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CIMA P1 - Management Accounting Question Tutorial Sample Questions:

1. 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 maximax criterion the project chosen would be:

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

2. Explain why sensitivity analysis is useful when dealing with uncertainty in project appraisal.
Select all the true statements.

A) In project appraisal, in analysis can be made of all the key variables to ascertain by how much each variable would need to change before the net present value (NPV) reaches 100% i.e. the maximum point.
B) Sensitivity analysis enables a company to determine the effect of changes to variables on the planned outcome
C) Sensitivity analysis enables a company to determine the effect of changes to fixed costs on the planned outcome
D) In project appraisal, an analysis can be made if all the key variables to ascertain by how much variable would need to change before the net present value (NPV) reaches zero i.e. the indifference point.

3. Explain THREE benefits that organizations gain from using budgetary planning and control systems.
Select ALL the true statements.

A) The budget is a useful device of influencing an operator's thoughts and motivating operators to perform in line with the organization's marketing budget.
B) It provides a standard which managers may be motivated to achieve. It can also encourage inefficiency
and conflict between managers particularly if the budget is imposed from above, whereby it may act as a threat rather than as a challenge.
C) The budget provides an external benchmark against which performance against which performance can be evaluated.
D) Budgeting forces an organization's management to look ahead and set performance targets.
E) The budget acts as a variable mechanism, with actual results being compared with budget.
F) The budget ensures actions of different parts of the organization are coordinated are reconciled otherwise managers take actions for the benefit of their own part of organization that may not benefit the organization as a whole.
G) Another benefit of budgeting is to set targets to motivate managers and optimize their performance.

4. RFT, an engineering company, has been asked to provide a quotation for a contract to build a new engine.
The potential customer is not a current customer of RFT, but the directors of RFT are keen to try and win the contract as they believe that this may lead to more contracts in the future. As a result, they intend pricing the contract using relevant costs. The following information has been obtained from a two-hour meeting that the Production Director of RFT had with the potential customer. The Production Director is paid an annual salary equivalent to $1,200 per 8-hour day. 110 square meters of material A will be required. This is a material that is regularly used by RFT and there are 200 square meters currently in inventory. These were bought at a cost of
$12 per square meter. They have a resale value of $10.50 per square meter and their current replacement cost is $12.50 per square meter. 30 liters of material B will be required. This material will have to be purchased for the contract because it is not otherwise used by RFT. The minimum order quantity from the supplier is 40 liters at a cost of $9 per liter. RFT does not expect to have any use for any of this material that remains after this contract is completed. 60 components will be required. These will be purchased from HY. The purchase price is $50 per component. A total of 235 direct labour hours will be required. The current wage rate for the appropriate grade of direct labour is $11 per hour. Currently RFT has 75 direct labour hours of spare capacity at this grade that is being paid under a guaranteed wage agreement. The additional hours would need to be obtained by either (i) overtime at a total cost of $14 per hour; or (ii) recruiting temporary staff at a cost of $12 per hour. However, if temporary staff are used they will not be as experienced as RFT's existing workers and will require 10 hours supervision by an existing supervisor who would be paid overtime at a cost of $18 per hour for this work. 25 machine hours will be required. The machine to be used is already leased for a weekly leasing cost of $600. It has a capacity of 40 hours per week. The machine has sufficient available capacity for the contract to be completed. The variable running cost of the machine is $7 per hour. The company absorbs its fixed overhead costs using an absorption rate of $20 per direct labour hour.
Select ALL the true statements.

A) The machine is currently being leased and it has spare capacity so it will either stand idle or be used on this work. The lease cost will be a relevant cost or $10 per hour.
B) The components are to be purchased from HY at a cost of $50 each. This is a relevant cost because it is future expenditure that will be incurred as a result of the work being undertaken.
C) Material B was a relevant cost.
D) The relevant cost is $7080
E) The relevant cost is $7100
F) The company absorbs its fixed overhead costs using an absorption rate of $20 per direct labour hour. This is a relevant cost.
G) The relevant cost is $7010
H) Material A was a relevant cost.
I) The cost for the production director meeting was a relevant cost.

5. 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.

A) 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.
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 ranking of activities and the determination of how limited resources should be allocated across competing activities.

Solutions: