P2 - Exam - Practice - Kit (ACORN) - 1 PDF

CIMA
Managment Level Paper P2
ADVANCED MANAGEMENT ACCOUNTING

Exam Practice Kit
Tutor contact details

Tufal Choudhury
tufal@acornlive.com
077 9090 4122
1|Page
P2 ADVANCED MANAGEMENT ACCOUNTING

Syllabus overview
Focusing primarily on the long term, P2 builds on the insights about costs and their
drivers (from P1) to provide the competencies needed to analyse, plan and manage costs
to support the implementation of the organisations strategy. It shows how to manage and
control the performance of various units of the organisation in line with both short-term
budgets and long-term strategy. Finally, P2 covers investment decision making and the
risks associated with such decisions. It provides the basis for developing deeper
understanding of various types of risk affecting the strategy and operations of
organisations (covered in P3).
Syllabus topic
Syllabus
weighting
Chapters relevant from

the Acorn study manual
A. Cost planning and analysis for

competitive advantage
25%
2,5 and 6
B. Control and performance management of

responsibility centres
30%
1,4 and 8
C. Long-term decision making
30%
D. Management control and risk
15%
7 and 9
2|Page
CONTENTS
Objective test questions

Chapter
Question
page
number
Answer
page
number
Introduction to relevant costing
143
Learning curve theory
19
151
Pricing
29
161
Beyond budgeting
39
167
Activity based costing
49
175
TQM techniques
69
191
Long-term decision making
89
205
Performance management and transfer pricing
103
223
Management control and risk
127
237
MOCK 1
MOCK 2
90 minute test (syllabus mixture of 60 questions)

90 minute test (syllabus mixture of 60 questions)
253
283
273
299
3|Page
4|Page
Chapter 1 - Introduction to relevant costing

1.1
Relevant costs need to be considered in decision making.
Which of the following if any are characteristics of relevant costs?
Future costs
Sunk costs
Incremental costs
Avoidable costs
Fixed costs
Common costs
Differential costs
1.2
Z Plc has 400kg of material in stock that had cost 1,750. The company no longer uses
the material and if sold for scrap would earn 1.75 a kg.
Z Plc however is considering taking on a special order from a customer, which would
require 500kg of this material. The current price of the material at present is 4.50 per kg.
When using relevant costing, the cost of this material is:
A
B
C
D
A sunk cost of 1,750

An opportunity cost of 700 and an incremental cost of 450
An incremental cost of 1,150
A sunk cost of 1,750 and an incremental cost of 450
1.3
Which of these is a non-relevant cost?
A
B
C
D
Variable costs
Committed costs
Product specific fixed costs
Incremental costs
5|Page
1.4
Which of these costs if any are not relevant in short term decision making?
Head office overheads
Depreciation
Rent agreement on a building to be confirmed
The cost of material bought last year
Managers salary of factory
Pre-paid elcectric and gas bill
Labour costs of staff who are working on a job
1.5
The cost of a scarce resource is:
A
B
C
D
Variable costs of scarce resource and market price of resource

Contribution lost by using this resource and therefore depriving another product
of its use
Variable costs of scarce resource and fixed costs of existing product it would be
used on
Replacement value of the scarce resource
1.6
Opportunity cost is best described as:
A
B
C
D
The costs incurred in choosing the next best alternative

The most expensive alternative not undertaken
The next best alternative foregone by you choosing to make a future decision
The least expensive alternative undertaken
1.7
A company has some material in stock and it has no further use for it. Which of these is
not a possible opportunity cost?
A
B
C
D
Current replacement cost of material

Scrap value of material
Material cost saved if used on another project
Special order request using this material for a customer on an internet auction site
6|Page
1.8
In what order does the decision making process normally occur?
A
B
C
D
Identify objectives, identify course of action, evaluate course of action, select best
option, compare actual v budget
Identify course of action, evaluate course of action, identify objectives, select best
Compare actual v budget, identify course of action, evaluate course of action,
identify objectives, select best option
Identify course of action, identify objectives, evaluate course of action, select best
1.9
If a company has a high operating gear ration this means:
A
B
C
D
It has high variable costs in comparison total costs

Profits are more variable to sales volume changes
Profits are less variable to sales volume changes
It has low fixed costs in comparison total costs
1.10
A company is considering the acceptance of a one-year contract, which requires the use
of two skilled employees. They would be recruited on a one-year contract at a cost of
45,000 per employee. An existing manager earning 80,000 a year, approximately
taking up 20% of her time, would also supervise them.
Instead of this plan above the company could instead retrain there existing employees
who currently earn 35,000 a year. This would require training costs of 20,000 in total
and the current existing employees would need to be replaced at a cost to the company of
60,000 in total. This would therefore not require any management time.
The relevant cost of the contract would be:
A
B
C
D
90,000
80,000
106,000
170,000
7|Page
1.11
ZYP Ltd has a current customer order which requires the use of a machine which was
purchased two years ago and currently has a net book value of 9,000. ZYP Ltd could
sell the machine now for 8,500, but if the machine is used on the above contract it
would require a complete reconditioning if it is to be used again, hence ZYP Ltd will
have to pay someone 1,000 to dismantle it and it could not therefore be sold anymore.
The cost of operating the machine (variable cost) for the customer would be 4,500 for
the job. The minimum price ZYP Ltd should quote the customer should be?
A
B
C
D
5,500
6,000
7,500
14,000
1.12
Qualitative data is concerned with:
A
B
C
D
Infinite numbers
Opinions
Internal data
Finite numbers
1.13
A by-product is:
A
B
C
D
A product which has a high sales value at the split-off point

A product where the costs are not apportioned to it on completion of process
Leather when slaughtering a cow
Beef when slaughtering a cow
1.14
The skilled labour is currently employed by your company and paid at a rate of $8.00 per
hour. If a new job were undertaken it would be necessary either to work 25 hours
overtime, which would be paid at time plus one half, OR in order to carry out the work in
normal time, reduce production of another product that earns contribution of $13.00 per
hour.
Calculate the relvant cost of skilled labour for the new job.
8|Page
1.15
Which THREE of the following are categories of relevant costs?
Incremental costs
Committed costs
Sunk costs
Differential costs
Absorbed fixed costs
Opportunity costs
1.16
A company is preparing a quotation for a one-off job that would require 1,200 kg of
Material B. There are 900 kg of Material B in inventory that were bought at a cost of $3
per kg. The company does not foresee any other use for the material. The material held in
inventory could be sold for $3.50 per kg. The current purchase price of Material B is
$4.50 per kg.
The relevant cost of Material B to be included in the cost estimate is:
A
B
C
D
$4,050
$4,500
$4,200
$5,400
1.17
When deciding whether to further process a product, what information is required?
Select ALL that apply.
The common costs of the joint process
The further processing costs of the product
The unit selling price of the product at the point of separation
The unit selling price of the product after further processing
The percentage losses of further processing the product
The actual output of the product from the joint process
9|Page
1.18
Which of the following is NOT a valid reason why the costs used for decision making
may be different from the costs used for profit reporting?
Costs used for decision making include only costs that are affected by the
decision.
Costs used for decision making never include fixed costs.
Costs used for decision making do not include past costs.
Costs used for decision making include opportunity costs.
1.19
A company makes three components, X, Y and Z. The costs to manufacture the
components are as follows:
Variable cost
Fixed cost
Total unit cost
Component X
$
5
4
9.00
Component Y
$
16
16.60
32.60
Component Z
$
10
7.50
17.50
The fixed costs are an allocation of general fixed overheads.

A supplier has offered to supply the components at the following prices:
Component X at $8
Component Y at $14
Component Z at $11
Which components should the company buy in order to minimise total costs?
A
B
C
D
Components X and Z
Component Y only
None of the components
All of the components
10 | P a g e
1.20
The performance of the three divisions of a company is detailed below:
Sales
Variable costs
Contribution
Fixed overheads
Net profit
Division W
$000
700
560
140
Division X
$000
840
420
420
Division Y
$000
300
240
60
Total
$000
1,840
1,220
620
525
95
40% of the fixed overheads are specific to the individual Divisions. Each division incurs
the same level of specific fixed overheads.
Which of the divisions should continue to operate if the company's objective is to
maximise profits?
A
B
C
D
All of the divisions

Division W and Division X only
Division X only
Division X and Division Y only
1.21
When deciding whether to replace a non-current asset, which of the following if any is
NOT relevant?
Tax balancing charge or allowance on the existing asset
Net book value of the existing asset
Effect on working capital requirements
Removal cost of the existing asset
1.22
Which one of the following is not a relevant cost?
A
B
C
D
Incremental cost
Committed
Avoidable cost
Differential cost
11 | P a g e
1.23
Which one of the following is a relevant cost when making a decision in the short-term?
A
B
C
D
Sunk cost
Historical cost
Notional cost
Differential cost
1.24
Which one of the following would not be a characteristic of a relevant cost or revenue?
A
B
C
D
Cash
Future
Incremental
Notional
1.25
Which of the following costs are more relevant for decision making?
A
B
C
D
Historical costs
Current costs
Notional costs
Future c osts
1.26
Alan Salt purchased some used mobile phones 6 motnhs ago and one of his regular
custoemrs wants to buy them off him but doesnot know what to quote him.
He originally bought them for 6,500 and if he put them on Ebay today hed get 3,500.
He could also melt down the phones and use the metal and plastic to manufacture retro
computers for his fans. He would have to buy this material in normally for 1,000.
What is Alans relvant cost here if he were to sell the phones to his regular cusotmer?
A
B
C
D
6,500
3,500
1,000
Not possible to say
12 | P a g e
1.27
The cost of a supervisor is based on a monthly salary of $3,500 multiplied by 10% as the
the project time estimate = $350. If the supervisor cannot complete this project work
within his normal hours he will work overtime but he is not paid for this.
What is the relevant cost for the project?
A
B
C
D
$3,500
$350
$0
Not enough information to calculate this
1.28
It will be necessary to hire specialist machine for a project. In total the project will
require the machine for 5 days but it is difficult to predict exactly which five days the
machine will be required within the overall project time of one month.
One option is to hire the machine for the entire month at a cost of $5,000 and then subhire the machine for $150 per day when it is not required. It is expected that we would be
able to sub-hire the machine for 20 days.
Alternatively we could hire the machine on the days we need it and its availability would
be guaranteed at a cost of $500 per day.
What is the relevant cost?
1.29
The overhead absorption rate in a company is 20 per hour and includes power costs
which are directly related to machine usage. If a job were undertaken, it is estimated that
the machine time required would be ten hours. The machines incur power costs of 0.75
per hour. There are no other overhead costs that can be specifically identified with this
job.
A
B
C
D
200
207.50
7.50
0
13 | P a g e
1.30
We need 500 square metres of steel for a project. The steel is regularly used, and has a
current stock value of $5.00 per square metre. There are currently 100 square metres in
stock. The steel is readily available at a price of $5.50 per square metre.
A
B
C
D
$2,500
$2,750
$2,200
$2,000
1.31
The skilled labour is currently employed by your company and paid at a rate of $18.00
per hour. If a new job were undertaken it would be necessary either to work 35 hours
overtime, which would be paid at time plus one half, OR in order to carry out the work in
normal time, reduce production of another product that earns contribution of $24.00 per
hour.
1.32
The cost of the estimating time of $400 is that attributed to the four hours taken by a
manager to analyse information to determine the cost estimate given. It is company
policy to add 20% of $1,000 to the production cost as an allowance for administration
costs associated with the jobs accepted. The brass fittings would have to be bought
specifically for this job: a supplier has quoted the price of $20 for the fittings required.
The semi-skilled labour that is needed for the job is $460; currently the company has
sufficient paid idle time to be able to complete this work.
What is the relevant cost here?
$20
$400
$1,080
$880
$460
$480
$0
14 | P a g e
1.33
Product
M
N
P
Selling price after

common process
$/litre
625
520
680
Selling price after

further processing
$/litre
840
645
745
Further variable
processing cost
$/litre
175
095
085
Calculate which products are finacnially worthwhile processing further?

1.34
Henry Ford owns a coach which cost him $12,000. The coach today is worth $8,000.
Enzo Ferrari has asked if he can borrow the coach. If Enzo borrowed the coach then it
would be out of use for Henry for eight days. At the same time Henry has a two day a
contract which has already been accepted which contains a significant financial penalty
clause. This contract earns a contribution of $250 per day. A replacement coach could be
hired for $180 per day.
1.35
Ronnie Biggs a bank robber needs a driver to drive the getaway car for a day. He already
has a driver who he pays $60,000 a month, but he is needed by his boss Tony Soprano on
a 5 day heist. If Tony uses the driver then Ronnie will need to replace him. The
replacement driver would be hired from a recruitment agency that charges $400 per day
for a suitably qualified driver.
What is the relevant cost to Ronnie if he has to give his driver to Tony?
1.36
General overheads of $2,000 are based upon the overhead absorption rate of $10 per unit
as set in the budget. The only general overhead cost that can be specifically identified
with the job is the time that has been spent in considering the costs of the job and
preparing the quotation. This amounted to $250.
15 | P a g e
1.37
Z can sell products R, S or T after this common process or they can be individually
further processed and sold as RZ, SZ and TZ respectively. The market prices for the
products at the intermediate stage and after further processing are:
Market prices per
kg:
R
S
T
RZ
SZ
TZ
$
3.00
5.00
3.50
6.00
5.75
6.75
The specific costs of the three individual further processes are:

Process R to RZ variable cost of $1.40 per kg, no fixed costs
Process S to SZ variable cost of $0.90 per kg, no fixed costs
Process T to TZ variable cost of $1.00 per kg, fixed cost of $600 per month based on
prodcutoon levels of 1,200kg.
Produce calculations to determine whether any of the intermediate products should be
further processed before being sold.
1.38
DVDBusters Ltd is a national chain of film rental shops carrying the latest from the silver
screen. Recently they are finding it difficult financially to maintain all their shops and are
considering shutting down some of them. Which of the following should they consider if
they are basing their decision on relevant costing?
A
B
C
D
Shops which have a loss should be discontinued

Shops making a contribution loss should be discontinued provided this will not
increase sales in other shops
Shops with a contribution loss should be discontinued
Shops with a contribution loss should not be discontinued if this will make
profitable shops bear a portion of the closed down shops overheads
16 | P a g e
1.39
David Peckham is evaluating whether to purchase a BMW 320 or continue to use his
Rover 75. Both cars are identical in Davids opinion. The BMW costs $25,000 has an
estimated service life of ten years, has no scrap value, and will have maintenance costs of
$500 per year.
The Rover 75 was $12,000 when he bought it brand new and has an existing book value
of $6,500. It has an estimated remaining service life of ten years and has no scrap value at
the end of ten years. It has a current disposal value of $3,500 and will have maintenance
costs of $2,650 per year.
Ignoring present value and tax considerations, what should David do?
A
B
C
D
Buy the BMW 320

Cannot be determined
Be indifferent between both cars
Keep the Rover 75
1.40
Usain wishes to discontinue his Broadband Division as he belives it is making losses. The
division has contribution margin of $10,000 and allocated overhead of $26,000 (of which
$7,000 cannot be eliminated). This shut down would:
A
B
C
D
Decrease operating income by $10,000

Decrease operating income by $9,000
Increase operating income by $10,000
Increase operating income by $9,000
1.41
Alan Sweet has 2,000 defective units of a product that cost $4 per unit to manufacture,
and can be sold for $2 per unit. These units can be reworked for $1 per unit and sold at
their full price of $6 each. If Alan reworked the defective units, how much extra benefit
will he obtain?
A
B
C
D
$2,000
$6,000
($6,000)
$12,000
17 | P a g e
1.42
An additional cost that results from a particular course of action is known as a(an):
A
B
C
D
Sunk cost
Opportunity cost
Incremental cost
Net present cost
1.43
Stuart Brand 17,000 defective units of a product that cost $3 per unit to manufacture, and
can be sold for $1 per unit. These units can be reworked for $3 per unit and sold at their
full price of $5 each. Should Henny-Penny rework the defective units, how much
incremental net return will result?
A
B
C
D
$85,000
($34,000)
$0
$17,000
1.44
The cost to produce 8,000 units at 70% capacity is:
Direct materials: $16,000
Direct labour: $8,000
Factory overhead, all fixed: $12,000
Selling expense (40% variable, 60% fixed): $8,000
What unit price would the company have to charge to make $2,000 on a sale of 500
additional units that would be shipped out of the normal market area?
A
B
C
D
$7.40
$7.80
$8.90
$7.00
18 | P a g e
Chapter 2 Learning curve thoery

2.1
X Plc has received an order for eight units of product F. The time estimated for the
production of the first unit will be 50 hours and a 90% learning curve is expected. The
rate of pay is 5 an hour. The direct cost is 500 a unit and specific fixed cost associated
with the order will be 3,500. The average cost of each unit (to the nearest 1) for this
order would be?
A
B
C
D
682
8,958
4,567
1,120
2.2
The average cost of the first 100 units of product X made was 44.45 per unit after
applying an 80% learning curve effect. What was the cost of making the first unit (to the
nearest 1)?
A
B
C
D
196
201
206
211
2.3
W Ltd used the following standard cost for the first 200 units worked for a new product
in one of its factories; it was believed that a 90% learning effect is in operation. The time
taken for the first unit was 10 hours.
Average time for the first 200 units was 4.47 hours
The standard time per unit to use for the next 200 units built (to the nearest one decimal)
would be?
A
B
C
D
4.0 hours
4.5 hours
3.6 hours
4.1 hours
19 | P a g e
2.4
A general law found to operate in many situations that would indicate that 20 per cent of
something causes 80 per cent of something else, would be called?
A
B
C
D
Pareto law
Usage value law
Requisite law
Perpetual law
2.5
Complete the following sentances by putting in the missing words in the correct order:
falls, avareage, doubles, fixed
Learning curve theory is the theory that as output
the
by a
percentage each time this happens.
time per unit
2.6
Which of these if any are assumptions of learning curve theory:
Heavy automation in production and so scope for learning
Repetitve work and so speed and accuracy can be improved
Consitensy in the workforce and so knowledge is retained
Extensive breaks in production so skills and techniques are learned
Early stages of production
2.7
If it is found that a 74% learning curve applies, it means that:
A
B
C
D
Each time output doubles on a cumulative basis, the cumulative average labour
hours per unit increase by 26%
Each time input doubles on a cumulative basis, the cumulative average labour
hours per unit increase by 26%
Each time output doubles on a cumulative basis, the cumulative average labour
hours per unit fall by 26%
Each time input doubles on a cumulative basis, the cumulative average labour
hours per unit fall by 26%
20 | P a g e
2.8
If actual initial batch labour costs were more than the estimated cost due to the actual
learning rates being worse than expected? Which of the following if any apply here:
Positive impact on labour costs involved and may have an overall decrease in costs.
Higher prices would now be needed to maintain expected profits.
Negative impact on labour costs involved and may have an overall increase in costs.
Lower prices would now be chargeds to customers as costs are lower.
2.9
If it is found that a 66% learning curve applies complete the table below (all figures
should be to 1 decimal palce):
Units
Hours
Average hours
21 | P a g e
The following information applies to 2.10 and 2.11:

A company is planning to launch a new product. It has already carried out market
research at a cost of $50,000 and as a result has discovered that the market price for the
product should be $50 per unit. The company estimates that 80,000 units of the product
could be sold at this price before one of the companys competitors enters the market
with a superior product. At this time any unsold units of the companys product would be
of no value.
The company has estimated the costs of the initial batch of the product as follows:
Direct materials
Direct labour ($10 per hour)
Other direct costs
$000
200
250
100
Production was planned to occur in batches of 10,000 units and it was expected that an
80% learning curve would apply to the direct labour until the fourth batch was complete.
Thereafter the direct labour cost per batch was expected to be constant. No changes to the
direct labour rate per hour were expected.
2.10
Calculate the revised expected cumulative direct labour costs for the four levels of output
given the actual cost of $280,000 for the first batch (you should do you answers to the
nearest $000).
2.11
Calculate the actual learning rate exhibited at each level of output (you should do you
answers to the nearest $000).
2.12
In your calculations, you anticipated that the time taken for the first unit would be 40
minutes and that a 75% learning curve would apply for the first 30 units. Note: The
learning index for a 75% learning curve is -0.415
Calculate the expected time for the 6th unit of output to the nearest 1 decimal place.
22 | P a g e
2.13
Market penetration or a penetration pricing policy has various implications, Which if any
of the following do not apply here?
This kind of pricing policy is good for high quality products
This can only work in a fast growing economy
This kind of pricing policy is good for inferior products
The economies of scale for the product should be achieved quicker
High amounts profit can be earned per unit sold
Competition may be discouraged and leave the market
2.14
The estimated labour time required for the first batch is 40 hours, but due to the nature of
the product and the manufacturing method to be used, it is expected that an 80% learning
curve will apply.
Calculate the expected time for the eighth batch to 2 decimal places.
2.15
Month
1
2
3
4
Total batches produced to date

