activity based budgeting allows the identification of value added and non-value added activity and ensures that any budget cuts are made to non-value added activities.

Question 13

A company produces a product that requires two materials, Material A and Material B. Details of the material quantities and costs for August are given in the table below.   Budgeted and actual output of the product for August was 12,000 units. The material yield variance for August is:

Accepted Answer

A)  $1,340 A 
B)  $1,590 A 
C)  $1,740 A 
D)  $1,340 F 
E)  $1,840 A 
A)  $1,340 A 
B)  $1,590 A 
C)  $1,740 A 
D)  $1,340 F 
E)  $1,840 A

Question 14

RS is a travel company providing daily tours of a major European capital city. The market is highly competitive and RS has commissioned some market research to help with the pricing decision for a new tour. The research identified the probability of three possible market conditions and the number of tickets that would be sold each day at three different price levels.   Demonstrate, using a decision tree and based on expected value, which ticket price RS should choose.

Accepted Answer

A)  RS should charge a ticket price of $70. 
B)  RS should charge a ticket price of $80. 
C)  RS should charge a ticket price of $90. 
D)  RS should charge a ticket price of $100. 
E)  RS should charge a ticket price of $75 
A)  RS should charge a ticket price of $70. 
B)  RS should charge a ticket price of $80. 
C)  RS should charge a ticket price of $90. 
D)  RS should charge a ticket price of $100. 
E)  RS should charge a ticket price of $75

Question 15

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:   Identify, using graphical linear programming, the weekly production schedule for products J and L that will maximize the profits of JRL during the next four weeks.

Accepted Answer

A)  Optimum plan (including major customer order) is therefore: W 900 units R 700 units X 2,100 units 
B)  W 1, 000 units R 600 units X 2,000 units 
C)  W 910 units R 800 units X 2,200 units 
D)  R 650 units 
E)  W 950 units R 750 units X 2,300 units 
A)  Optimum plan (including major customer order) is therefore: W 900 units R 700 units X 2,100 units 
B)  W 1, 000 units R 600 units X 2,000 units 
C)  W 910 units R 800 units X 2,200 units 
D)  R 650 units 
E)  W 950 units R 750 units X 2,300 units

Question 16

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:   * Refer to your answer in the previous question. The optimal solution to the previous question shows that the shadow prices of skilled labour and direct material A are as follows: Skilled labour $ Nil Direct Material A $11.70 Explain the relevance of these values to the management of JRL. Select ALL the true statements.

Accepted Answer

A)  The shadow price equals the additional contribution that would be earned from one extra unit of a scarce resource. 
B)  In a situation such as this, where a number of resources are scarce, the shadow price of any particular scarce resource will depend on whether or not the resource is not binding. 
C)  The shadow price for skilled labour is NIL because although there is a shortage of skilled labour it does have a constraining effect on output of JR as other resources are more scarce. 
D)  Since material A is one of the binding constraints, if the availability of material A could be increased by one unit, this would change the optimal plan. 
E)  The decrease in contribution as a result of this change is the value of the shadow price of material A. The shadow price thus represents the maximum premium that should be paid for an additional unit of material A. 
A)  The shadow price equals the additional contribution that would be earned from one extra unit of a scarce resource. 
B)  In a situation such as this, where a number of resources are scarce, the shadow price of any particular scarce resource will depend on whether or not the resource is not binding. 
C)  The shadow price for skilled labour is NIL because although there is a shortage of skilled labour it does have a constraining effect on output of JR as other resources are more scarce. 
D)  Since material A is one of the binding constraints, if the availability of material A could be increased by one unit, this would change the optimal plan. 
E)  The decrease in contribution as a result of this change is the value of the shadow price of material A. The shadow price thus represents the maximum premium that should be paid for an additional unit of material A.

Question 17

XY can choose from four mutually exclusive projects. The projects will each last for one year and their net cash inflows will be determined by market conditions. The forecast net cash inflows for each of the possible outcomes are shown below.   If the company applies the maximin criterion the project chosen would be:

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D 
A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D

Question 18

A major company sells a range of electrical, clothing and homeware products through a chain of department stores. The main administration functions are provided from the company's head office.  Each department store has its own warehouse which receives goods that are delivered from a central distribution center. The company currently measures profitability by product group for each store using an absorption costing system. All overhead costs are charged to product groups based on sales revenue. Overhead costs account for approximately one-third of total costs and the directors are concerned about the arbitrary nature of the current method used to charge these costs to product groups. A consultant has been appointed to analyses the activities that are undertaken in the department stores and to establish an activity based costing system. The consultant has identified the following data for the latest period for each of the product groups for the X Town store:   Calculate the total profit for each of the product groups: …. using the current absorption costing system;

Accepted Answer

A)  The profit or loss in $ was….  Clothing 122; Electrical 56; Homeware (178) 
B)  The profit or loss in $ was…. Clothing (175); Electrical 86; Homeware 22 
C)  The profit or loss in $ was…. Clothing 85; Electrical 36; Homeware (28) 
D)  The profit or loss in $ was…. Clothing 192; Electrical (56); Homeware 148 
A)  The profit or loss in $ was….  Clothing 122; Electrical 56; Homeware (178) 
B)  The profit or loss in $ was…. Clothing (175); Electrical 86; Homeware 22 
C)  The profit or loss in $ was…. Clothing 85; Electrical 36; Homeware (28) 
D)  The profit or loss in $ was…. Clothing 192; Electrical (56); Homeware 148

Question 19

GH manufactures a product using skilled labour and high quality materials. The company operates a standard costing system and a just-in-time (JIT) purchasing and production system. The standard selling price and variable costs for one unit of the product are as follows:     Calculate the following variances for October, taking account of the more detailed information regarding the labour mix: (i) The total labour efficiency variance (ii) The total labour mix variance (iii) The total labour yield variance Select the correct statements.

Accepted Answer

A)  Labour yield variance: $ 144 000 A 
B)  Labour mix variance: $ 66 000 F 
C)  Labour efficiency variance: $ 78 000 A 
D)  Labour efficiency variance: $ 78 000 F 
E)  Labour efficiency variance: $ 88 000 F
F) Labour mix variance: $ 75 000 F
G) Labour efficiency variance: $ 98 000 A
H) Labour mix variance: $ 63 000 A 
A)  Labour yield variance: $ 144 000 A 
B)  Labour mix variance: $ 66 000 F 
C)  Labour efficiency variance: $ 78 000 A 
D)  Labour efficiency variance: $ 78 000 F 
E)  Labour efficiency variance: $ 88 000 F
F) Labour mix variance: $ 75 000 F
G) Labour efficiency variance: $ 98 000 A
H) Labour mix variance: $ 63 000 A

Question 20

A company has to choose between three mutually exclusive projects. Market research has shown that customers could react to the projects in three different ways depending on their preferences. There is a 30% chance that customers will exhibit preferences 1, a 20% chance they will exhibit preferences 2 and a 50% chance they will exhibit preferences 3. The company uses expected value to make this type of decision. The net present value of each of the possible outcomes is as follows:   A market research company believes it can provide perfect information about the preferences of customers in this market. What is the maximum amount that should be paid for the information from the market research company?

Accepted Answer

A)  $145 000 
B)  $140 000 
C)  $125 000 
D)  $135 000 
A)  $145 000 
B)  $140 000 
C)  $125 000 
D)  $135 000

A master budget comprises the...

11ec37eb_8bab_63de_97b9_cd36936cf705__00 Select the benefits to a company of using sensitivity analysis in investment appraisal. (Select all the true statements.)

A flexible budget is a budget that is:

The term 'budgetary slack' refers to the:

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Exam 2: P1 Management Accounting

A master budget comprises the...

11ec37eb_8bab_63de_97b9_cd36936cf705__00 Select the benefits to a company of using sensitivity analysis in investment appraisal. (Select all the true statements.)

A flexible budget is a budget that is:

The term 'budgetary slack' refers to the:

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