1
2
4
8
Learning rate
75%
75%
90%
For months 3 to 4, state possible reasons why the actual learning rates differed from the
expected rates.
Labour force is getting quicker
Decrease in staff turnover
More reworks
Increase in staff turnover
Staff have become disinterestd and less moticateed
Inferiror materials being used
There is not much more that can be learned now
Production is in its early stages
23 | P a g e
2.16
If the total time taken to produce the first eight batches of a toy was 18225 hours,
calculate the cumulative learning rate given that the first batch took 45 hours. Your
answer should be to the nearest whole %.
The following information applies to 2.17, 2.18 and 2.19:
Time for the 1st batch was 10 hrs and the learning rate is 70%. The learning will have
ceased after 30 batches. Note: The learning index value for 70% learning curve is 0.5146.
2.17
How long does it take to make the first 30 batches?
2.18
How long does it take make the 30th batch?
2.19
How long should it take to make 50 batches?
24 | P a g e
2.20
Report 1
Output (batches)
Direct labour hours
Direct labour cost ($)
Budget
60
163.53
$1,962
Actual
50
93.65
$1,146
Variance
10 (A)
69.88 (F)
$816 (A)
Flexed budget
50
68.91
$826.92
Actual
50
93.65
$1,146
Variance
Report 2
Output (batches)
Direct labour hours
Direct labour cost ($)
24.74 (A)
$319.08 (A)
Select from the following whch you think, if any, are better to aid diecison making in
respect of the above reports:
Report 1 is better as it is easier to see how costs behave.
Report 1 is better as it allows an understanding of how many much should have
been spent if we made 60 batches.
Report 2 is better as it compares actuals to flexed budget information.
Report 1 is better as it shows the real difrence in output.
Report 2 is better has it allows us to understand how many hours should have
been used if you are making 50 batches.
Each unit of a product was expected to take 8 hours to produce at a cost of $15 per hour.
Actual output of the product was 560 units
However, the production manager now realises that the standard time of 8 hours per unit
was the time taken to produce the first unit and that a learning rate of 90% will apply.
Note: The learning index for a 90% learning curve is -0.1520
2.21
Calcuulate the total time taken to make 560 units (nearest whole hour).
25 | P a g e

The first batch of 100 units will take 1,500 labour hours to produce. There will be an 85%
learning curve that will continue until 6,400 units have been produced. Batches after this
level will each take the same amount of time as the 64th batch. The batch size will always
be 100 units. Note: The learning index for an 85% learning curve is -0.2345
2.22
Calculate the cumulative average time per batch for the first 64 batches (2 decimal
places)
2.23
Calculate the time taken for the 64th batch (2 decimal places)
The following information applies to 2.24, 2.25, 2.26 and 2.27:
A company is developing a new product. During its expected life it is expected that 8,000
units of the product will be sold for $90 per unit.
The direct material and other non-labour related costs will be $45 per unit throughout the
life of the product.
Production will be in batches of 1,000 units throughout the life of the product. The direct
labour cost is expected to reduce due to the effects of learning for the first four batches
produced. Thereafter the labour cost will remain at the same cost per batch as the 4th
batch. The direct labour cost of the first batch of 1,000 units is expected to be $40,000
and a 90% learning effect is expected to occur. There are no fixed costs that are specific
to the product.
Note: The learning index for a 90% learning curve = -0.152
2.24
Calculate the average direct labour cost per batch of the first four batches.
2.25
Calculate the direct labour cost of the 4th batch.
2.26
Calculate the contribution earned from the product over its lifetime.
26 | P a g e
2.27
Due to the low lifetime product volume of 8,000 units the company now believes that
learning may continue throughout its entire product life.
Calculate the rate of learning required (to the nearest whole percentage) to achieve a
lifetime product contribution target of $150,000, assuming that a constant rate of learning
applies throughout the products life.
The following information applies to 2.28 and 2.29
A new product has a budgeted total profit of $75,000 from the first 64 units. The time
taken to produce the first unit was 225 hours. The labour rate is $40 per hour. A 90%
learning curve is expected to apply indefinitely.
Note: The learning index for a 90% learning curve is -0.152
2.28
Calculate the sensitivity of the budgeted total profit from the first 64 units to independent
changes in the labour rate (do all workings and answer to 2 decimal places).
2.29
Calculate the sensitivity of the budgeted total profit from the first 64 units to independent
changes in the learning rate (do all workings and answer to 2 decimal places).
2.30
A management accountant is considering analysing a new production process to
determine the implications of a learning curve. Which of the following factors would
make such an analysis relevant?
The process is highly mechanised
The process is highly labour intensive
The process is complex
The process is relatively new
Staff turnover is rapid
27 | P a g e
28 | P a g e
Chapter 3 - Pricing
3.1
Which of the following is NOT a factor causing an increase or decrease in demand?
A
B
C
D
Fashion
Cost of factors of production
Advertising
Technology
3.2
The price elasticity of demand measures
A
B
C
D
The change in demand to changes in prices

The change in price to changes in demand
The correlation of changes between demand and price
The correlation of demand to price
3.3
If a company had an inelastic demand curve and wanted to increase its sales revenue, you
would recommend:
A
B
C
D
A cut in price
An increase in price
A reduced advertising campaign
A money off coupon scheme
3.4
The price elasticity demand of an elastic demand curve is:
A
B
C
D
Greater than zero

Between zero and -1
Less than -1
Infinity
29 | P a g e
3.5
Which of these is NOT true about perfect competition:
A
B
C
D
Large number of buyers

Large number of sellers
Different goods and services
Free entry and exit to market
3.6
Which of these is true about monopolistic competition:
A
B
C
D
A few buyers
One seller
Different goods and services
Barriers of entry and exit
3.7
A company offers a much lower price to consumers than they charge to businesses. This
is an example of differential pricing using which basis?
A
B
C
D
Product version
Time
Place
Market segment
3.8
The selling price of Product G is 350 each unit and it is expected that 50,000 units will
be sold this year. The company requires a return on investment of 15% for this year based
on the current investment of 25m in research, development and advertising. The target
cost per unit for the year is?
A
B
C
D
245
275
305
315
30 | P a g e
3.9
A company has found that the maximum demand for their product is 75,000 units every
year. They also know that for every 1 change in selling price the number of units
demanded will change by 25 units. The company also has calculated that the number of
units in order to maximise profit will be 60,000 units. The price at which these units will
be sold at to achieve profit maximisation would be?
A
B
C
D
600
650
700
750
3.10
When is a market penetration strategy appropriate?
If demand is inelastic
If the product has a short product lifecycle
If the demand is elastic
If the product is very expensive to manufacture
If the product is recognised as inferior by customers
The firm wants to discourage new entrants in to the industry
3.11
A company offers customers if they buy a set menu a selection of starters, mains and
puddings to choose from, for a certain price. This form of pricing is known as?
A
B
C
D
Market skimming
Loss leader
Product bundling
Price discrimination
31 | P a g e
3.12
XYZ Plc has estimated that at a price of 100 no units will be sold and for each 2
reduction in price there would be one additional unit sold. Fixed cost is 80 per week.
Variable costs are expected to be 50 per unit for the first 8 units sold; thereafter each
unit will cost 5 more than the preceding one.
The most profitable number of units sold on a weekly basis would be?
A
B
C
D
10 units
11 units
13 units
14 units
3.13
At a price of 80 a company expects to sell 10,000 units of a product. If it were to
increase the price to 81 it would expect total revenue of 769,500. The price elasticity of
the product is?
A
B
C
D
3.0
3.5
4.0
4.5
3.14
Which of these is NOT an advantage of market skimming?
A
B
C
D
May extend the life of the product life-cycle

Good for innovative products where little competition exists initially
Good for high quality products
Good for elastic demand
3.15
Which of these is an advantage of market penetration?
A
B
C
D
Good for inelastic demand

Good for high quality products
May discourage competition
May extend the life of the product life-cycle
32 | P a g e
3.16
A company sells bleach and decides to price one of its bleaches, the extra long lasting
bleach known as Wicked!, higher than the rest of its range of bleaches. This is an
example of:
A
B
C
D
Product line pricing
Loss leaders
Psychological pricing
3.17
The disadvantage with full cost plus pricing is that it is:
A
B
C
D
Time consuming and difficult

Not good for long-term profitability analysis
Not suitable for an ABC system
Not suit price/demand conditions
3.18
Which one of these is NOT an advantage of marginal cost plus pricing:
A
B
C
D
Better understanding of cost

Used when variable cost is available only (traders)
Good for short-term decision-making
Ensures fixed overheads are recovered in the long-term
3.19
Target costing is when a company:
A
B
C
D
Sets a target budget for a product

Takes into account the market price and a desired level of profit when costing a
product
Includes variable costs and product specific fixed costs only in its target budget
Bases its costs only on the market price
33 | P a g e
3.20
Which of the following is most likely to produce a horizontal demand curve?
A
B
C
D
Monopoly
Monopolistic competition
Perfect competition
Oligopoly
3.21
Charging a very low price on one item in order to generate customer loyalty and
increased sales of other items is called
A
B
C
D
Market penetration
Loss leader pricing
Product penetration
Skim pricing
3.22
The use of skim pricing as a marketing technique will result in
A
B
C
D
Non recovery of promotional costs

Enticing new customers to buy a product or service
High prices normally at an early stage of the product lifecycle
Low prices so denying competitors opportunities to gain market share
34 | P a g e
3.23
Complete the diagram for the product (or industry) life cycle below, by matching the
appropriate numbers (1 to 5) identified for each stage, to the words given below the
diagram?
Sales
Time
A
Maturity
B
Senility
C
Harvest
D
Director
E
Introduction
F
Decline
G
Growth
3.24
Complete the following table below by selecting the correct pricing strategy according to
the examples given within the table. Select THREE of the possible options (A to F)
below the table.
Example
Pricing
strategy
A retailor offering a sandwich and drink for a combined price

A train operator charging different prices according to the time of travel
A bar using happy hour (low prices) to encourage sales when off peak
A
Premium
Pricing
B
Price
Discrimination
C
Loss
Leader
D
Product
Bundling
E
Psychological
Pricing
F
Variable
Pricing
35 | P a g e
3.25
Which of the following if any are NOT ways of distinguishing a good from a service?
Greater tangibility
More labour intensive
Less perishability
Easier to brand
Existence of inventory
Greater homogeneity
Difficult to return
Greater separability
3.26
Which ONE of the following methods would include various products sold at a combined
price?
A
B
C
D
Promotional pricing
Product orientation
Product differentiation
Product bundling
3.27
A rapid increase in sales and profits are a characteristic of which ONE of the following
stages of the product life cycle?
A
B
C
D
Introduction stage
Maturity stage
Saturation stage
Growth stage
3.28
Which ONE of the following is a stage of the product lifecycle?
A
B
C
D
Obsolescence
Maturity
Entropy
Saturation
36 | P a g e
3.29
Which ONE of the following marketing terms would best describe a chocolate
manufacturer selling a 250ml jar of its instant hot chocolate, combined and sold along
with two bars of its chocolate for a special promotional price?
A
B
C
D
Premium Pricing
Multiple product pricing
Promotional pricing
Product bundling
3.30
Store loyalty cards and product differentiation are both forms of?
A
B
C
D
Non-price competition
Sale promotions
Public relations
Personal selling
3.31
Complete the following table below for the following product life-cycle stages by
matching each stage to the characteristics given below the table? Select all FOUR of the
possible options (A to D) below the table and place them in the correct order.
PLC Theory
Characteristics (insert letters A to D)
INTRODUCTION
GROWTH
MATURITY
DECLINE
High sales volume

and economies of
scale, profitability
and cash-flow
positive.
Customers
unaware and low
consumer
adoption, cashflow and profit
negative.
Consumer
adoption rapidly
increases,
profitability and
cash-flow
improve.
Product
obsolescence and
over capacity within
the industry.
37 | P a g e
38 | P a g e
Chapter 4 - Beyond budgeting

4.1
Which of the following statements apply to feedforward control?
(i) It is the measurement of differences between planned outputs and actual outputs.
(ii) It is the measurement of differences between planned outputs and forecast outputs.
(iii) Target costing is an example.
(iv) Variance analysis is an example.
A
B
C
D
(i) and (iii)

(i) and (iv)
(ii) and (iii)
(ii) and (iv)
4.2
Which of the following best describes a basic standard?
A
A standard set at an ideal level, which makes no allowance for normal losses,
waste and machine downtime.
A standard which assumes an efficient level of operation, but which includes

allowances for factors such as normal loss, waste and machine downtime.
A standard which is kept unchanged over a period of time.
A standard which is based on current price levels.
4.3
The term budgetary slack refers to the:
A
Lead time between the preparation of the functional budgets and the approval
of the master budget by senior management
Difference between the budgeted output and the actual output
Difference between budgeted capacity utilisation and full capacity
Intentional over estimation of costs and/or under estimation of revenue in a

budget
39 | P a g e
4.4
S has several sales teams, each of whom is allocated a specific territory. S has used
traditional budgeting techniques in the past to provide targets and to motivate sales staff.
The sales director is considering switching to a beyond budgeting approach.
Which of the following are potential benefits of beyond budgeting?
Coordination between sales and production will improve
There will be less scope for budget slack
Sales staff will be better motivated
Coordination and cooperation will increase across the sales department
Less time will be spent on budgeting
4.5
Which of the following if any may be considered to be objectives of budgeting?
Co-ordination
Marketing
Communication
Expansion
Resource allocation
4.6
What is feedforward control?
A
The comparison of actual results with planned outcomes and taking action to
correct differences in order to achieve the desired future results.
The comparison of forecast results with planned outcomes and taking action to
avoid forecast differences.
The forecasting of future events as a basis for a system of budgetary planning and
control.
The communication of budgetary plans to budget holders in advance of the budget

period.
40 | P a g e
4.7
What does responsibility accounting mean? Select all that apply if any.
To allow comparisons between the budge and actual results and then any
major differences can be investigated.
To allows mangers to be responsible for the management of resources that
they have been allocated in the budget, and as a result assessed on the
success of resource management.
To allow a more efficient production of goods and services because they can
be linked with one another.
To allow judgements to be made on the performance of the managers by
comparing the actual results with the budget.
To allow targets to be created for managers that they will want to achieve.
To allow everyone to understand what resources are available and how they
are to be allocated to different budgets.
4.8
What is the behavioural side of budgets concerned about? Select all that apply if any.
How budgets or standards affect people within an organisation
How budgets or standards affect costs
How budgets or standards affect profits
How budgets or standards affect the environment
How budgets or standrads affect resource allocation
4.9
Which of these are advantages of participation of staff in budget preparation? Select all
that apply if any.
Greater motivation of staff
Faster process in setting the budget
Reduction in busget padding
Targets are more likely to be accepted by staff
Useful if revenue and costs are stable
41 | P a g e
4.10
Which of these are disadvantages of participation of staff in budget preparation? Select
all that apply if any.
Inexpereinced staff
Reduced training costs of staff for budget preparation
Targets are less likely to be achived
Increased slack in the budget
Slower process
4.11
Beyond budgeting may include the following: Select all that apply if any:
Focus on cost control not cash forecasts
Budgets revised more frequently and a longer time horizon when forecasting
Using a fixed budget to make comparisons
Benchmarking for continuous improvement
4.12
Please use some of the following words:
Rigid, Flexible, Flexibilty, Rigidity, Information, Acceptance, Conformance,
Internally, Externally
To complete the following sentances with respect to Beyond Budgeting.
The traditional budget process is too ______________ and requires __________ to it
with not enough _______________ .With the constantly changing business environment,
managers need to be having more up to date _____________ to help them make
decisions.
The budget process is often too bureaucratic, __________ focussed and time consuming.
42 | P a g e
4.13
Please use some of the following words:
Quickly, Stable, Dynamic, Innovation, Costs, Customer, Slowly, Resources
To complete the following sentances with respect to Beyond Budgeting.
Beyond budgeting will allow businesses to react __________ in a __________
environment giving management the advantage to change and allocate __________ . This
should result in better ___________, lower __________ and improved ________ and
supply loyalty.
4.14
Which of these are NOT the main principles of Beyond Budgeting? Select all that apply.
Managers are given less discretion and freedom to make decisions
Managers targets are linked with the organisations strategy
Everyone has undefined areas of responsibility
Front line teams are responsible for managing the business relationships with
customers and suppliers
Information should be transparent and relevant
4.15
Which of these is not an example of a KPI? Select all that apply if any.
Number of complaints
Courtsey of staff
Nuumber of breakdowns
Percentage increase in sales
The product range
Profit
43 | P a g e
4.16
Which of these is not an example of CSF? Select all that apply if any.
No of late deliveries
Number of repeat business sales
Easy of use of product
New internal control system
Stock turnover
Price elasticity of demand
4.17
Which of these is an example of a KPI? Select all that apply if any.
Share price growth
Strategy developemt
Training days per emplyoee
Number of machine breakdowns per day
Earnings per share
Average customer ratings
4.18
Which of these is an example of a CSF? Select all that apply if any.
Net Present Value
Percentage of staff suggestions for improvement
Number of products launched
Return on capital employed
The functions of a product
Number of defective products
4.19
Which of these relate to feedback control? Select all that apply if any.
Feedback can be negative (adverse) or positive (favourable)
Feedback is based on comparing actual to a standard of performance
It isa pre-emptive reaction to actual change
Examples of feedback control is a rolling budget
Control action would be closing the stable door after the horse has bolted
44 | P a g e
4.20
Which of these relate to feedforward control? Select all that apply if any.
Forecasting ahead and doing something now before the event occurs
They are good for adaptive planning
Examples of feedforward control is variance analysis
Control action would be closing the stable door before the horse bolts
Part of the output of a system is measured and returned as input to regulate
the systems further output.
4.21
Fill in this diagram of an open loop control system using the words below:
Input, Sensor, Comparator, Output, High Level Controller, Effector, Process
45 | P a g e
4.22
Which of these if any describe a double feeback loop system? Select all that apply if any.
It is an open loop control system
Corrective action is not automatically taken
Environmental factors are not considered before any control action
It is not a closed loop control sytem
It includes human intervention
4.23
Which if these if any describe a single feedback loop system? Select all that apply if any.
Corrective action is automatically taken
It is a closed loop control sytem
4.24
Which of these defines the High Level Controller in an open control system?
A
B
C
D
Detects information it is programmed or instructed to find

Compares results against a predetermined standard or plan
It is either automatic or human action taken to correct future undesired outcomes
It is human intevention
4.25
Whioch of these defines the sensor in an open control system?
A
B
C
D

It is the process undertaken to make or create value
It is the input of raw data
46 | P a g e
4.26
Associate the correct word with the relevant example, not all words will apply.
Input, Process, Sensor, Output, Comparator, Effector, High Level Controller
Sales being generated by sales reps
Comparisons are made between the target level of sales expected
by sales reps and the actual results
The report showing level of sales and commissions earned by
different sales reps
Sales manager takes action over those sales reps that did not meet
their sales targets
4.27
Associate the correct word with the relevant example, not all words will apply.
Input, Process, Sensor, Output, Comparator, Effector, High Level Controller
The sales manager will review the level of sales and production and
in conjunction with the production manager and together agree on
appropriate action to increase or decrease raw materials levels to
ensure that a satisfactory level of production is reached to support
sales.
Comparisons are made between the actual level of sales and actual
level of production of finished goods.
This is a quality control procedure of the finished product to ensure it
meets certain standards.
These are the products themselves which are sold customers.
The raw materials are used in the production process.
Raw materials being delivered to a factory to go into production.
47 | P a g e
4.28
Which of these defines the comparator in an open control system?
A
B
C
D

It is the process undertaken to make or create value
It is the input of raw data
4.29
Which of these defines the Effector in an open control system?
A
B
C
D

It is either automatic or human action taken to correct future undesired outcomes
It is human intevention
4.30
Which of these, if any, are why budgetary planning and control might be inappropriate in
a rapidly changing business environment.
Stifle innovation and creativity.
consume large amounts of management time to set
Too internal in focus
Ceate barriers within departments
Too short-term in focus
48 | P a g e
Chaper 5 - Activity based costing

5.1
RDE plc uses an activity based costing system to attribute overhead costs to its three
products. The following budgeted data relates to the year to 31 December 2008:
Product
Production units (000)
Batch size (000 units)
X
15
2.5
Y
25
5
Z
20
4
Machine set up costs are caused by the number of batches of each product and have been
estimated to be 600,000 for the year.
Calculate the machine set up costs that would be attributed to each unit of product Y.
The following information is given for sub-questions 5.2 and 5.3 below
RS has recently introduced an activity based costing system. RS manufactures two
products, details of which are given below:
Budgeted production per annum (units)
Batch size (units)
Machine set-ups per batch
Processing time per unit (minutes)
Product R
80,000
100
3
3
Product S
60,000
50
3
5
The budgeted annual costs for two activities are as follows:

Machine set-up
Processing
$180,000
$108,000
5.2
The budgeted processing cost per unit of Product R is:
A
B
C
D
$0.20
$0.51
$0.60
$0.45
49 | P a g e
5.3
The budgeted machine set-up cost per unit of Product S is:
A
B
C
D
$150
$1.80
$1.50
$30
The following data are given for questions 5.4 and 5.5
DRP Limited has recently introduced an Activity Based Costing system. It manufactures
three products, details of which are set out below:
Product D
100,000
100
3
2
2
Budgeted annual production (units)

Batch size (units)
Purchase orders per batch
Processing time per unit (minutes)
Product R
100,000
50
4
1
3
Product P
50,000
25
6
1
3
Three cost pools have been identified. Their budgeted costs for the year ending 31
December 2004 are as follows:
Machine set-up costs
Purchasing of materials
Processing
150,000
70,000
80,000
5.4
Calculate the annual budgeted number of:
(a) batches
(b) machine set-ups
(c) purchase orders
(d) processing minutes
5.5
Calculate the budgeted overhead unit cost for Product R for inclusion in the budget for
2004.
50 | P a g e
The following data are given for sub-questions 5.6 to 5.8

K makes many products, one of which is Product Z. K is considering adopting an
activity-based costing approach for setting its budget, in place of the current practice of
absorbing overheads using direct labour hours. The main budget categories and cost
driver details for the whole company for October are set out below, excluding direct
material costs:
Budget category
Direct labour
Set-up costs
Quality testing costs*
Other overhead costs
128,000
22,000
34,000
32,000
Cost driver details

8,000 direct labour hours
88 set-ups each month
40 tests each month
absorbed by direct labour hours
* A quality test is performed after every 75 units produced

The following data for Product Z is provided:
Direct materials
Direct labour
Batch size
Set-ups
Budgeted volume for October
budgeted cost of 21.50 per unit

budgeted at 0.3 hours per unit
30 units
2 set-ups per batch
150 units
5.6
Calculate the budgeted unit cost of product Z for October assuming that a direct labourbased absorption method was used for all overheads.
5.7
Calculate the budgeted unit cost of product Z for October using an activity-based costing
approach.
5.8
Explain in less than 50 words, why the costs absorbed by a product using an activitybased costing approach could be higher than those absorbed if a traditional labour-based
absorption system were used, and identify two implications of this for management.
51 | P a g e

SM makes two products, Z1 and Z2. Its machines can only work on one product at a
time. The two products are worked on in two departments by differing grades of labour.
The labour requirements for the two products are as follow:
Minutes per unit of product
Department 1
Department 2
Z1
12
20
Z2
16
15
There is currently a shortage of labour and the maximum times available each day in
Departments 1 and 2 are 480 minutes and 840 minutes, respectively.
The current selling prices and costs for the two products are shown below:
Selling price
Direct materials
Direct labour
Variable overheads
Fixed overheads
Profit per unit
Z1
per unit
50.00
10.00
10.40
6.40
12.80
10.40
Z2
per unit
65.00
15.00
6.20
9.20
18.40
16.20
As part of the budget-setting process, SM needs to know the optimum output levels. All
output is sold.
5.9
Calculate the maximum number of each product that could be produced each day, and
identify the limiting factor/bottleneck.
5.10
Using traditional contribution analysis, calculate the profit-maximising output each day,
and the contribution at this level of output.
5.11
Using a throughput approach, calculate the throughput-maximising output each day,
and the throughput contribution at this level of output.
52 | P a g e
5.12
CJD Ltd manufactures plastic components for the car industry. The following budgeted
information is available for three of their key plastic components:
Selling price
Direct material
Direct labour
W
per unit
200
50
30
X
per unit
183
40
35
Y
per unit
175
35
30
Units produced and sold
10,000
15,000
18,000
The total number of activities for each of the three products for the period is as follows:
Number of purchase requisitions
Number of set ups
1,200
240
1,800
260
2,000
300
Overhead costs have been analysed as follows:

Receiving/inspecting quality assurance
Production scheduling/machine set up
1,400,000
1,200,000
Calculate the budgeted profit per unit for each of the three products using activity based
budgeting.
LM operates a parcel delivery service. Last year its employees delivered 15,120 parcels
and travelled 120,960 kilometres. Total costs were $194,400. LM has estimated that 70%
of its total costs are variable with activity and that 60% of these costs vary with the
number of parcels and the remainder vary with the distance travelled. LM is preparing its
budget for the forthcoming year using an incremental budgeting approach and has
produced the following estimates:
All costs will be 3% higher than the previous year due to inflation
Efficiency will remain unchanged
A total of 18,360 parcels will be delivered and 128,800 kilometres will be travelled.
5.13
Calculate the total variable costs related to the number of parcels delivered.
5.14
Calculate the total variable costs related to the distance travelled.
53 | P a g e
5.15
An ABC system refers to
A
B
C
D
A Japanese style problem solving device that is particularly helpful in inventory

management
An inventory management method that concentrates effort on the most important
items
Accuracy, brevity and clarity in the quality of system reporting
A mainframe solution to managing inventory
5.16
Which of these is an advantage of ABC?
A
B
C
D
Very good for a company which has one or two products

Gives 100% illustration of what drives fixed costs
Cheap to run and maintain
More efficient management of resources
5.17
For a hospital which of these does not seem like a sensible activity and cost driver?
A
B
C
D
Activity
Insurance for building
Phone appointments
Patient main reception
Length of patient stay
Cost driver
Maintenance costs
No. of patients
No. of patients
No. of patients
5.18
Satisfying customers whilst minimising resource use is an example of:
A
B
C
D
Activity based management

Customer profitability analysis
Distribution channel profitability
Business process re-engineering
54 | P a g e
5.19
Y Ltd operates an activity based costing system to allocate overhead to cost units.
In its budget for the year, the company expected to undertake a total number of quality
control inspections of 550 at a total cost of 5,775. During this period, a total number of
inspections of 468 were undertaken, which incurred an actual cost of 4,500. The over or
under recovery of these costs for the above period was
A
B
C
D
Over absorption 414

Under absorption 414
Over absorption 1,275
Under absorption 1,275
5.20
A Ltd has recently introduced an activity based costing system. It manufactures two
products details were as follows:
Product A
Budgeted annual production (units) 50,000
Batch size (units)
1,000
Machine set ups per batch
7
Product B
30,000
300
5
Budgeted costs for the machine set up for the above period was 55,250. The budgeted
machine set up cost per unit for the above period was:
A
B
C
D
50
55
60
65
5.21
An accountancy practice recovers its fixed salaries of audit managers, by charging a fixed
amount to a client on the basis of the number of hours of consultation provided.
Budgeted salaries for the period were 300,000 and actual salaries and consulting hours
performed for the period were 320,000 and 16,000 hours respectively. There was an
over absorption of salary overhead for the period of 24,000.
The overhead absorption rate per consultancy hour would have been?
A
B
C
D
15.00
18.75
20.00
21.50
55 | P a g e
5.22
The accounting entry for an over absorption of production fixed overhead for a period,
within an integrated system of cost bookkeeping would be?
A
B
C
D
Debit
Work-in-progress account
Production overhead control account
Cost of sales account
Credit
Profit and loss account
Finished goods control account
5.23
The double entry for the transfer of completed production for a company operating an
integrated cost ledger bookkeeping system would be?
A
B
C
D
Debit
Credit
5.24
Activity based costing (ABC) is claimed to provide more accurate product costs than a
traditional absorption costing system.
Which of the following statements does NOT support this claim?
A
B
C
D
ABC uses cost drivers to allocate overhead costs to products by cost pool
ABC will improve gives an exact understanding of how overheads were onsumed
ABC assigns overheads to each major activity
ABC uses volume based cost drivers
56 | P a g e
5.25
A company uses an activity based costing system. Three products are manufactured,
details of which are given below:
Annual production (units)
Batch size (uints)
A
80,000
100
3
B
100,000
50
4
C
50,000
25
6
Annual machine set-up costs are $150,000.

The machine set-up cost per unit of Product B (to the nearest $0.01) is:
A
B
C
D
$0.46
$0.65
$6.70
$0.54
5.26
Put the following stages of an activity based budgeting system in chronological order.
Take action to adjust the capacity of resources to match the projected supply
Determine the resources that are required to perform organisational activities
Estimate the production and sales volume by individual products and
customers
Estimate the demands for organisational activities
Place EACH of the following options against ONE of the above
.
1st, 2nd, 3rd and 4th
57 | P a g e
5.27
Classify the following activity based costs incurred in a multi-product manufacturing
environment by placing the activities next to the costs below:
Unit level activities
Batch level activities
Product sustaining activities
Facility sustaining activities
Cost
Purchase order processing costs
Classification
Product advertising costs

Factory rent and rates
Direct labour costs
Product redesign costs
Material handling costs
5.28
A company uses an activity based costing system to attribute overhead costs to its three
products. The following budgeted data relates to this year:
Product
Production (units)
Batch size
X
50,000
250
Y
25,000
100
Z
20,000
400
Material handling costs are determined by the number of batches of each product and
have been estimated to be $60,000 for the year. What is the cost driver rate for material
handling costs?
58 | P a g e
5.29
Details of 2 customers Mr Pink and Mr White and total company sales:
Number of:
Packs sold (000)
Sales visits to customers
Orders placed by customers
Normal deliveries to customers
Urgent deliveries to customers
Activity costs:
Processing orders placed by customers
Mr Pink
Mr White
Company
50
24
75
45
5
27
12
20
15
0
300
200
700
240
30
$000s
50
70
120
60
Work out the 4 relevant cost drivers.

5.30
Details of 2 customers Mr Pink and Mr White and total company sales:
Number of:
Packs sold (000)
Orders placed by customers
Activity
Normal delivery
Order processing
Urgent deliveries
Sales visits
Company
34
30
43
70
25
45
12
30
45
4
300
200
700
240
30
Cost driver rate

$700/delivery
$400/order
$3,000/urgent delivery
$500/visit
59 | P a g e
Fill in the CPA statement below:
Costs
$000
$000
Sales visits
Orders processing
Normal deliveries
Urgent deliveries
Total costs
5.31
The main difference (or differences) between how traditional costing and activity based
costing treat indirect manufacturing costs is (are) that
A
Traditional costing uses only production volume based drivers while activity
based costing uses only non production volume based drivers.
D amd E
Traditional cost allocations are usually based on a plant wide overhead rate, while
ABC systems use departmental overhead rates.
Traditional costing treats only unit level costs as variable, while ABC systems
treat unit level, batch level and product level costs as variable.
A and C
60 | P a g e
5.32
Indicate which are true or false.
Statements
True or False
If products are uniform and customers are similar in their demands,

activity based costing may not offer a significant advantage over
machine hours when assigning overhead.
In activity based costing, the manufacturing overhead cost per unit will
depend partially on the number of units in a batch.
The cost to set up production equipment is best allocated directly to
products via machine hours.
5.33
Which would be the most favorable basis for allocating manufacturing overhead for a
factory with automated equipment and a significant variation of services by its indirect
labour?
A
B
C
D
Direct labour hours

Machine hours
ABC
None of the above
5.34
The ABC cost allocation system excludes consideration of which of the following if any?
Costs allocated to service departments using the reciprocal costing method
Committed fixed costs
Direct costs of materials
Variable non-manufacturing costs
Manufacturing fixed overhead costs
61 | P a g e
5.35
Which of the following, if any, is true of an activity based costing system?
An activity based costing system will provide a more accurate apportionment
of overheads to products than absorption costing
An activity based costing system will cost less to administer than an
absorption costing system
The activity based costing system will be less detailed than an absorption
costing system
An activity based costing system is easier to administer than an absorption
costing system
5.36
Indicate which are true or false.
Statements
True or False
Under ABC, indirect manufacturing costs are predominantly assigned

on the basis of direct machine hours.
Setup cost is an example of a batch-level cost.
In ABC the assumption is that prodcuts use resources or cause costs.
5.37
A company has a budgeted level of fixed overheads of 385,000 and the overhead
recovery rate is 4.25 per machine hour, what is the number of machine hours we expect
to use?
A
B
C
D
4,250
385,000
90,600
1,636
62 | P a g e
5.38
Which would be the least favorable basis for allocating manufacturing overhead for a
factory with automated equipment and a significant variation of services by its indirect
labour?
A
B
C
D
Direct labour hours

Machine hours
ABC
None of the above
5.39
Which of the following statements is correct?
A
Activity based costing uses a number of activity cost pools, each of which is
allocated to products on the basis of direct labour hours
An activity based costing system is generally easier to implement and maintain

than traditional costing system
Activity rates in activity based costing are computed by dividing costs from the
first-stage allocations by the activity measure for each activity cost pool
One of the goals of activity based management is the elimination of waste by

allocating costs to products that waste resources
5.40
All of the following are examples of batch level activities except?
A
B
C
D
Worker recreational facilities

Purchase order processing
Setting up equipment
Clerical activity associated with processing purchase orders to produce an order
for a standard product
63 | P a g e
5.41
The estimated total cost and expected activity for a company's activity cost pools are as
follows.
Total cost
150,000
Hrs for Product A

500
Hrs for Product B

700
The activity rate under the activity based costing system for this activity is closest to:
A
B
C
D
300
125
214
140
5.42
A company uses activity-based costing to compute product costs. The company applies
overheads using a predetermined overhead rate for each activity cost pool.
Budgeted costs were 20,000 and budgted activity was 1,250. Actual activity for the
current year was 3,000. The amount of overhead applied for this activity during the year
was closest to:
A
B
C
D
42,000
26,780
48,000
34,190
5.43
All of the following are examples of product level activities except:
A
B
C
D
Parts administration
Advertising a product
Testing a prototype of a new product
Human resource management
64 | P a g e
5.44
A company has two products, X and Y. The annual production and sales level of product
X is 17,000 units. The annual production and sales level of product Y is 13,000. The
company uses activity based costing and has prepared the following analysis showing the
estimated total cost and expected activity for each of its three activity cost pools.
Activity cost pool
Budgeted overhead cost
Alpha
Beta
Gamma
$15,000
$30,000
$45,000
Hrs for
Product X
800
400
100
Hrs for
Product Y
300
700
2,300
Total
1,200
1,100
2,400
The ABC overhead absorption rate for Gamma is:

$29.32
$19.57
$18.75
$17.66
A
B
C
D
5.45
A company has two products, G and H. The annual production and sales level of product
G is 9,000 units. The annual production and sales level of product H is 20,000. The
company uses activity based costing and has prepared the following analysis showing the
estimated total cost and expected activity for each of its three activity cost pools.
Activity cost pool
Budgeted overhead cost
Alpha
Beta
Gamma
$24,000
$88,000
$12,000
Hrs for
Product G
800
400
100
Hrs for
Product H
300
700
2,300
Total
1,200
1,100
2,400
The overhead cost per unit of product G under activity based costing is:
A
B
C
D
$5.39
$3.56
$10.45
$7.56
65 | P a g e
5.46
A company has three activity cost pools and applies overhead using predetermined
overhead rates for each activity cost pool. Estimated costs and activities for the current
year are presented below for the three activity cost pools:
Activity cost pool
G
H
I
Budgeted costs
45,000
10,000
25,000
Hrs for product V

6
70
130
The ABC overhead rates for G, H and I to the nearest whole number:
A
B
C
D
G = 396, H = 300, I = 450

G = 143, H = 7,500, I = 192
G = 450, H = 261, I = 396
G = 7,500, H = 143, I = 192
5.47
When there are batch level or product level costs, in comparison to a traditional cost
system, an activity based costing system ordinarily will shift costs from:
A
B
C
D
Standardised to specialised products

High volume to low volume products
Specialised to standardised products
Low volume to high volume products
5.48
The following are steps in ABC:
Calculation of cost application rates
Identification of cost drivers
Assignment of cost to products
Identification of cost pools
66 | P a g e
5.49
Shah Rukh Khans production company writes songs for Indian films.
During a recent period, his company wrote 10,000 songs which cost 145,000. If 3,312 of
these songs were sad songs and the remainder were happy songs, what would be the costs
allocated to the happy songs?
A
B
C
D
96,976
48,024
145,000
10,000
5.50
Which of the following apply if any?
ABC systems:
Use a single volume based cost driver
Assign overheads to products only based on the products' use of labour
Often reveal products that were under or overcosted by traditional costing systems
Typically use fewer cost drivers than more traditional costing systems
Have a tendency to distort product costs
5.51
Which of the following cannot use ABC?
Manufacturers
Financial-services firms
Book publishers
Hotels
None of the above, as all are able to use this costing system
5.52
Which of the following statements about ABC is false?
ABC cannot be used by service businesses
ABC can help a company eliminate (or reduce) non-value added costs
ABC results in less cost averaging of various diversified activities compared to
traditional absorption costing
ABC results in more costs being classified as direct costs
ABC tends to reduce cost distortion among product lines
67 | P a g e
68 | P a g e
Chapter 6 - TQM techniques

6.1
A just-in-time (JIT) purchasing system may be defined as:
A
A purchasing system in which the purchase of material is contracted so that the

receipts and usage of material coincide.
A purchasing system which is based on estimated demand for finished products.
A purchasing system where the purchase of material is triggered when inventory

levels reach a pre-determined re-order level.
A purchasing system which minimises the sum of inventory ordering costs and
inventory holding costs.
A company produces three products using three different machines. No other products
are made on these particular machines. The following data is available for December
2003.
Product
Contribution per unit
Machine hours required per unit
Machine 1
Machine 2
Machine 3
Estimated sales demand (units)
A
36
B
28
C
18
5
5
2.5
50
2
5.5
1
50
1.5
1.5
0.5
60
Maximum machine capacity in December will be 400 hours per machine.

6.2
(a) Calculate the machine utilisation rates for each machine for December 2003.
(b) Identify which of the machines is the bottleneck machine.
6.3
(a) State the recommended procedure given by Goldratt in his Theory of Constraints
for dealing with a bottleneck activity.
(b) Calculate the optimum allocation of the bottleneck machine hours to the three
products.
69 | P a g e
6.4
An rganization manufactures four products J, K, L and M. The products use a series
of different machines but there is a common machine, X, which causes a bottleneck. The
standard selling price and standard cost per unit for each product for the forthcoming year
are as follows:
Selling price
Cost:
Direct materials
Labour
Variable overheads
Fixed overheads
Profit
Machine X minutes per unit
J
/unit
2,000
K
/unit
1,500
L
/unit
1,500
M
/unit
1,750
410
300
250
360
680
120
200
200
200
300
600
100
300
360
300
210
330
70
400
275
175
330
570
110
Direct material is the only unit level manufacturing cost.

Using a throughput accounting approach, how would you rank the products?
6.5
Definition A: A technique where the primary goal is to maximise throughput while
simultaneously maintaining or decreasing inventory and operating costs.
Definition B: A system whose objective is to produce or procure products or
components as they are required by a customer or for use, rather than for inventory.
Which of the following pairs of terms correctly matches the definitions A and B above?
A
B
C
D
Definition A
Definition B
Manufacturing resource planning

Enterprise resource planning
Optimised production technology
Just-in-time
Material requirements planning
Just-in-time
70 | P a g e
6.6
Which of the following statements is/are true?
(i) Computer-integrated manufacturing (CIM) brings together advanced manufacturing
technology and modern quality control into a single computerised coherent system.
(ii) Flexible manufacturing systems (FMS) are simple systems with low levels of
automation that offer great flexibility through a skilled workforce working in teams.
(iii) Electronic data interchange (EDI) is primarily designed to allow the operating units
in an organisation to communicate immediately and automatically with the sales and
purchasing functions within the organisation.
A
B
C
D
(i) only
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only

SM makes two products, Z1 and Z2. Its machines can only work on one product at a
time. The two products are worked on in two departments by differing grades of labour.
The labour requirements for the two products are as follow:
Minutes per unit of product
Department 1
Department 2
Z1
12
20
Z2
16
15
There is currently a shortage of labour and the maximum times available each day in
Departments 1 and 2 are 480 minutes and 840 minutes, respectively.
The current selling prices and costs for the two products are shown below:
Selling price
Direct materials
Direct labour
Variable overheads
Fixed overheads
Profit per unit
Z1
per unit
50.00
10.00
10.40
6.40
12.80
10.40
Z2
per unit
65.00
15.00
6.20
9.20
18.40
16.20
As part of the budget-setting process, SM needs to know the optimum output levels. All
output is sold.
71 | P a g e
6.7
Calculate the maximum number of each product that could be produced each day, and
identify the limiting factor/bottleneck.
6.8
Using traditional contribution analysis, calculate the profit-maximising output each day,
and the contribution at this level of output.
6.9
Using a throughput approach, calculate the throughput-maximising output each day,
and the throughput contribution at this level of output.
6.10
Definition 1: A system that converts a production schedule into a listing of materials and
components required to meet the schedule so that items are available when needed.
Definition 2: An accounting system that focuses on ways by which the maximum return
per unit of bottleneck activity can be achieved.
Which of the following pairs of terms correctly matches definitions 1 and 2 above?
A
B
C
D
Definition 1
Definition 2
Manufacturing resources planning (MRP2)

Material requirements planning (MRP1)
Material requirements planning (MRP1)
Supply chain management
Backflush accounting
Throughput accounting
Theory of constraints
Throughput accounting
72 | P a g e
6.11
Which of the following statements is/are true?
(i) Enterprise Resource Planning (ERP) systems use complex computer systems, usually
comprehensive databases, to provide plans for every aspect of a business.
(ii) Flexible Manufacturing Systems (FMS) are simple systems with low levels of
automation that offer great flexibility through a skilled workforce working in teams.
(iii) Just-in-time (JIT) purchasing requires the purchasing of large quantities of inventory
items so that they are available immediately when they are needed in the production
process.
A
B
C
D
(i) only
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
6.12
Which of the following definitions are correct?
(i) Just-in-time (JIT) systems are designed to produce or procure products or components
as they are required for a customer or for use, rather than for inventory;
(ii) Flexible manufacturing systems (FMS) are integrated, computer-controlled
production systems, capable of producing any of a range of parts and of switching
quickly and economically between them;
(iii) Material requirements planning (MRP) systems are computer based systems that
integrate all aspects of a business so that the planning and scheduling of production
ensures components are available when needed.
A
B
C
D
(i) only
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
73 | P a g e
6.13
S Ltd manufactures three products, A, B and C. The products use a series of different
machines but there is a common machine, P, that is a bottleneck. The selling price and
standard cost for each product for the forthcoming year is as follows:
Selling price
Direct materials
Conversion costs
Machine P minutes
A
$
200
41
55
12
B
$
150
20
40
10
C
$
150
30
66
7
Calculate the return per hour for each of the products.

6.14
Two CIMA definitions follow:
1. A system that converts a production schedule into a listing of the materials and
components required to meet that schedule so that adequate stock levels are maintained
and items are available when needed.
2. An accounting oriented information system, generally software driven, which aids in
identifying and planning the enterprise-wide resources needed to resource, make, account
for and deliver customer orders.
Which of the following pairs of terms matches the definitions?
A
B
C
D
Definition 1
Definition 2
74 | P a g e
The following data are given for sub-questions 6.15 and 6.16
A manufacturing company recorded the following costs in October for Product X:
Direct materials
Direct labour
Variable production overhead
Fixed production overhead
Variable selling costs
Fixed distribution costs
Total costs incurred for Product X
$
20,000
6,300
4,700
19,750
4,500
16,800
72,050
During October 4,000 units of Product X were produced but only 3,600 units were sold.
At the beginning of October there was no inventory.
6.15
The value of the inventory of Product X at the end of October using marginal costing
was:
A
B
C
D
$3,080
$3,100
$3,550
$5,075
6.16
The value of the inventory of Product X at the end of October using throughput
accounting was:
A
B
C
D
$630
$1,080
$1,100
$2,000
6.17
A company can produce many types of product but is currently restricted by the number
of labour hours available on a particular machine. At present this limitation is set at
12,000 hours per annum. One type of product requires materials costing $5 which are
then converted to a final product which sells for $12. Each unit of this product takes 45
minutes to produce on the machine. The conversion costs for the factory are estimated to
be $144,000 per annum. Calculate the throughput accounting ratio for this product and
state the significance of the result.
75 | P a g e
6.18
The following details relate to Product Z:
Selling price
Purchased components
Labour
Variable overhead
Fixed overhead
$/unit
45.00
14.00
10.00
8.50
4.50
Time on bottleneck resource 10 minutes

Product return per minute is
A
B
C
D
$0.80
$1.25
$2.10
$3.10
6.19
In the context of quality costs, customer compensation costs and test equipment running
costs would be classified as:
A
B
C
D
Customer compensation costs
Test equipment running costs
Internal Failure Costs

Internal Failure Costs
External Failure Costs
External Failure Costs
Prevention Costs
Appraisal Costs
Appraisal Costs
Prevention Costs
76 | P a g e
The following scenario is to be used for questions 6.20 and 6.21

A company manufactures three products: W, X and Y. The products use a series of
different machines, but there is a common machine that is a bottleneck.
The standard selling price and standard cost per unit for each product for the next period
are as follows:
Selling price
180
150
150
Cost:
Direct material
Direct labour
Variable production overheads
Fixed production overheads
Profit
Time (minutes) on bottleneck machine
41
30
24
36
49
7
20
20
16
24
70
10
30
50
20
30
20
7
The company is trying to plan the best use of its resources.

6.20
Using a traditional limiting factor approach, the rank order (best first) of the products
would be
A
B
C
D
W, X, Y
W, Y, X
X, W, Y
Y, X, W
6.21
Using a throughput accounting approach, the rank order (best first) of the products would
be
A
B
C
D
W, X, Y
W, Y, X
X, W, Y
Y, X, W
77 | P a g e
6.22
Which of the following statements are true?
(i) Enterprise Resource Planning (ERP) systems are accounting oriented information
systems which aid in identifying and planning the enterprise wide resources needed to
resource, make, account for and deliver customer orders.
(ii) Flexible Manufacturing Systems (FMS) are integrated, computer-controlled
production systems, capable of producing any of a range of parts and of switching
quickly and economically between them.
(iii) Just-In-Time (JIT) is a system whose objective is to produce, or to procure, products
or components as they are required.
A
B
C
D
(i) and (ii) only

(i) and (iii) only
(ii) and (iii) only
(i), (ii) and (iii)
A company produces three products D, E and F. The statement below shows the selling
price and product costs per unit for each product, based on a traditional absorption
costing system.
Product D
Product E
Product F
$
$
$
Selling price per unit
Variable costs per unit
Direct material
Direct labour
Variable overhead
Fixed cost per unit
Fixed overhead
Total product cost
Profit per unit
Additional information:
Demand per period (units)
Time in Process A (minutes)
32
28
22
10
6
4
8
4
2
6
4
2
9
29
3
6
20
8
6
18
4
3,000
20
4,000
25
5,000
15
Each of the products is produced using Process A which has a maximum capacity of
2,500 hours per period.
78 | P a g e
6.23
If a traditional contribution approach is used, the ranking of products, in order of priority,
for the profit maximising product mix will be:
A
B
C
D
D, E, F
E, D, F
F, D, E
D, F, E
6.24
If a throughput accounting approach is used, the ranking of products, in order of priority,
for the profit maximising product mix will be:
A
B
C
D
D, E, F
E, D, F
F, D, E
D, F, E
6.25
Core features of world-class manufacturing involve:
A
B
C
D
Competitor benchmarking and an investment in training and development

An investment in IT and technical skills
Global sourcing networks and an awareness of competitor strategies
A strong customer focus and flexibility to meet customer requirements
6.26
Corrective work, the cost of scrap and materials lost are
A
B
C
D
Examples of internal failure costs

Examples of external failure costs
Examples of appraisal costs
Examples of preventative costs
79 | P a g e
6.27
Economies of scope refers to
A
B
C
D
The economic viability of making alterations to systems

An organisation becoming economically viable through a process of rightsizing
Mass production assembly lines achieving economies through volume of
output
Economically producing small batches of a variety of products with the same
machines
6.28
Reck and Longs strategic positioning tool identifies an organisations
A
B
C
D
Purchasing approach
Sales approach
Manufacturing approach
Warehousing approach
6.29
Inbound logistics is a
A
B
C
D
Secondary activity that refers to price negotiation of incoming raw materials

Ssecondary activity that refers to receipt, storage and inward distribution of raw
materials
Primary activity that refers to inbound enquiries and customer complaints
Primary activity that refers to receipt, storage and inward distribution of raw
materials
6.30
Which ONE of the following would best describe individuals or departments within an
operation that supply products or services to other deparments or individuals within an
operation?
A
B
C
D
Hierarchy of operations
Internal supplier
Supply network
Internal customer
80 | P a g e
6.31
Which ONE of the following statements about Kaizen would NOT be correct?
A
B
C
D
Kaizen is similar to TQM

Kaizen means continuous improvement
Kaizen may use quality circles
Kaizen is a measure of quality
6.32
Which ONE of the following would NOT normally be a characteristic of lean production
methods?
A
B
C
D
Mass production techniques

Flexible workforce
JIT stock control
Continuous improvement
6.33
Which ONE of the following would NOT be an example of an internal failure cost for an
organisation?
A
B
C
D
Failure analysis and correction of defects found in production

Re-inspection of goods after defects have been found in production
Scrap of materials and work-in-progress
Training staff to reduce defects during the production process
6.34
Which ONE of the following product processes tend to deal with deal with high variety
and low volumes?
A
B
C
D
Continuous
Job
Project
Mass
81 | P a g e
6.35
Which ONE of the following is a key feature of a lean philosophy?
A
B
C
D
Quality accreditation
Elimination of waste
Service quality improvement
6.36
The following information is relevant to handling customer enquires within a call centre.
1000 customer enquires
30 minutes average duration per customer enquiry
The total throughput time for the call centre would be?
minutes
6.37
Which of the following are less likely to be forms of waste to eliminate when using lean
production methods?
Select THREE only.
Services
Waiting time
Movement
Quality
Over-production
Cost
Defects
Transport
6.38
Which ONE of the following would describe machine operators and assembly workers
which are trained to undertake routine servicing, fault diagnosis and maintenance of their
own operating machinery?
A
B
C
D
Lean production
Total productive maintenance
Total quality management
Lean synchronisation
82 | P a g e
6.39
Which ONE of the following would describe a car manufacturer which is organised into
smaller standalone factories with teams in each factory responsible for making a
complete product or small range of products?
A
B
C
D
Layout and flow

Focus factories
Cellular manufacturing
6.40
Which ONE of the following means the flow of products or services delivered exactly to
what customers require and with zero waste in this process?
A
B
C
D
JIT systems
Flexible manufacturing systems
Sustainable operations
6.41
A key feature of a lean philosophy within operations is
A
B
C
D
removal of waste
incremental change
official accreditation
continuous improvement
6.42
The aim of total productive maintenance is which ONE of the following?
A
B
C
D
Inclusivity and empowerment

Motivation and teamwork
Engagement and commitment
Prevention and continuity
6.43
Which ONE of the following does NOT represent a spoke in Cousins' supply wheel?
A
B
C
D
Cost benefit analysis

Portfolio of relationships
Performance measures
A firm's infrastructure
83 | P a g e
6.44
Small groups of employees that meet to identify work problems and their solution are
known as
A
B
C
D
Quality circles
Peer counsellors
Cellular production teams
Teleworkers
6.45
Porter's value system shows the organisation in terms of
A
B
C
D
the value chains of suppliers, channels and the customer

primary activities, support activities and margin
the technostructure, strategic apex and operating core
passive, independent, supportive and integrative approaches to supply
6.46
Service Level Agreements are normally associated with
A
B
C
D
job reductions negotiated with staff groups

de-skilling
agreed appraisal outcomes
outsourcing
6.47
Supplier relationships in a supply network are categorised in which ONE of the following
ways?
A
B
C
D
Single, multiple, delegated and parallel

Primary, secondary and post-purchase
Phased, pilot and integrated
One-to-one, several to one, 180 degrees and 360 degrees
6.48
Which ONE of the following is NOT a cost of quality?
A
B
C
D
Internal failure
Appraisal
Prevention
Transaction
84 | P a g e
6.49
Which of the following characteristics would distinguish traditional purchasing from
supply chain management?
Select THREE only.
Operational
Strategic
Supplier partnerships
Routine
Transformational
Passive
6.50
Which ONE of the following would NOT be a spoke within Cousins strategic supply
wheel?
A
B
C
D
Skills and competences

Strategic performance measures
Cost-benefit analysis
Multiple sourcing
6.51
Which ONE of the following supplier sourcing strategies would include shopping around
on the internet in order to find the best price available for ordering?
A
B
C
D
Single sourcing
Multiple sourcing
Delegated sourcing
Parallel sourcing
6.52
Which ONE of the following would be a characteristic to explain quality control?
A
B
C
D
Feedforward Control
Feedback Control
Quality assurance procedures and systems
85 | P a g e
6.53
Which of the following would be examples of prevention costs for quality?
Select THREE only.
Rework of work-in-progress
Regular inspection and routine servicing of equipment
Supplier quality assurance schemes
Performance measures to monitor quality
Inspection of materials and components
Consumer acceptance testing
TQM culture of staff
6.54
Which of the following would be examples of external failure costs for quality?
Select THREE only.
Customer complaint departments
Wastage of raw materials
Product performance testing
Cost of free repairs under gurantee
Regular inspection of equipment
Poor brand reputation
Retraining of staff due to ineffective processes
6.55
Which ONE of the following processes is used commonly in car manuafacturing today?
A
B
C
D
Job production
Dedicated cell production
Focus factory production
Batch production
6.56
Supply chain partnerships grow out of
A
B
C
D
Recognising the supply chain and linkages in a value system
An expansion of trade
Adopting a marketing philosophy
86 | P a g e
6.57
Kaizen is a quality improvement technique that involves
A
B
C
D
Continuous improvement by small incremental steps

A complete revision of all organisational processes and structures
Immediate, often radical right first time changes to practice
A problem solving fishbone technique to identify cause and effect
6.58
According to Porters value chain, the final primary activity is referred to as
A
B
C
D
Marketing and sales

Outbound logistics
Procurement
Service
6.59
Information systems or software which can provide a list of parts and materials required
for the type and number of products entered thus allowing better inventory management,
would normally be called?
A
B
C
D
Computer aided manufacturing

Materials requirement planning
6.60
Collaborating with its suppliers may bring a company added value because it can
A
B
C
D
Strike a harder bargain with its suppliers

Work with a supplier to improve quality and reduce costs
Avoid transaction costs
Introduce price competition amongst suppliers
6.61
Total productive maintenance involves
A
B
C
D
Maintaining worker satisfaction and high productivity

A cycle of PDCA
A prevention of quality failures through equipment faults
Eliminating non-value adding activities from a process
87 | P a g e
6.62
A lean approach is associated with which ONE of the following?
A
B
C
D
Supply sourcing strategies

Demographic profiling
Employee selection criteria
Removal of waste
6.63
Which ONE of the following is NOT a feature of a service?
A
B
C
D
Intangibility
Immediate consumption
Inventory management
Involvement of the consumer
6.64
Reck and Long's strategic positioning tool measures the contribution of which ONE of
the following organisational functions?
A
B
C
D
Quality control and assurance

Purchasing and supply
The management of systems
The management of human resources
6.65
Loss of goodwill and the expense of product recalls are known as which ONE of the
following?
A
B
C
D
External failure costs

Costs of lean
Excess production costs
Transaction costs
88 | P a g e
Chapter 7 - Long-term decision making

7.1
A project requires an initial investment of $150,000 and has an expected life of five
years. The required rate of return on the project is 12% per annum.
The projects estimated cash flows each year are as follows:
Sales revenue
Variable costs
Incremental fixed costs
$000
101
30
5
The selling price, costs and activity levels are expected to remain the same for each year
of the project. Ignore taxation and inflation.
Calculate the percentage change in the selling price that would result in the project being
rejected.
7.2
A company has a real cost of capital of 6% per annum and inflation is 3% per annum.
The companys money cost of capital per annum is:
A
B
C
D
9.00%
2.91%
3.00%
9.18%
7.3
An investment project requires an initial investment of $500,000 and has a residual value
of $130,000 at the end of five years. The net present value of the project is $140,500 after
discounting at the companys cost of capital of 12% per annum.
The profitability index of the project is:
A
B
C
D
0.38
0.54
0.28
0.26
89 | P a g e
7.4
PQ is purchasing the lease on a property which has an annual lease payment of $300 in
perpetuity. The lease payments will be paid annually in advance.
PQ has a cost of capital of 12% per annum.
The present value of the lease payments is:
A
B
C
D
$2,500
$2,800
$3,600
$3,900
7.5
A company is considering investing in a project with an expected life of four years. The
project has a positive net present value of $280,000 when cash flows are discounted at
12% per annum. The projects estimated cash flows include net cash inflows of $320,000
for each of the four years. No tax is payable on projects of this type.
The percentage decrease in the estimated annual net cash inflows that would cause the
companys management to reject the project from a financial perspective is, to the nearest
0.1%:
A
B
C
D
87.5%
21.9%
3.5%
28.8%
7.6
A company has a money cost of capital of 9%. The rate of inflation is 3%. The
companys real cost of capital is nearest to:
A
B
C
D
6.0%
12.0%
12.3%
5.8%
90 | P a g e
7.7
A capital investment project has the following estimated cash flows and present values:
Year
0
1-5
1-5
5
Initial investment
Contribution per annum
Fixed costs per annum
Residual value
Cash flow
$
(200,000)
108,000
(30,000)
30,000
Discount factor Present value

@ 12%
$
1.0
(200,000)
3.605
389,340
3.605
(108,150)
0.567
17,010
Calculate the sensitivity of the investment decision to a change in the annual contribution.
7.8
A companys management is considering investing in a project with an expected life of 4
years. It has a positive net present value of $180,000 when cash flows are discounted at
8% per annum. The projects cash flows include a cash outflow of $100,000 for each of
the four years. No tax is payable on projects of this type.
The percentage increase in the annual cash outflow that would cause the companys
management to reject the project from a financial perspective is, to the nearest 0.1%:
A
B
C
D
54.3%
45.0%
55.6%
184.0%
7.9
A company is considering investing $50,000 in a project which will yield $5,670 per
annum in perpetuity. The companys cost of capital is 9% per annum. Calculate the net
present value of the project.
7.10
A five year project has a net present value of $160,000 when it is discounted at 12%. The
project includes an annual cash outflow of $50,000 for each of the five years. No tax is
payable on projects of this type. The percentage increase in the value of this annual cash
outflow that would make the project no longer financially viable is closest to
A
B
C
D
64%
89%
113%
156%
91 | P a g e
7.11
A company has determined that the net present value of an investment project is $12,304
when using a 10% discount rate and $(3,216) when using a discount rate of 15%.
Calculate the Internal Rate of Return of the project to the nearest 1%.
7.12
A company has a nominal (money) cost of capital of 18% per annum. If inflation is 6%
each year, calculate the companys real cost of capital to the nearest 0.01%.
The following data are to be used when answering questions 7.13 and 7.14
JKL plc has $1 million available for investment. It has identified three possible
investments, J, K and L, which each have a life of three years. The three year period
coincides with JKL plcs investment plans. JKL plc uses a 15% cost of capital when
appraising investments of this type.
Details of these investments are set out below:
J
$000
K
$000
L
$000
Initial investment
400
500
300
Net positive cashflows:

Year 1
Year 2
Year 3
40
80
510
70
90
630
50
50
380
Net Present Value
31
43
31
7.13
Assuming that each of the investments is divisible, they are not mutually exclusive and
cannot be invested in more than once, state the optimum investment plan for JKL plc.
7.14
Calculate the Internal Rate of Return of an investment in project K to the nearest 0.01%.
92 | P a g e
The following data are to be used when answering questions 7.15 to 7.17:
M plc is evaluating three possible investment projects and uses a 10% discount rate to
determine their net present values.
Investment
Initial Investment
A
000
400
B
000
450
C
000
350
Incremental cashflows
Year 1
Year 2
Year 3
Year 4
Year 5*
100
120
140
120
100
130
130
130
130
150
50
110
130
150
100
Net present value
39
55
48
*includes 20,000 residual value for each investment project.

7.15
Calculate the payback period of investment A.
7.16
Calculate the discounted payback period of investment B.
7.17
Calculate the Internal Rate of Return (IRR) of investment C.
7.18
X is considering the following five investments:
Investment
Initial investment
Net Present Value
J
$000
400
125
K
$000
350
105
L
$000
450
140
M
$000
500
160
N
$000
600
190
Investments J and L are mutually exclusive, all of the investments are divisible and none
of them may be invested in more than once. The optimum investment plan for X
assuming that the funding available is limited to $1m is
A
B
C
D
$400,000 in J plus $600,000 in N.

$400,000 in M plus $600,000 in N.
$500,000 in M plus $500,000 in N.
$350,000 in K plus $600,000 in N plus $50,000 in M.
93 | P a g e
7.19
A hospital is considering investing $80,000 in a new computer system that will reduce
the amount of time taken to process a patients records when making an appointment. It is
estimated that the cash benefit of the time saved will be $20,000 in the first year, $30,000
in the second year and $50,000 in each of the next three years. At the end of five years
the computer system will be obsolete and will need to be replaced. It is not expected to
have any residual value.
Calculate the payback period to one decimal place of one year.
7.20
An investment company is considering the purchase of a commercial building at a cost of
0.85m. The property would be rented immediately to tenants at an annual rent of
80,000 payable in arrears in perpetuity.
Calculate the net present value of the investment assuming that the investment companys
cost of capital is 8% per annum.
Ignore taxation and inflation.
7.21
An investment project that requires an initial investment of $500,000 has a residual value
of $130,000 at the end of five years. The projects cash flows have been discounted at the
companys cost of capital of 12% and the resulting net present value is $140,500. The
profitability index of the project is closest to:
A
B
C
D
0.02
0.54
0.28
0.26
7.22
A project has a net present value of $320,000. The sales revenues for the project have a
total pre-discounted value of $900,000 and a total present value of $630,000 after tax.
The sensitivity of the investment to changes in the value of sales is closest to:
A
B
C
D
$310,000
$580,000
51%
36%
94 | P a g e
The following data are given for sub-questions 7.23 and 7.24:
An investment project with no residual value has a net present value of $87,980 when it
is discounted using a cost of capital of 10%. The annual cash flows are as follows:
Year
0
1
2
3
4
5
$
(200,000)
80,000
90,000
100,000
60,000
40,000
7.23
Calculate the Accounting Rate of Return of the project using the average investment
value basis.
7.24
Calculate the Internal Rate of Return of the project.
7.25
A company has an annual money cost of capital of 20% and inflation is 8% per annum.
Calculate the companys annual real percentage cost of capital to 2 decimal places.
7.26
A project has a net present value of $683,000. The present value of the direct material
cost is $825,000. Calculate the sensitivity of the project to changes in the direct material
cost to 2 decimal places.
95 | P a g e
7.27
A company is considering an investment of $400,000 in new machinery. The machinery
is expected to yield incremental profits over the next five years as follows:
Year
1
2
3
4
5
Profit ($)
175,000
225,000
340,000
165,000
125,000
Thereafter, no incremental profits are expected and the machinery will be sold. It is
company policy to depreciate machinery on a straight line basis over the life of the asset.
The machinery is expected to have a value of $50,000 at the end of year 5.
Calculate the payback period of the investment in this machinery to the nearest 0.1 years.
7.28
A project has an initial investment of $140,000 and a Net Present Value of $42,500. The
present value of the sales revenue generated by the project is $385,000.
The sensitivity of the investment to changes in the value of sales revenue is closest to
A
B
C
D
36%
$342,500
89%
11%
7.29
A company has a real cost of capital of 6.00% per annum and inflation is currently 4.00%
per annum.
The companys annual money cost of capital is closest to
A
B
C
D
10.24%
10.00%
2.00%
1.92%
96 | P a g e
The following data is to be used when answering questions 7.30 and 7.31:
A company is considering investing in a new machine. The machine will cost $15,000
and has an expected life of five years with a residual value of $3,000. The machine will
increase the operating cashflows of the company as follows:
Year
1
2
3
4
5
Increase in operating cashflow

$
2,500
3,000
5,500
4,000
3,000
7.30
Calculate the payback period of the new machine to the nearest 0.1 years.
7.31
Calculate the average Annual Accounting Rate of Return over the lifetime of the
investment in the new machine.
7.32
A company is considering the following investments for the year ending 30 June 2009:
Investment
W
X
Y
Z
Capital required
$
100,000
150,000
140,000
190,000
NPV
$
56,000
75,000
68,000
91,000
None of the investments are divisible. They cannot be undertaken more than once within
each year. The company has only $350,000 available to invest in the year to 30 June
2009. There are no other investments available at this time.
Which investments (if any) should the company undertake?
97 | P a g e
7.33
A project with an initial outlay of $250,000 has a net present value of $46,000 when
discounted at the cost of capital of 8%. The present value of the receipts from sales is
$520,000.
The sensitivity of the investment decision to changes in the initial outlay is:
A
B
C
D
18.4%
$204,000
$270,000
8.8%
7.34
A project with a five year life requires an initial investment of $120,000 and generates a
net present value (NPV) of $50,000 at a discount rate of 10% per annum.
The project cash flows are as follows.
Variable material cost
Variable labour cost
Incremental fixed cost
$000 per annum

30
10
5
The costs and activity levels are expected to remain the same for each year of the project.
Ignore taxation and inflation.
The sensitivity of the investment decision to changes in the variable costs is:
A
B
C
D
131.9%
44.0%
33.0%
29.3%
7.35
PJ is considering building a warehouse on a piece of land which will be leased at
anannual cost of $4,000 in perpetuity. The lease payments will be made annually in
advance. PJ has a cost of capital of 12% per annum.
Calculate the present value of the lease payments.
98 | P a g e
7.36
A company has recently carried out a post-completion audit at the end of Year 2 of a
project that had an original investment of $100,000. It is concerned that the estimated
cash flows are not going to be achieved. The cash flows that were forecast when the
investment decision was originally taken were as follows:
$
60,000
80,000
(70,000)
80,000
60,000
Year 1
Year 2
Year 3
Year 4
Year 5
The data from the post-completion audit show that the net cash outflow in Year 3 will be
$90,000 and the cash inflows in Years 4 and 5 will be $60,000 and $40,000 respectively.
You should assume that all cash flows with the exception of the original investment will
arise at the end of the year. The companys cost of capital is 12% per annum.
Demonstrate, using calculations, whether or not the project should be abandoned
immediately. You should assume that there will be no additional costs associated with
abandoning the project.
7.37
A five year investment project has a positive net present value of $320,000 when
discounted at the cost of capital of 10% per annum. The project includes annual net cash
inflows of $100,000 which occur at the end of each of the five years.
The percentage reduction in the annual net cash inflow that would result in the project not
being financially viable is:
A
B
C
D
31.25%
118.5%
84.4%
18.5%
99 | P a g e
7.38
A company has a maximum of $80 million available for investment and seven
independent projects in which it could invest as follows:
Project
A
B
C
D
E
F
G
Investment
$ miilion
10.0
40.0
20.0
40.0
50.0
20.0
20.0
Net present value

$million
4.20
6.10
8.50
13.70
3.80
4.90
4.33
None of the projects can be carried out more than once. Each project is divisible therefore
investment in part of a project can be undertaken. Prioritise the projects and determine
the maximum net present value that can be achieved from the $80 million investment.
The following data is to be used when answering questions 7.39 and 7.41:
A company is considering a project which requires the purchase of a van to be used to
deliver sandwiches to office workers. The van will cost $40,000 and have a maximum
life of 3 years. It is difficult to estimate how successful the project is likely to be. The
company has the option to abandon the project after 1 or 2 years when the van would still
have a resale value. The estimated cash inflows for the project are as follows:
Year
Operating net cash inflows
Resale value of van
1
2
3
$
16,800
18,000
24,000
$
24,800
16,000
0
The companys cost of capital is 12% per annum. Ignore tax and inflation.
7.39
Calculate the net present value of the project if operated for 3 years
7.40
Calculate the net present value of the project if abandoned after 2 years
7.41
Calculate the net present value of the project if abandoned after 1 year.
100 | P a g e
7.42
Selecting a project on how quickly it returns the original investment is an example of:
A
B
C
D
Payback
Internal rate of return
Net present value
Accounting rate of return
7.43
Which of these is NOT an advantage of ARR?
A
B
C
D
Ignores non-cash items

Simple to calculate
Simple to understand
Deals with costs and revenues over the entire life of the project
7.44
Which of these is a disadvantage of NPV?
A
B
C
D
Can have multiple NPVs for a project

Cannot deal with non-conventional cashflows
Difficulty in choosing an appropriate discount rate
Includes non-cash items and therefore can be manipulated
The following information is to be used for 7.45 and 7.46:

M Plc is about to invest in a machine with a cost of 30,000 today and a residual value of
zero in four years time. The machine will produce 2,000 units at the end of each year for
the next fours years, with each unit contributing contribution of 5.50 a unit. The
companys annual cost of capital is 10% and the rate of inflation expected each year will
be 5% per annum.
7.45
The net present value of the project (to the nearest 500) is?
A
B
C
D
8,000
9,000
10,000
11,000
101 | P a g e
7.46
If the annual inflation rate above was instead 2%, the maximum monetary cost of capital
for the project to break-even (to the nearest 1%) would be?
A
B
C
D
18%
19%
20%
21%
102 | P a g e
Chapter 8 - Performance management and transfer pricing

8.1
JKs trade receivables outstanding at the end of this year are expected to be 55 days.
Credit sales for this year are expected to be $862,860 spread evenly throughout the year.
JK is preparing the budget for next year and estimates that credit sales will increase by
5%. The trade receivables amount, in $, outstanding at the end of next year is estimated
to be the same as at the end of this year.
Calculate the budgeted trade receivable days at the end of next year. Your answer should
be rounded to two decimal places of a day.
8.2
It is estimated that at the end of this year AB will have trade payables outstanding of
$547,800. This represents 55 days of purchases based on a 365 day year. All purchases
are on credit and are spread evenly each year. AB is preparing the budget for next year
and estimates that annual purchases will increase by 15%.
The trade payables days are expected to change from 55 days to 50 days due to several
suppliers offering early settlement discounts.
The budgeted trade payables outstanding at the end of next year will be:
A
B
C
D
$629,970
$498,000
$692,967
$572,700
8.3
BC had trade receivables of $242,000 at the start of the year. BC forecasts that the sales
revenue for the year will be $1,500,000. All sales are on credit. Trade receivable days at
the end of the year are expected to be 60 days based on a 365 day year.
The expected receipts from customers during the year are closest to:
A
B
C
D
$1,495,425
$1,742,000
$ 1,253,425
$ 1,504,575
103 | P a g e
8.4
ABs estimated trade receivables outstanding at the end of this year are the equivalent of
60 days credit sales. Credit sales for this year are projected to be $682,000. AB is
preparing the budget for next year and estimates that credit sales will increase by 15%.
The trade receivables amount, in $, outstanding at the end of next year is anticipated to be
the same as at the end of this year.
The budgeted trade receivable days at the end of next year, to the nearest day, will be:
A
B
C
D
52 days
69 days
51 days
60 days
8.5
An extract from a companys trial balance at the end of its financial year is given below:
Sales revenue (85% on credit)
Cost of sales
Purchases (90% on credit)
Inventory of finished goods
Trade receivables
Trade payables
$000
2,600
1,800
1,650
220
350
260
Calculate the following working capital ratios:

(i) Inventory days
(ii) Trade receivables days
(iii) Trade payables days
8.6
A flexible budget is a budget that is
A
B
C
D
set prior to the control period and not subsequently changed in response to
changes in activity, costs or revenues
continuously updated by adding a further accounting period when the earliest
accounting period has expired
changed in response to changes in the level of activity
changed in response to changes in costs
104 | P a g e
8.7
Which of the following definitions best describes Zero-Based Budgeting?
A
A method of budgeting where an attempt is made to make the expenditure under

each cost heading as close to zero as possible.
A method of budgeting whereby all activities are re-evaluated each time a budget
is formulated.
A method of budgeting that recognises the difference between the behaviour of

fixed and variable costs with respect to changes in output and the budget is
designed to change appropriately with such fluctuations.
A method of budgeting where the sum of revenues and expenditures in each

budget centre must equal zero.
8.8
Which of the following statements are true?
(i) A flexible budget can be used to control operational efficiency.
(ii) Incremental budgeting can be defined as a system of budgetary planning and control
that measures the additional costs that are incurred when there are unplanned extra units
of activity.
(iii) Rolling budgets review and, if necessary, revise the budget for the next quarter to
ensure that budgets remain relevant for the remainder of the accounting period.
A
B
C
D
(i) and (ii) only

(ii) and (iii) only
(iii) only
(i) only
105 | P a g e
8.9
The CIMA definition of zero-based budgeting is set out below, with two blank sections.
Zero-based budgeting: A method of budgeting which requires each cost element
___________, as though the activities to which the budget relates _______________.
Which combination of two phrases correctly completes the definition?
Blank 1
Blank 2
to be specifically justified
could be out-sourced to an external supplier
to be set at zero
could be out-sourced to an external supplier
to be specifically justified
were being undertaken for the first time
to be set at zero
were being undertaken for the first time
The summarised financial statements for P Limited, a potential major supplier, are shown
below. Before a contract is signed, the financial performance of P Limited is to be
reviewed.
Summary Balance Sheets for P Limited at year end
2003
2002
000
000
Non-current assets
1,600
1,400
Inventories
300
280
Trade receivables
200
210
Cash
50
10
Trade payables
(280)
(290)
Long-term borrowings
(900)
(800)
Net assets
970
810
Share capital
Retained earnings
Sales
Cost of sales
Operating profit
600
370
970
Summary Income Statements for the years
2003
000
3,000
1,600
600
600
210
810
2002
000
2,500
1,300
450
106 | P a g e
8.10
Calculate the following financial statistics for P Limited for 2003
(a) Receivables days
(b) Payables days
(c) Inventory days
8.11
Calculate the following financial statistics for P Limited for 2003
(a) Current ratio
(b) Acid test (quick ratio)
8.12
DY had a balance outstanding on trade receivables at 30 September 2006 of $68,000.
Forecast credit sales for the next six months are $250,000 and customers are expected
toreturn goods with a sales value of $2,500.
Based on past experience, within the next six months DY expects to collect $252,100
cash and to write off as bad debts 5% of the balance outstanding at 30 September 2006.
Calculate DYs forecast trade receivables days outstanding at 31 March 2007.
8.13
DYs trade receivables balance at 1 April 2006 was $22,000. DYs income statement
showed revenue from credit sales of $290,510 during the year ended 31 March 2007.
DYs trade receivables at 31 March 2007 were 49 days. Assume DYs sales occur evenly
throughout the year and that all balances outstanding at 1 April 2006 have been received.
Also, it should be assumed all sales are on credit, there were no bad debts and no trade
discount was given. How much cash did DY receive from its customers during the year to
31 March 2007?
A
B
C
D
$268,510
$273,510
$312,510
$351,510
107 | P a g e
8.14
DR has the following balances under current assets and current liabilities:
Current assets
Inventory
Trade receivables
Bank
$
50,000
70,000
10,000
Current liabilities
Trade payables
Interest payable
$
88,000
7,000
Required:
Calculate DRs quick ratio.
8.15
EV had inventory days outstanding of 60 days and trade payables outstanding of 50 days
at 31 October 2007.
EVs inventory balance at 1 November 2006 was $56,000 and trade payables were
$42,000 at that date.
EVs cost of goods sold comprises purchased goods cost only. During the year to 31
October 2007, EVs cost of goods sold was $350,000.
Assume purchases and sales accrue evenly throughout the year and use a 365 day year.
Further assume that there were no goods returned to suppliers and EV claimed no
discounts.
Calculate how much EV paid to its credit suppliers during the year to 31 October 2007.
8.16
DBs latest estimate for trade payables outstanding at the end of this year is 45 days.
Estimated purchases for this year are $474,500. DB is preparing the budget for next year
and estimates that purchases will increase by 10%.
The trade payables amount, in $, outstanding at the end of next year is estimated to be the
same as at the end of this year.
Calculate the budgeted trade payable days at the end of next year.
108 | P a g e
8.17
RS reviews the financial performance of potential customers before setting a credit limit.
The summarised financial statements for PQ, a potential major customer operating in the
retail industry, are shown below.
Summary Statement of Financial Position for PQ at year end
2011
2010
$000
$000
Non-current assets
6,400
5,600
Inventories
1,200
1,120
Trade receivables
800
840
Cash
200
40
Trade payables
(1,120)
(1,160)
Non-current liabilities
(3,600)
(3,200)
Net assets
3,880
3,240
Share capital
Retained earnings
2,400
1,480
3880
2,400
840
3240
Summary Income Statement for PQ for the years

2011
2010
$000
$000
Sales
12,000
10,000
Cost of sales
(6,400) (5,200)
Operating profit
2,400
1,800
Calculate the following ratios, to the nearest 0.1 days, for PQ for 2011
(i) Receivables days
(ii) Payables days
(iii) Inventory days
109 | P a g e
8.18
Division XP has requested an inside quotation from XA division whose price was
35,000. XA has the spare capacity to make the supply and would incur 5,000 variable
cost of their own but would also require purchasing components from two other members
of the same group. This quote would require XA to purchase components from XB at a
price of 8,000; XB is currently at full capacity manufacturing these and other
components.
The quotation from XA would also require purchasing a component from XC who is at
spare capacity, the price to be charged by XC would be 20,000, but XC would also have
to purchase a component from XB at a price of 12,000. XC quotes at a 70% mark up on
its own cost (the cost excluding purchases from other group companies). The marginal
cost to the group of XA making the supply to XP (to the nearest 1) would be?
29,706
17,706
36,765
25,000
8.19
A flexible budget is a budget
A
B
C
D
With variable production cost only

Which shows costs and revenues at different activity levels
Prepared using a spreadsheet package
Which shows fixed production cost only
8.20
Which one of the following perspectives, if any, are encompassed in the balanced
scorecard?
Supplier perspective
Investor perspective
Innovation and learning perspective
Internal perspective
Employee perspective
Environment perspective
Government perspective
Minority shareholder perspective
110 | P a g e
8.21
Zero based budgeting is best defined as
A
B
C
D
A method of budgeting where every item of expenditure is justified before its

inclusion within the budget
A budget, which is produced at one single level of activity only
A budget, which shows costs and revenues at different activity levels
The setting of a budget using costs and revenues for the previous period, adjusted
for growth and inflation
8.22
Division A makes and sells a single product. Financial information for the preceding
period is:
Sales 50,000 units
Variable cost per unit 5
Fixed costs 45,000
Depreciation 23,500
Net assets 360,000
Division A is assessed by the residual income it earns, head office uses a 10% cost of
capital per period. For division A, what price would have been charged in order to earn a
residual income of 64,700?
A
B
C
D
9.56
8.99
8.88
8.38
8.23
Maximum capacity
External sales
Market price for external sales
Variable cost for each unit sold
50,000
40,000
40
13
The price this division would need to quote internally if a buyer within the same group
requests 15,000 units, based on opportunity costing would be?
A
B
C
D
40 for 15,000 units

40 for 5,000 units and 13 for 10,000 units
13 for 15,000 units
40 for 10,000 units and 13 for 5,000 units
111 | P a g e
8.24
Division A and B are part of the same group.
Division A makes a component and four of these components are used in the assembly of
one unit that Division B manufactures. Division A has no external market for its product.
Division A variable cost per unit is 40 and the transfer pricing policy existing currently
is variable cost plus 50%. Division B variable cost excluding the variable cost of the
components supplied by division A is 45 a unit for labour and material.
Division B
Units produced
Marginal revenue
8
300
9
295
10
290
11
285
12
280
13
275
The number of units that Division B must sell in order to maximise divisional profit
would be?
A
B
C
D
9 units
10 units
11 units
12 units
8.25
Division X target return on investment (ROI) is 12%. It also had fixed costs of 400,000
and a variable cost per unit of 5. The net assets of the division forecast for the following
period will be 1.5m and the number of units forecast to be sold is 30,000 units. The
average contribution for each unit sold in the next period would be?
A
B
C
D
24.33
19.33
14.56
9.50
112 | P a g e
8.26
Within a group exists three divisions X, Y and Z each with target return on investments
of 40%, 30% and 25% respectively. Three proposals are being considered
X is to spend 40,000 implementing and running a new just in time stock control system
increasing the net book value of fixed assets, which would increase profits by 13,000
Y is offering a 5% discount for early settlement aiming to reduce debtors by 40,000. Its
sales income for the year is forecast to be 1m and 30% of customers are expected to take
up this offer.
Z is considering selling a factory with a net book value of 0.75m but earns profits each
year of 150,000.
Which of the above divisions are more likely to reject the forthcoming proposals because
of the effect on their return on investment?
A
B
C
D
Division X and Z
Division Y and Z
Division X and Y
Division X, Y and Z
8.27
Within the XYZ group, division X transfers to division Z a component incurring its own
cost of 30 a unit. The unit cost of this component for division X is as follows:
Variable cost
Fixed cost absorbed
20.00
10.00
30.00
Division X is at spare capacity making this component and sells each unit of the
component to division Z for 70 a unit. Division X also produces other products.
Division Z also knows of an alternative supplier of this component that can be purchased
for 65 a unit. If this division uses the external supplier the effect on profits would be?
A
B
C
D
Division X profit will decrease and the groups profit would increase
Division X profit will increase and the groups profit would increase
Division X profit will increase and the groups profit would decrease
Division X profit will decrease and the groups profit would decrease
113 | P a g e
8.28
A new mobile phone has been launched by AppSung. The costs are as follows:
Plastic
Metal
Variable overheads
Labour
Fixed costs
12
15
34
89
10
What is the selling price if the company use a full cost plus pricing approach and the
mark up is 20%?
A
B
C
D
160
192
150
140
8.29
A cheese manufacturing group called DairySpree has 2 divisions, being the cheese
division and the milk division. The cheese division needs the milk from the milk divison
to make cheese, which it then sells to supermarkets. Milk can be bought externally for
40 a litre. The costs to make a litre of milk are as follows:
Whiskey
Chicken
Flavorings
Fixed production costs
Variable production costs
Labour
1
2
4
1
3
9
Using a dual pricing approach what would be the transfer prices for the milk?
A
B
C
D
Cheese division pays 19

Milk sells for 40

Milk sells for 20
Milk sells for 40
Milk sells for 19
114 | P a g e
8.30
A new car has been launched. The costs are as follows:
Paper
Steel
Cardboard
Labour
Variable cost
Fixed costs
23
53
81
35
45
55
What is the selling price if the company use a marginal cost plus pricing approach and the
mark up is 35%?
A
B
C
D
292
237
394
320
8.31
Ragbir is the manger of Om Shanti Om division. He is accountable for only the sales
generated by the division. Om Shanti Om is what kind of a centre?
A
B
C
D
Investment centre
Profit centre
Revenue centre
Cost centre
8.32
Roshan Group Plc uses a separate transfer price for each buying and selling division in a
single transaction in the company. What kind of transfer pricing is this?
A
B
C
D
Full cost pricing

2 part tariff pricing
Dual pricing
Market based pricing
115 | P a g e
8.33
Vinod division is operating at full capacity and can sell everything produced either
internally or externally. What kind of transfer price therefore will it be willing to use?
A
B
C
D
Full cost plus a mark-up

Variable costing
Dual pricing
Market price
8.34
Daabang Ltd has 2 divisions, Don and Race. Don makes a component for tablets which it
can sell only to Race. It has no other outlet for sales. Current information for the divisions
is as follows:
Incremental cost for Don division 150
Incremental cost for Race division 250
Transfer price for component 202.50
Final tablet selling price 600
The transfer price is based on a 35% mark up on incremental costs.
What is the profit per tablet for Daabang?
A
B
C
D
200
350
147.50
247.50
116 | P a g e
8.35
Sholay Ltd has 2 divisions, Rahul and Anjali. Rahul makes a component for sunglasses
which it can sell only to Anjali. It has no other outlet for sales. Current information for
the divisions is as follows:
Incremental cost for Rahul division 200
Incremental cost for Anjali division 400
Transfer price for component 220
Final sunglasses selling price 800
Unit sales 100
What is the amount of profit recognized by Anjali division?
A
B
C
D
20,000
18,000
16,000
14,000
8.36
Roti Ltd 2 divisions, Bread and Dough. Bread makes a component for ovens which it can
sell only to Dough. It has no other outlet for sales. Current information for the divisions is
as follows:
Incremental cost for Bread division 20
Incremental cost for Dough division 40
Final oven selling price 500
Gandoo Ltd has offered to sell Dough division the same component it currently gets from
Bread division for 25 per unit. If Dough accepts Gandoos offer, Roti will be:
A
B
C
D
7 per unit better off

7 per unit worse off
5 per unit worse off
5 per unit better off
117 | P a g e
8.37
JJ Ltd has 2 divisions, BB and DD. BB makes a component for watch which it can sell
only to DD. It has no other outlet for sales. Current information for the divisions is as
follows:
Incremental cost for BB 45
Incremental cost for DD 145
Final watch selling price 600
The transfer price is based on 200% of incremental costs.
ZZ has offered to sell DD the same component it currently gets from BB for 65 per unit.
Given this information, what is the minimum amount that BB would be willing to sell to
DD?
A
B
C
D
45 per unit
65 per unit
90 per unit
75 per unit
8.38
Dil Ltd uses cost based transfer pricing. Dilkush division has costs of 300 per unit, and
Dilwalle division has divisional costs of 250 per unit, what will be Dilwalles total cost
per unit if the mark-up rate is 60%?
A
B
C
D
550
880
730
700
118 | P a g e
8.39
Cleopatra coming at ya Ltd has 2 divisions, Jules and Vernes. Jules makes a component
for electric shoes which it can sell only to Vernes. It has no other outlet for sales. Current
information for the divisions is as follows:
Incremental cost for Jules division 65
Incremental cost for Vernes division 145
A fixed fee to transfer of 100,000
Final electric shoes selling price 800
Unit sales 4,000
What is the transfer price per unit under a 2 part tariff pricing system?
A
B
C
D
210
90
65
25
8.40
AHA Ltd has 2 divisions, Tpau and Erasure. Tpau makes a component for earphones
which it can sell to Erasure. The earphone component can be sold externally for 50
each. Current information for the divisions is as follows:
Incremental cost for Tpau division 15
Incremental cost for Erasure division 35
A fixed fee to transfer of 300,000
Final earphones selling price
Unit sales 6,000
What is the transfer price per unit under a dual pricing system?
A
B
C
D
Tpau
15
50
65
35
Erasure
50
15
65
50
119 | P a g e
8.41
Allowing suboridnates at a lower level in a company is known as what?
A
B
C
D
Control
Power
Centralisation
Decentralisation
8.42
Which of these is not a property of management control system?
A
B
C
D
Gathering and using information

Guiding manager and employee behaviour
Supporting political actions
Making organisation planning and control decisions
8.43
If a manager is in charge of a division which is accountable for revenues, costs and
investments, what kind of centre is this?
A
B
C
D
Profit
Investment
Cost
Revenue
120 | P a g e
8.44
P Ltd has 2 divisions, Ace and Ventura. Ace makes a chemical for dog shampoo which it
can sell to Ventura. The chemical can be sold externally for 20 each. Ace has spare
capacity of 4,000 units. Current information for the divisions is as follows:
Incremental cost for Ace division 15
Incremental cost for Ventura division 65
Final dog shampoo selling price
Unit sales 6,000
What is the transfer price per unit under an opportunity cost approach?
A
B
C
D
15 for 4,000 units and then 20 for 2,000 units

20 for 6,000 units
15 for 6,000 units
35 for 6,000 units
8.45
The divisional manager and the company as a whole make the same decision as their
interst are aligned, what is this known as?
A
B
C
D
Goal congruence
Sub optimal decision
Profit minimisation
Cost maximisation
8.46
Which of these pricing systems would need head office to adsorb and re-apportion
differences as extra overheads to all divsions?
A
B
C
D
Dual pricing
Opportunity cost pricing
Variable cost plus pricing
8.47
Faster reaction to local markets is a?
A
B
C
D
Management drawback
Centralisation benefit
Decentralisation benefit
Decentralisation cost
121 | P a g e
8.48
Which of these pricing systems would need the buying division to accept a fixed fee
before transfer?
A
B
C
D
Dual pricing
Opportunity cost pricing
Variable cost plus pricing
8.49
Which of the statements below are true if any?
Rresidual income will result in division managers making decisions that are in
their own best interest and not in the best interest of the company as a whole.
Residual income incorporates a companys cost of capital.
Residual income is a percentage measure and not an absolute measure.
8.50
What will be maximised in a division under residual income?
A
B
C
D
Caplital employed
Cash flows
Income in excess of a head office imputed interest charge
Cost of capital
122 | P a g e
8.51
Ryu Ltd as an ROI of 8% and a division of Ryu, which has a 5% ROI and $250,000 of
residual income, is considering an ivestment. It will reduce the divisional ROI but
produce an extra $120,000 of residual income.
From below select all that apply, if the company wants goal congruence, the investment:
Should not be acquired because it produces $120,000 of residual income
Should be acquired because after the acquisition, the division's ROI and
residual income are both positive numbers
Should not be acquired because the division's ROI is less than the corporate
ROI before the investment is considered
Should be acquired because it produces $120,000 of residual income for the
division.
Should not be acquired because it reduces divisional ROI
8.52
Petrol PLC has income of 60,000 and assets of 500,000. There is a business venture
with Alan Sugar which will cost 75,000 and yield a profit of 8,250.
The cost of capital for Petrol is 5%, would the business venture be attractive to:
Divisional management if ROI is used to evaluate divisional performance?
Divisional management if residual income (RI) is used to evaluate divisional
performance?
The management of Petrol?
A
B
C
D
Attractive to division ROI

No
Yes
Yes
Yes
Attractive to division RI
Yes
No
No
Yes
Attractive to Petrol
Yes
No
Yes
Yes
123 | P a g e
8.53
Rambo division has a residual income of 200,000 for the year just ended. The division
had 8,000,000 of invested capital and 1,000,000 of income. What is the cost of capital?
A
B
C
D
2%.
Not enough information to work out
12%
10%
8.54
Commando Ltd uses a cost of capital of 7% in the calculation of residual income.
Division Cobra had invested capital of $600,000 and an ROI of 13%. What will be
Cobras residual income?
A
B
C
D
78,000
36,000
42,000
58,000
8.55
Catty division has a negative residual income of 6,000,000. Head office is
contemplating an investment opportunity that will reduce this negative amount to
$4,000,000. The investment:
A
B
C
D
Should be pursued because it is attractive for both Catty and head office.
Should be pursued because it is attractive for Catty but not for head office.
Should be pursued because it is attractive for head office but not for Catty.
Should not be pursued because it is unattractive fof both Catty and head office.
124 | P a g e
8.56
Which of the following if any would be classified under innovation and learning
perspective from the balanced scorecard?
New products launched compared to competitors
Percentage of sales which is repeat business
Percentage market share
Health and safety training days per employee
Share price growth
Percentage of staff suggestions for improvement used by management
Econcomic Value Added
8.57
Holly division reported profit of 80,000 and invested capital of 220,000. Assuming a
cost of capital of 25%, which of the following is correct?
ROI
RI
36%
25,000
36%
80,000
25%
80,000
25%
25,000
125 | P a g e
8.58
Which of the following if any are not classified under financial perspective from the
balanced scorecard?
Share price growth
Return on investment
Staff turnover
8.59
Which of the following best describes goal congruence when setting transfer prices?
A
B
C
D
Maximise profits of the buying division

Minimize opportunity costs
Allow top management to become actively involved
Establish incentives for autonomous division managers to make decisions that are
in the best interests for the company as a whole
8.60
Which of the following if any are true?
Income taxes and import duties are an important consideration when setting a
transfer price for companies that pursue international commerce
Transfer prices cannot be used by organizations in the service industry
Transfer prices are totally cost based in nature not market based
126 | P a g e
Chapter 9 - Management control and risk

9.1
A company is considering the launch of a new product which it estimates has a 75%
chance of success if no marketing is undertaken. The company believes that if it
undertakes a marketing campaign costing $50,000 the probability of success of the
product will increase to 90%.
If successful, the product will make a profit of $300,000, before marketing costs.
However, if it is unsuccessful, the product will make a loss of $80,000 before marketing
costs.
Calculate whether it is worthwhile for the company to undertake the marketing campaign.
9.2
A company is planning to launch a new product. The price at which it will sell the
product will be determined by the level of competition in the market which is currently
uncertain. The possible selling prices and variable costs and their respective associated
probabilities are as follows:
$
60
64
68
$
20
24
26

Probability
030
025
045
Variable cost per unit
Probability
025
040
035
Selling price and variable cost per unit are independent of each other.
Calculate the probability of the contribution per unit being equal to or greater than $40.
127 | P a g e
9.3
EF sells personal computers on which it gives a one year warranty. EF is estimating the
cost of warranty claims for next year.
If all products under warranty need minor repairs the total cost is estimated to be $2
million. If all products under warranty need major repairs it would cost $6 million. If all
products under warranty need to be replaced it would cost $10 million.
Based on past experience EF has estimated that 80% of products under warranty will
require no repairs, 15% will require minor repairs, 3% will require major repairs and 2%
will need to be replaced.
Calculate the expected value of the cost of warranty claims for next year.
A marketing manager is deciding which of four potential selling prices to charge for a
new product. The market for the product is uncertain and reaction from competitors may
be strong, medium or weak. The manager has prepared a payoff table showing the
forecast profit for each of the possible outcomes.
Competitor
Reaction
Strong
Medium
Weak
Selling price
$80
$70,000
$50,000
$90,000
$90
$80,000
$60,000
$100,000
$100
$70,000
$70,000
$90,000
$110
$75,000
$80,000
$80,000
9.4
Identify the selling price that would be chosen if the manager applies the maximin
criterion to make the decision.
9.5
Identify, using a regret matrix, the selling price that would be chosen if the manager
applies the minimax regret criterion to make the decision.
128 | P a g e
9.6
A decision maker who makes decisions using the maximax decision criterion would be
described as:
A
B
C
D
Pessimistic
Optimistic
A bad loser
Cautious
The committee of a new golf club is setting the annual membership fee. The number of
members depends on the membership fee charged and economic conditions. The forecast
annual cash inflows from membership fees are shown below.
Membership Fee
$600
$800
$900
$1,000
Membership level
Low
Average
High
$000
$000
$000
360
480
540
400
440
480
360
405
495
320
380
420
9.7
If the maximin criterion is applied the fee set by the committee would be:
A
B
C
D
$600
$800
$900
$1,000
9.8
If the minimax regret criterion is applied the fee set by the committee would be:
A
B
C
D
$600
$800
$900
$1,000
129 | P a g e
9.9
A decision maker who makes decisions using the expected value criterion would be
classified as:
A
B
C
D
Risk averse
Risk seeking
Risk neutral
Risk spreading
9.10
PT provides expert quality assurance services on a consultancy basis. The management of
the company is unsure whether to price the services it offers at the Deluxe, High,
Standard or Low fee level. There is uncertainty regarding the mix of staff that would be
available to provide each of the services. As the staff are on different pay scales the mix
of staff would affect the variable costs of each service.
Staffing mix
X
Y
Z
Deluxe
$135,000
$150,000
$165,000
Fee level
High
Standard
$140,000
$137,500
$160,000
$165,000
$180,000
$192,500
Low
$120,000
$160,000
$200,000
The table below details the annual contribution earned from each of the possible
outcomes. If PT applies the minimax regret criterion, the fee level it will choose is:
A
B
C
D
Deluxe
High
Standard
Low
130 | P a g e
9.11
PL currently earns an annual contribution of $2,880,000 from the sale of 90,000 units of
product B. Fixed costs are $800,000 per annum.
The management of PL is considering reducing the selling price per unit to $48. The
estimated levels of demand at the revised selling price and the probabilities of them
occurring are as follows:
Selling price of $48
Demand
100,000 units
120,000 units
Probability
040
060
The estimated variable costs per unit at either of the higher levels of demand and the
probabilities of them occurring are as follows:
Variable cost (per unit)
$21
$19
Probability
025
075
The level of demand and the variable cost per unit are independent of each other.
Calculate the probability that the profit will increase from its current level if the selling
price is reduced to $48.
9.12
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.
State of the economy

Boom
Growth
Recession
Regret Matrix
Selling price
$40
$45
$50
$10,000
$0
$20,000
$20,000
$10,000
$0
$0
$10,000
$20,000
$55
$30,000
$20,000
$30,000
131 | P a g e
If the manager applies the minimax regret criterion to make decisions, which selling price
would be chosen?
A
B
C
D
$40
$45
$50
$55
9.13
A decision maker that makes decisions using the minimax regret criterion would be
classified as:
A
B
C
D
Risk averse
Risk seeking
Risk neutral
Risk spreading
9.14
FP can choose from three mutually exclusive projects. The net cash flows from the
projects will depend on market demand. All of the projects will last for only one year.
The forecast net cash flows and their associated probabilities are given below:
Market demand
Probability
Project A
Project B
Project C
Weak
0.30
$000
400
300
500
Average
0.50
$000
500
350
450
Good
0.20
$000
600
400
650
(i) Calculate the expected value of the net cash flows from each of the THREE projects.
(ii) Calculate the value of perfect information regarding market demand.
132 | P a g e
9.15
A company is deciding which of four potential selling prices it should charge for a new
product. Market conditions are uncertain and demand may be good, average or poor. The
company has calculated the contribution that would be earned for each of the possible
outcomes and has produced a regret matrix as follows.
State of the economy

Good
Average
Poor
Regret Matrix
Selling price
$140
$160
$180
$20,000
$60,000
$0
$50,000
$0
$40,000
$0
$30,000
$20,000
$200
$10,000
$20,000
$30,000
If the company applies the minimax regret criterion to make decisions, which selling
price would be chosen?
$140
$160
$180
$200
A
B
C
D
9.16
A company is deciding whether to launch a new product. The initial investment required
is $40,000. The estimated annual cash flows and their associated probabilities are shown
in the table below.
High
Medium
Low
Probability
0.20
0.50
0.30
Year 1
$20,000
$14,000
$9,000
Year 2
$24,000
$16,000
$12,000
Year 3
$18,000
$15,000
$10,000
The companys cost of capital is 10% per annum. You should assume that all cash flows
other than the initial investment occur at the end of the year. The expected present value
of the year 1 cash flows is
A
B
C
D
$12,453
$(27,547)
$15,070
$13,700
133 | P a g e
9.17
Nile Limited is preparing its sales budget for 2004. The sales manager estimates that
sales will be 120,000 units if the Summer is rainy, and 80,000 units if the Summer is dry.
The probability of a dry Summer is 0.4.
What is the expected value for sales volume for 2004?
A
B
C
D
96,000 units
100,000 units
104,000 units
120,000 units
The following data relate to both questions 9.18 and 9.19

TX Ltd can choose from five mutually exclusive projects. The projects will each last for
one year only and their net cash inflows will be determined by the prevailing market
conditions. The forecast net cash inflows and their associated probabilities are shown
below.
Market Conditions
Probability
Poor
0.20
Good
0.50
Excellent
0.30
Project L
Project M
Project N
Project O
Project P
$000
500
400
450
360
600
$000
470
550
400
400
500
$000
550
570
475
420
425
9.18
Based on the expected value of the net cash inflows, which project should be undertaken?
9.19
Calculate the value of perfect information about the state of the market.
134 | P a g e
9.20
A company has estimated the selling prices and variable costs of one of its products as
follows:
Variable cost per unit
$
Probability
$
Probability
40
0.30
20
0.55
50
0.45
30
0.25
60
0.25
40
0.20
Given that the company will be able to supply 1,000 units of its product each week
irrespective of the selling price, and that selling price and variable cost per unit are
independent of each other, calculate the probability that the weekly contribution will
exceed $20,000.
The following data are to be used when answering questions 9.21 and 9.22
A company expects to sell 1,000 units per month of a new product but there is
uncertainty as to both the unit selling price and the unit variable cost of the product. The
following estimates of selling price, variable costs and their related probabilities have
been made:
Selling Price
Unit Variable Cost
per unit
Probability
per unit
Probability
20
25%
8
20%
25
40%
10
50%
30
35%
12
30%
There are specific fixed costs of 5,000 per month expected for the new product.
9.21
The expected value of monthly contribution is
A
B
C
D
5,890
10,300
10,890
15,300
9.22
The probability of monthly contribution from this new product exceeding 13,500 is
A
B
C
D
24.5%
30.5%
63.0%
92.5%
135 | P a g e
9.23
A baker is trying to decide the number of batches of a particular type of bread that he
should bake each day. Daily demand ranges from 10 batches to 12 batches. Each batch of
bread that is baked and sold yields a positive contribution of 50, but each batch of bread
baked that is not sold yields a negative contribution of 20.
Assuming the baker adopts the minimax regret decision rule; calculate the number of
batches of bread that he should bake each day. You must justify your answer.
9.24
A company has determined its activity level and is now predicting its costs for the quarter
ended 31 March 2008. It has made the following predictions:
Variable costs
$560,000
$780,000
$950,000
Probability
03
05
02
Fixed costs
$440,000
$640,000
$760,000
Probability
015
055
030
Calculate the expected value of total cost and its standard deviation.
Note: SD =
(x x)
n
9.25
A company is considering its costs in respect of a new product. The following tables
show the predictions made by the company, together with their associated probabilities:
Fixed costs
$
100,000
Probability
130,000
0.45
160,000
0.20
$
70,000
0.35
Variable costs
Probability
0.40
90,000
0.35
110,000
0.25
Calculate the expected value of total costs.
136 | P a g e
9.26
The owner of a van selling hot take-away food has to decide how many burgers to
purchase for sale at a forthcoming outdoor concert. The number of burgers sold will
depend on the weather conditions and any unsold burgers will be thrown away at the end
of the day.
The table below details the profit that would be earned for each possible outcome:
Weather
Bad
Average
Good
Number of burgers purchased

1,000
2,000
3,000
4,000
$1,000
$0
($1,000) ($3,000)
$3,000
$6,000
$7,000
$6,000
$3,000
$6,000
$9,000
$12,000
(i) If the van owner applies the maximin rule how many burgers will he purchase?
(ii) If the van owner applies the minimax regret rule how many burgers will he purchase?
9.27
A company is considering investing in a new project. The following table shows the
projects estimated cash inflows and cash outflows, together with their associated
probabilities. The cash inflows and cash outflows are totally independent.
Cash Inflows
$
Probability
120,000
0.30
140,000
0.45
160,000
0.25
Cash Outflows
$
Probability
50,000
0.25
60,000
0.35
70,000
0.40
Calculate the probability of net cash flows being $90,000 or greater.

9.28
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.
137 | P a g e
The net present value of each of the possible outcomes is as follows:

Probability
Preferences 1
Preferences 2
Preferences 3
0.3
0.2
0.5
Project A
$000
400
500
700
Project B
$000
800
300
200
Project C
$000
500
600
400
A market research company believes it can provide perfect information about the
preferences of customers in this market.
Calculate the maximum amount that should be paid for the information from the market
research company.
9.29
A marketing manager is deciding which of four potential selling prices to charge for a
new product. Market conditions are uncertain and demand may be good, average or poor.
The contribution that would be earned for each of the possible outcomes is shown in the
payoff table below:
Demand level
Good
Average
Poor
$40
$50,000
$20,000
$30,000
Selling price
$60
$80
$60,000
$40,000
$30,000
$30,000
$30,000
$20,000
$100
$30,000
$20,000
$10,000
If the manager applies the maximin criterion to make decisions, which selling price
would be chosen?
A
B
C
D
$40
$60
$80
$100
9.30
A company is considering whether to develop and market a new product. The cost of
developing the product is estimated to be $150,000. There is a 70% probability that the
development will succeed and a 30% probability that the development will be
unsuccessful.
138 | P a g e
If the development is successful the product will be marketed. There is a 50% chance that
the marketing will be very successful and the product will make a profit of $250,000.
There is a 30% chance that the marketing will be reasonably successful and the product
will make a profit of $150,000 and a 20% chance that the marketing will be unsuccessful
and the product will make a loss of $80,000. The profit and loss figures stated are after
taking account of the development costs of $150,000.
The expected value of the decision to develop and market the product is:
A
B
C
D
$154,000
$4,000
$107,800
$62,800
9.31
A company is considering whether to invest in a new project. The probability distribution
of the net present value of the project is as follows:
Net present value
$2,800
$3,900
$4,900
Probability
0.25
0.40
0.35
Calculate the expected value of the net present value of the project and its standard
deviation.
Note:
9.32
A decision maker who makes decisions using the maximin criterion would be classified
as:
A
B
C
D
Risk averse
Risk seeking
Risk neutral
Risk spreading
139 | P a g e
9.33
NG is deciding which of four potential venues should be used to stage an entertainment
event. Demand for the event may be low, medium or high depending on weather
conditions on the day. The management accountant has estimated the contribution that
would be earned for each of the possible outcomes and has produced the following regret
matrix:
Regret Matrix
Venue
Demand
Low
Medium
High
Ayefield
$
Beefield
$
Ceefield
$
Deefield
$
0
330,000
810,000
200,000
110,000
590,000
300,000
0
480,000
450,000
150,000
0
If the company applies the minimax regret criterion the venue chosen would be
A
B
C
D
Ayefield
Beefield
Ceefield
Deefield
The following data are given for questions 9.34 and 9.35 below
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.
Market Conditions
Project A
Project B
Project C
Project D
Poor
$
440
400
360
320
Average
$
470
550
400
380
Good
$
560
580
480
420
9.34
If the company applies the maximin criterion the project chosen would be:
A
B
C
D
Project A
Project B
Project C
Project D
140 | P a g e
9.35
If the company applies the maximax criterion the project chosen would be:
A
B
C
D
Project A
Project B
Project C
Project D
9.36
The table below shows the possible outcomes, the probability of their occurrence and the
expected value of the net present value for Project A:
Net present value
$2 million
$3 million
$4 million
Probability
30%
20%
50%
Expected value
$0.6 million
$0.6 million
$2.0 million
$3.2 million
Calculate the standard deviation of the net present value for Project A.
Note:
9.37
A risk seeker is an individual who:
A
B
C
D
Selects the alternative which has the highest level of risk

Selects the option with the lowest level of risk
Selects the option with the highest return but with the lowest level of risk
Selects the option with the highest return regardless of the level of risk
9.38
Project M has possible results of 3, 10 or 25 with probabilities of 0.3, 0.3, 0.4
respectively. The expected profit is:
A
B
C
D
12.30
13.90
15.60
25
141 | P a g e
9.39
Project A will earn 1.5m or 3m with probabilities of 0.4 and 0.6 respectively and
project B will earn 0.8m with probability of g or alternatively 3.2m. The value of g
if both projects are equally attractive under expected value is:
A
B
C
D
0.256
0.356
0.333
0.312
The following information should be used for 9.40 and 9.41

A famous sports car company is considering whether or not to exhibit their cars at a
motor show in Birmingham, which is to held later in the year. The total cost of setting up
and holding the show would be 10,000. Sales will be dependent on the turn out of new
models by competitors, there is a 0.4 chance competition will be better in comparison and
a 0.6 chance that it will be worse.
If competition is better, the company expects to sell 4 cars at the exhibition. If the
competition is worse, they expect to sell 8 cars at the exhibition. The contribution per car
is on average 15,000.
If the company does not set up an exhibition at the show, they believe 4 of the above cars
would be sold anyway during the year.
9.40
The expected net gain from exhibiting the show would be?
A
B
C
D
26,000
86,000
96,000
109,000
142 | P a g e
Chapter 1 Solutions - Classification of costs and maths for budgets

1.1 Answer
Future costs
Sunk costs
Incremental costs
Avoidable costs
Fixed costs
Common costs
Differential costs
1.2 Answer is B
400kg in stock if not used could be sold for (400 x 1.75)
100kg extra required at current cost (4.50 x 100)
700
450
1,150
The extra 100kg is an extra or incremental cost 450

The 400 kg could have earned 700 and therefore is an opportunity cost
The past cost for the stock of 1,750 is a sunk cost and is irrelevant
1.3 Answer is B
1.4 Answer
Head office overheads
Depreciation
Rent agreement on a building to be confirmed
The cost of material bought last year
Managers salary of factory
Pre-paid elcectric and gas bill
Labour costs of staff who are working on a job at full capacity
1.5 Answer is B
1.6 Answer is C
1.7 Answer is A
1.8 Answer is A
1.9 Answer is B
143 | P a g e
1.10 Answer is B
2 new employees needed:
Recruit (2 x 45,000 = 90,000)
Or retrain existing employees (20,000 + 60,000) = 80,000
The lowest cost option would be to retrain the existing employees therefore the relevant
cost is 80,000
Salaries of existing staff and the managers apportioned salary cost is irrelevant when
decision-making.
1.11 Answer is D
The minimum price that ZYP Ltd should accept for the above contract , using relevant
costing would be:
Variable cost
4,500
Opportunity cost
8,500
Cost to dismantle after use 1,000
Minimum price
14,000
The net book value is an historical cost and therefore not relevant when decision
making
1.12 Answer is B
1.13 Answer is B
1.14 Answer is $300
Skilled labour can either be obtained by asking staff to do overtime or stop production of
another product, because there is no skilled labour available.
Cost of overtime = 25hrs x $8p/h x 1.5 = $300
Stop existing production
= labour costs + lost contribution
= (25hrs x $8p/h) + (25hrs x $13p/h) = $525
Choose the cheapest option which would be paying staff overtime, therefore $300.
144 | P a g e
1.15 Answer
Incremental costs
Committed costs
Sunk costs
Differential costs
Absorbed fixed costs
Opportunity costs
1.16 Answer is B
900kg x $3.50
300kg x $4.50
Total
=
=
$3,150
$1,350
$4,500
1.17 Answer
The common costs of the joint process
The further processing costs of the product
The unit selling price of the product at the point of separation
The unit selling price of the product after further processing
The percentage losses of further processing the product
The actual output of the product from the joint process
1.18 Answer
Costs used for decision making include only costs that are affected by the
decision.
Costs used for decision making never include fixed costs.
Costs used for decision making do not include past costs.
Costs used for decision making include opportunity costs.
1.19 Answer is B
Compare the companys variable costs for each compnonet with suppliers price to see
which is cheaper to buy in. Fixed costs are ignored as they are sunk.
1.20 Answer is B
40% of fixed overheads are relevant and need to be deducted to find the real contrbutions
earned. This is because they are specific costs that have to be spent by each divison if
they are to manufacture.
40% x 525 = $210
145 | P a g e
Each divison will get an equal share of $210, therefore $70 each. Now work out
contribution:
Divison W
Divison X
Divison Z
=
=
=
$140 - $70 = $70

$420 - $70 = $350
$60 - $70 = ($10)
Therefore only continue with divsinos W and X.

1.21 Answer
Tax balancing charge or allowance on the existing asset
Net book value of the existing asset
Effect on working capital requirements
Removal cost of the existing asset
1.22 Answer is B
1.23 Answer is D
1.24 Answer is D
1.25 Answer is D
1.26 Answer is B
You take the higher of the scrap value and what you can save in material if you can use it
in another project or production.
Ignore the histtorical purchase price as this is not relevant.
Therfore the answer is 3,500.
1.27 Answer is C
1.28 Answer is $2,000
The machine hire cost is based on 5 days multiplied by a hire charge of $500 per day.
However, this is not the relevant cost because there is a lower cost option available.
If the machine is hired for an entire month at a cost of $5,000 and then sub hired for $150
per day for 20 days (total $3,000) the net cost of this option is $2,000. Therefore the
relevant cost is $2,000.
146 | P a g e
1.29 Answer is C
The overheads are fixed and therefore ignored, but the machine power costs will be
incurred as a result of this job, and so therefore we should include these costs. 0.75 x
10hrs = 7.50.
1.30 Answer is B
It is a direct material which is regularly used and therefore we would need to use the
replacement cost to value it for the quote. 500m x $5.50 = $2,750
1.31 Answer is $945
Skilled labour can either be obtained by asking staff to do overtime or stop production of
another product, because there is no skilled labour available.
Cost of overtime = 35hrs x $18p/h x 1.5 = $945
Stop existing production
= labour costs + lost contribution
= (35hrs x $18p/h) + (35hrs x $24p/h) = $1,470
Choose the cheapest option which would be paying staff overtime, therefore $945.
1.32 Answer
$20
$400
$1,080
$880
$460
$480
$0
147 | P a g e
1.33 Answer is M and N only

To work out the optimal processing plan we need to also consider the extra benefit
compared to the extra cost involved in processing M, N and P further.
Products
M
N
P
Extra revenue
$8.40 - $6.25 = $2.15
$6.45 $5.20 = $1.25
$7.45 - $6.80 = $$0.65
Extra cost
$1.75
$0.95
$0.85
Net benefit
$0.40
$0.30
($0.20)
The optimal processing plan is to make products M and N further as they yield further
profits, but not product P as it yields a further loss.
1.34 Answer is $360
If we were to go ahead with this contract we would need to obtain a replacement coach to
cover existing obligations. If this is ignored then we lose contribution and incur
significant penalties on existing obligations.
Replacement coach costs = $180 x 2 days = $360 or if we dont honour our current
obligations then we would lose contribution of $250 x 2 days = $500. It is cheaper to hire
replacement coach for $360.
1.35 Answer is $400
Ronnie only needs his driver for a 1 day bank robbery. All the other days he is not
required. Therefore we need to hire a replacement driver for 1 day to cover the bank
robbery. Therefore $400 x 1 day = $400.
1.36 Answer is $0
These are to be ignored as they are not relevant to the quote.
148 | P a g e
1.37 Answer is make RZ, TZ and S

We need to work out the extra benefit of making RZ, SZ and TZ and then compare these
to the extra cost involved. We should make those which give a net extra benefit.
Product
Extra benefit
RZ
SZ
TZ
$6.00 - $3.00 = $3.00

$5.75 - $5.00 = $0.75
$6.75 - $3.50 = $3.25
Extra variable
cost
$1.40
$0.90
1.00
Extra fixed cost
Net
Nil
Nil
$600 / 1200 kg = $0.50
$1.60
($0.15)
$1.75
Products R and T should be further processed to produce products RZ and TZ

respectively as they provide and extra net benefit of $1.60 and $1.75 per kg respectively.
Product S should not be further processed to make product SZ as there is net cost of
$0.15 per kg every time an SZ is produced.
1.38 Answer is C
Shops that are making contribution losses should be shut down and overheads are sunk
and so therefore their apportionment is irrelevant.
1.39 Answer is C
BMW = $25,000 + ($500 x 10) - $3,500 = $26,500
Rover 75 = $2,650 x 10 = $26,500
1.40 Answer is B
The real benefit gained here will be the elminarion of a loss.
This would be the $10,000 less the $19,000 of specific fixed overheads, therefore $9,000
loss which will now not be incurred if shut down.
(To get $19,000 remove the $7,000 from the $26,000 of overheads to be left with the
specific fixed overheads which is relevant).
149 | P a g e
1.41 Answer is B
Sales after reworking: 2,000 x $6 = $12,000
The cost to rework: 2,000 x $1 = $2,000
The opportunity cost of not making new units: 2,000 x $2 = $4,000
The net return of reworking: $12,000 - ($2,000 + $4,000) = $6,000
The net return of scrapping: 2,000 x $2 = $4,000
1.42 Answer is C
The definition given applies to an incremental cost; an additional cost that will result
when a particular course of action is taken.
1.43 Answer is D
Sales after reworking: 17,000 x $5 = $85,000
The cost to rework: 17,000 x $3 = $51,000
The opportunity cost of not making new units: 17,000 x $2 = $34,000
The net return of reworking: $85,000 - ($51,000 + $34,000) = $0
The net return of scrapping is 17,000 x $1 = $17,000
1.44 Answer is A
The unit cost:
Materials = $16,000 / 8,000 = $2
Labour = $8,000 / 8,000 = $1
Fixed overhead = $0 because they are sunk
Selling expenses, variable only = $8,000 x 40% = $3,200 / 8,000 = $0.40
Variable cost per unit:
$2.00 + $1.00 + $.40 = $3.40
Total variable cost = $3.40 x 500 = $1,700
Selling price = $1,700 + $2,000 = $3,700 / 500 = $7.40
150 | P a g e
Chapter 2 Solutions - Learning curve theory

2.1 Answer is D
Log 0.9/log 2 = -0.152
Average time for the first 8 units = 50 x 8 0.152 = 36.45 hours
36.45 hours x 8 units x 5 =
500 x 8 units
Specific fixed cost
1,458
4,000
3,500
8,958
8,958/8 units = 1,120

2.2 Answer is A
Log 0.8/log 2 = -0.3219
44.45 = cost of first unit x 100-0.3219
44.45 = cost of first unit x 0.227
44.45/0.227 = cost of first unit
44.45/0.227 = 196
2.3 Answer is C
Log 0.9/log 2 = -0.152
First 400 units 10 x 400-0.152 = 4.02 hours x 400 units = 1608 hours
First 200 units 4.47 hours x 200 units =
(894) hours
Units 201-400 (total)
714
714 hours/200 units = 3.57 hours
2.4 Answer is A
Pareto law
2.5 Answer
Learning curve theory is the theory that as output doulbes the average time per unit falls
by a fixed percentage each time this happens.
151 | P a g e
2.6 Answer
Heavy automation in production and so scope for learning
Repetitve work and so speed and accuracy can be improved
Consitensy in the workforce and so knowledge is retained
Extensive breaks in production so skills and techniques are learned
Early stages of production
2.7 Answer is C
2.8 Answer
Positive impact on labour costs involved and may have an overall decrease in costs.
Higher prices would now be needed to maintain expected profits.
Negative impact on labour costs involved and may have an overall increase in costs.
Lower prices would now be chargeds to customers as costs are lower.
2.9 Answer
Units
Hours
Average hours
(2 x 5) x 66% =6.6
3.3
(4 x 5) x 66% 66% = 8.7
2.2
(8 x 5) x 66% x 66% x 66% = 11.5
1.4
2.10 Answer
The company did originally estimate the labour costs for the first batch to be $250,000,
however the actual cost for the first batch was $280,000. There is a learning curve rate of
80% which we will apply to the actual cost to obtain the revised expected cumulative
labour costs.
Number of cumulative batches
1
2
4
8
Average labour cost

(000s)
$280
$280 x 0.8 = $224
$224 x 0.8 = $179
$179 x 0.8 = $143
Total labour costs

(000s)
$280
224 x 2 = $448
179 x 4 = $717
143 x 8 = $1,144
152 | P a g e
2.11 Answer
Number of cumulative batches
1
2
4
8
Average labour cost

(000s)
$280
$476 / 2 = $238
$809 / 4 = $202
$1,376 / 8 = $172
Learning curve rate

$238 / $280 = 0.85
$202 / $238 = 0.85
$172 / $202 = 0.85
Learning curve rate at each output is 85%.

2.12 Answer is 11.5 mins
Y = aXb
Y = average time for that (X) number of units or the average cost per unit
a = time for the first unit or the cost for the first unit
X = the number of units you want to calculate an average time or cost for
b = the index of learning (log r/log 2)
a = 40 mins, b = -0.415
To work out the time taken for the sixth unit of output:
Time for the first 6 units = 40 x (6 to the power of 0.415) x 6 = 114.1 mins
Time for the first 5 units = 40 x (5 to the power of 0.415) x 5 = 102.6 mins
Time for the 6th unit = 114.1 mins 102.6 mins = 11.5 mins
2.13 Answer
This kind of pricing policy is good for high quality products
This can only work in a fast growing economy
This kind of pricing policy is good for inferior products
The economies of scale for the product should be achieved quicker
High amounts profit can be earned per unit sold
Competition may be discouraged and leave the market
153 | P a g e
2.14 Answer is 14.18 hours

Y = aXb
a = 40 hours, b = log 0.8 / log 2 = -0.3219
To work out the time taken for the 8th batch:
Time for the first 8 batches 40 x (8 to the power of 0.3219) x 8 = 163.85 hours
Time for the first 7 batches 40 x (7 to the power of 0.3219) x 7 = 149.67 hours
Time for the 8th batch = 163.85 hours 149.67 hours = 14.18 hours
2.15 Answer
Labour force is getting quicker
More reworks
Increase in staff turnover
Staff have become disinterestd and less moticateed
Production is in its early stages
There is not much more that can be learned now
Inferiror materials being used
2.16 Answer is 80%
a = 45 hrs, y = 182.25 hrs / 8 batches = 22.78 hrs on average for 8 batches.
If we assume that r represents the learning rate, then:
Batches
1
2
4
8
Average hours per unit

45
45 x r
45 x r x r
45 x r x r x r
154 | P a g e
Therefore for 8 batches:

45r = 22.78
r = 22.78 / 45
r = 0.506
r = (0.506) to the power of 1/3
r = 0.797
Therefore learning rate is 80%
Using the learning curve formula:
Y = aXb
a = 10 hours, b = -0.5146
Work out the average time for 30 batches:
Y = 10 x (30 to the power of 0.5146) = 1.737 hours
Total time for 30 batches = 1.737 x 30 = 52.11 hours
Total time for 29 batches = 1.768 x 29 = 51.27 hours
Time for the 30th batch = 52.11 hours 51.27 hours = 0.84 hours
Total time for 50 batches = 52.11 hours + (20 batches x 0.84 hours) = 68.91 hours
155 | P a g e
2.20 Answer
Report 1 is better as it is easier to see how costs behave.
Report 1 is better as it allows an understanding of how many much should have
been spent if we made 60 batches.
Report 2 is better as it compares actuals to flexed budget information.
Report 1 is better as it shows the real difrence in output.
Report 2 is better has it allows us to understand how many hours should have
been used if you are making 50 batches.
2.21 Answer is 1,712 hours
Y = aXb
a = 8 hours, b = -0.1520
Work out the average time for the first 560 units:
Total time for 560 units = 3.057 x 560 = 1,712 hours
Y = aXb
a = 1500 hours, b = -0.2345
Y = 1500 x (64 to the power of -0.2345) = 565.64 hours
156 | P a g e
2.23 Anseer is 433.65 hours

Total time for 64 batches = 565.64 x 64 = 36,200.96 hours
Time for the 64th batch = 36,200.96 hours 35,767.31 hours = 433.65 hours
2.24 Answer is $32,400
Y = aXb
a = $40,000, b = -0.152
Y = 40,000 x (4 to the power of -0.152) = $32,400
2.25 Answer is $28,056
Total cost for 4 batches = $32,400 x 4 = $129,600
Y = 40,000 x (3 to the power of 0.152) = $33,848
Total time for 3 batches = $33,848 x 3 = $101,544
Time for the 4th batch = $129,600 $101,544 = $28,056
2.26 Answer is $118,176
Revenue (8,000 units x $90)
Non- labour related costs (8,000 units x $45)
Labour costs $129,600 + (4 x $28,056)
Contribution
$
720,000
(360,000)
(241,824)
118,176
157 | P a g e
2.27 Answer is 87%

In order to achieve a contribution of $150,000 the total labour cost over the products
lifetime would have to equal ($720,000 - $360,000 - $150,000) = $210,000.
This equals an average batch cost of $210,000 / 8 = $26,250
This represents $26,250 / $40,000 = 65.625% of the cost of the first batch
8 batches represent 3 doublings of output
Therefore the rate of learning required is the third root of 0.65625 = 86.9% = 87%
2.28 Answer is 24.5%
Y = aXb
a = 225 hours, b = -0.152
The target profit of $75,000 is earned by 7,653.12 hours. This represents $9.80 per
hour.
The hourly rate could rise by $9.80 before the profit is eroded.
The sensitivity is therefore (9.80 / 40.00) x 100% = 24.5%
158 | P a g e

Total labour cost of 64 units = 7,653.12 hours x $40 = $306,124.80
The labour cost could rise to $306,124.80 + $75,000 = $381,124.80, before no profit is
earned.
This equals $381,124.80 / $40 = 9,528.12 hours
The cumulative average time for the first 64 units
= 9,528.12 / 64 hours per unit
= 148.88 hours per unit
Units
1
2
4
8
16
32
64

225
225 x r
225 x r x r
225 x r x r x r
225 x r x r x r x r
225 x r x r x r x r x r
225 x r x r x r x r x r x r
Therefore for the first 64 units:

225r (to the power of 6) = 148.88
r (to the power of 6) = 148.88 / 225
r (to the power of 6) = 0.66168
r = 0.66168 to the power of 1/6
r = 0.9335
Therefore the learning rate can fall to 93.35%.
Sensitivity is 3.35 / 90 = 3.72%
2.30 Answer
The process is highly mechanised
The process is highly labour intensive
The process is complex
The process is relatively new
Staff turnover is rapid
159 | P a g e
160 | P a g e
Chapter 3 Solutions - Pricing

3.1 Answer is B
3.2 Answer is A
3.3 Answer is B
3.4 Answer is A
3.5 Answer is C
3.6 Answer is C
3.7 Answer is D
3.8 Answer is B
ROI (15%) = Desired profit/Current investment (25m)
Therefore 15% 25m = 3.75m desired profit
Sales = 350 x 50,000 units = 17.5m
Target cost 17.5m 3.75m = 13.75
13.75m/50,000 units = 275 a unit
3.9 Answer is A
At maximum demand the price will be zero
Price function
P = a- bQ
0 = a- 1/25(75,000)
a = 3,000
Therefore P = 3000-0.04Q
At 60,000 units P = 3000-0.04(60000) = 600
161 | P a g e
3.10 Answer
If demand is inelastic
If the product has a short product lifecycle
If the demand is elastic
If the product is very expensive to manufacture
If the product is recognised as inferior by customers
The firm wants to discourage new entrants in to the industry
3.11 Answer is C
3.12 Answer is A
Units
Total
variable cost
10
11
12
13
515
580
650
725
Selling price
per unit
80
78
76
74
Total sales
revenue
Total contribution
800
858
912
962
285
278
262
237
Fixed cost can be ignored as it is the same in every decision, therefore concentrate on
maximisation of contribution,
P = 100 2Q
MR = 100 4Q
An alternative method would be to derive the MR function and equate it to the marginal
cost of each number of units being produced (profit is maximised whereby MR = MC).
Units
9
10
11
12
13
MR
64
60
56
52
48
MC
55
60 (MR = MC)
65
70
75
3.13 Answer is C
% change in price 1/80 = 0.0125
% change in demand 500/10,000 = 0.05
PED = 0.05/0.0125 = 4
3.14 Answer is D
162 | P a g e
3.15 Answer is C
3.16 Answer is B
3.17 Answer is D
3.18 Answer is D
3.19 Answer is B
3.20 Answer is C
3.21 Answer is B
Loss leader pricing
3.22 Answer is C
High prices normally at an early stage of the product lifecycle
3.23 Answer
Sales
E
Introduction
G
Growth
A
Maturity
F
Decline
B
Senility
Time
163 | P a g e
3.23 Answer
Example
A retailor offering a sandwich and drink for a combined price
Pricing
strategy
D
Product
Bundling
A train operator charging different prices according to the time of travel
Price
Discrimination
A bar using happy hour (low prices) to encourage sales when off peak
Variable
Pricing
3.25 Answer
Greater tangibility
Less perishability
Easier to brand
Existence of inventory
Greater homogeneity
Difficult to return
Greater separability
3.26 Answer D
Product bundling.
3.27 Answer D
Growth stage.
3.28 Answer B
Maturity.
3.29 Answer D
Product bundling.
3.30 Answer A
Non-price competition.
164 | P a g e
3.31 Answer
PLC Theory
Characteristics (insert letters A to D)
INTRODUCTION
Customers unaware and low consumer adoption, cashflow and profit negative.
GROWTH
Consumer adoption rapidly increases, profitability and

cash-flow improve.
MATURITY
High sales volume and economies of scale, profitability

and cash-flow positive.
DECLINE
Product obsolescence and over capacity within the

industry.
C
A
D
165 | P a g e
166 | P a g e
Chapter 4 Solutions - Beyond budgeting

4.1 Answer is C
An example of a feedback control system is a budgetary control system. This would
gather information on past performance from the output of the system e.g. actual
financial performance, and compare this to a predetermined standard or plan (budget)
using any deviations e.g. variances, as a basis of improving future performance through
control action taken.
Feedback contrasted to feed-forward control is like closing the door after the horse has
already bolted, in other words there is little you can do about it now, except try and
rectify the situation to avoid it happening again. Feed-forward control is more prevention
than appraisal, controlling a system by making adjustments now to the system in advance
before any exceptions occur. It does this by trying to predict what will happen in the
future.
Feedback can be transformed into feed-forward control by being more proactive and
predictive as to what will happen in the future, rather than being reactive or backward
looking by historical reflection on the past.
Target costing
Market price to achieve desired market share
XX
TARGET COST (Balance)
(XX)
Desired profit
XX
Used by Nissan, Sony and Toyota and many other Japanese companies, who sought not
what a product does cost (which is what most UK companies used as the method of
pricing) but rather what it should cost.
Traditional approaches were to develop a product, determine its cost, add mark up and
determine a price. This therefore ignored competition or demand.
Target costing combines the use of JIT, TQM, cost reduction, value analysis and
benchmarking. The idea is that a product price is determined by the market place, costs
are then reduced to enable the product to be sold at that price.
4.2 Answer is C
167 | P a g e
4.3 Answer is D
Budgetary slack or padding is a term used to describe the difference between the
minimum necessary expenditure required and the actual estimate or forecast submitted.
It is the intentional over estimation of costs and / or under estimation of revenue in a
budget.
4.4 Answer
Coordination between sales and production will improve
There will be less scope for budget slack
Sales staff will be better motivated
Coordination and cooperation will increase across the sales department
Less time will be spent on budgeting
4.5 Answer
Co-ordination
Marketing
Communication
Expansion
Resource allocation
4.6 Answer is A
4.7 Answer
To allow comparisons between the budge and actual results and then any
major differences can be investigated.
To allows mangers to be responsible for the management of resources that
they have been allocated in the budget, and as a result assessed on the
success of resource management.
To allow a more efficient production of goods and services because they can
be linked with one another.
To allow judgements to be made on the performance of the managers by
comparing the actual results with the budget.
To allow targets to be created for managers that they will want to achieve.
To allow everyone to understand what resources are available and how they
are to be allocated to different budgets.
168 | P a g e
4.8 Answer
How budgets or standards affect people within an organisation
How budgets or standards affect costs
How budgets or standards affect profits
How budgets or standards affect the environment
How budgets or standrads affect resource allocation
4.9 Answer
Greater motivation of staff
Faster process in setting the budget
Reduction in busget padding
Targets are more likely to be accepted by staff
Useful if revenue and costs are stable
4.10 Answer
Inexpereinced staff
Reduced training costs of staff for budget preparation
Targets are less likely to be achived
Increased slack in the budget
Slower process
4.11 Answer
Focus on cost control not cash forecasts
Budgets revised more frequently and a longer time horizon when forecasting
Using a fixed budget to make comparisons
Benchmarking for continuous improvement
4.12 Answer
The traditional budget process is too rigid and requires conformance to it with not
enough flexibility. With the constantly changing business environment, managers need
to be having more up to date information to help them make decisions.
The budget process is often too bureaucratic, internally focussed and time consuming.
4.13 Answer
Beyond budgeting will allow businesses to react quickly in a dynamic environment
giving management the advantage to change and allocate resources. This should result in
better innovation, lower costs and improved customer and supply loyalty.
169 | P a g e
4.14 Answer
Managers are given less discretion and freedom to make decisions
Managers targets are linked with the organisations strategy
Everyone has undefined areas of responsibility
Front line teams are responsible for managing the business relationships with
customers and suppliers
Information should be transparent and relevant
4.15 Answer
Courtsey of staff
Nuumber of breakdowns
Percentage increase in sales
The product range
Profit
4.16 Answer
No of late deliveries
Number of repeat business sales
Easy of use of product
New internal control system
Stock turnover
Price elasticity of demand
4.17 Answer
Share price growth
Strategy developemt
Training days per emplyoee
Number of machine breakdowns per day
Earnings per share
Average customer ratings
170 | P a g e
4.18 Answer
Which of these is an example of a CSF?
Net Present Value
Percentage of staff suggestions for improvement
Number of products launched
Return on capital employed
The functions of a product
Number of defective products
4.19 Answer
Which of these relate to feedback control?
Feedback can be negative (adverse) or positive (favourable)
Feedback is based on comparing actual to a standard of performance
It isa pre-emptive reaction to actual change
Examples of feedback control is a rolling budget
Control action would be closing the stable door after the horse has bolted
4.20 Answer
Which of these relate to feedforward control?
Forecasting ahead and doing something now before the event occurs
They are good for adaptive planning
Examples of feedforward control is variance analysis
Control action would be closing the stable door before the horse bolts
Part of the output of a system is measured and returned as input to regulate
the systems further output.
171 | P a g e
4.21 Answer
High Level
Controller
(Human)
Effector
(Takes control
action)
Input
(Data)
Comparator
(Compares
actual to
standard)
Process
(Calculate,
sort, amend)
Sensor
(Data
collected and
measured)
Output
(Information)
4.22 Answer
Which of these if any describe a double feeback loop system? Select all that apply if any.
Corrective action is not automatically taken
It is not a closed loop control sytem
172 | P a g e
4.23 Answer
Which if these if any describe a single feedback loop system? Select all that apply if any.
Corrective action is automatically taken
It is a closed loop control sytem
4.24 Answer is D
4.25 Answer is A
4.26 Answer
Input
Sales being generated by sales reps
Comparator
Comparisons are made between the target level of sales expected

by sales reps and the actual results
Output
The report showing level of sales and commissions earned by

different sales reps
Effector
Sales manager takes action over those sales reps that did not meet
their sales targets
173 | P a g e
4.27 Answer
Effector
The sales manager will review the level of sales and production and
in conjunction with the production manager and together agree on
appropriate action to increase or decrease raw materials levels to
ensure that a satisfactory level of production is reached to support
sales.
Comparator
Comparisons are made between the actual level of sales and actual
level of production of finished goods.
Sensor
This is a quality control procedure of the finished product to ensure it

meets certain standards.
Output
These are the products themselves which are sold customers.
Process
The raw materials are used in the production process.
Input
Raw materials being delivered to a factory to go into production.
4.28 Answer is B
4.29 Answer is C
4.30 Answer
Stifle innovation and creativity.
consume large amounts of management time to set
Too internal in focus
Ceate barriers within departments
Too short-term in focus
174 | P a g e
Chapter 5 Solutions - Activity based costing

5.1 Answer is 7.50 per unit of product Y
Product
Production units
Batch size
Number of set ups required
X
15,000
2,500
15,000 / 2,500
=6
Y
25,000
5,000
25,000 / 5,000
=5
Z
20,000
4,000
20,000 / 4,000
=5
Total number of set ups required = 6 + 5 + 5 = 16

Cost per set up = 600,000 / 16 = 37,500
Machine set up costs attributed to product Y = 37,500 x 5 = 187,500
Set up cost per unit of Y = 187,500 / 25,000 = 7.50
5.2 Answer is C
Budgeted production per annum (units)
Number of batches
Number of machine set-ups
Total processing time (minutes)
Product R
80,000
800
2,400
240,000
Product S
60,000
1,200
3,600
300,000
Total
140,000
2,000
6,000
540,000
Cost driver rate = $108,000 / 540,000 = $0.20

Total processing costs = $0.20 x 240,000 = $48,000
Processing costs per unit = $48,000 / 80,000 = $0.60
5.3 Answer is B
Cost driver rate = $180,000 / 6,000 = $30 per set up
Total set-up costs = $30 x 3,600 = $108,000
Set up cost per unit =$108,000 / 60,000 = $1.80
175 | P a g e
5.4
Budgeted number of batches
Product D
100,000 100 =
Product R
100,000 50 =
Product P
50,000 25 =
Budgeted number of machine set-ups

Product D
1000 batches x 3
Product R
2000 batches x 4
Product P
2000 batches x 6
Budgeted number of purchase orders
Product D
1000 batches x 2
Product R
2000 batches x 1
Product P
2000 batches x 1
Budgeted number of processing minutes
Product D
100,000 x 2 =
Product R
100,000 x 3 =
Product P
50,000 x 3 =
1000
2000
2000
5000
3000
8000
12000
23000
2000
2000
2000
6000
200,000
300,000
150,000
650,000
5.5
Budgeted cost per set up
150,000 23000 = 6.52 per set-up
Budgeted cost per order
70,000 6000 =
11.67 per order
Budgeted cost per minute of processing
80,000 650,000 = 0.123 per minute
Overhead unit cost for product R
Set-up
Order
Processing
(6.52 x 4 set-ups) 50 units

(11.67 x 1 order) 50 units
0.123 x 3 minutes
0.52
0.23
0.37
1.12
176 | P a g e
5.6
Budgeted unit cost for product Z
Direct material
Direct labour (W1) 16 x 0.3 hours =
Fixed overhead absorbed (W2) 11.00 x 0.3 hours =
W1 Labour rate per hour

128,000 8,000 hours =
21.50
4.80
3.30
29.60
16.00
W2 Fixed overhead absorption rate per hour

Set-up cost
Quality testing cost
Other overhead cost
Budgeted direct labour hours

Fixed overhead absorbed per labour hour (88,000 8,000 hrs) =
22,000
34,000
32,000
88,000
8000
11.00
5.7
Budgeted unit cost for product Z
Direct material
Direct labour 16 x 0.3 hours =
Set-up cost (250 x 2 per batch) 30 units per batch =
Quality testing (850 per test 75 units each test) =
Other overhead cost (4 per labour hour x 0.3 hours per unit) =
21.50
4.80
16.67
11.33
1.20
55.50
Cost drivers
Set-up cost (22,000 88 set-ups) =
250 per set-up
Quality testing (34,000 40 tests) =
850 per test
Other overhead cost (32,000 8,000 labour hours) =
4 per labour hour
177 | P a g e
5.8
Tip: The ABC approach recognises the complexity and diversity of how different
products consume different resources and therefore fixed overhead. This gives a
better overall understanding of product costing when contrasted to the simple
absorption costing approach. Four implications for management of using ABC have
been provided below; however the question only requires two.
The ABC approach could lead to a higher cost absorbed, if a product consumes far more
resources and therefore shares a higher proportion of the cost drivers e.g. set-up, quality
testing etc. Rather than just how much labour time each product consumes when
contrasted to absorption costing.
More efficient management of resources by a greater understanding of what
drives fixed overhead to be incurred e.g. increase batch sizes to reduce unit cost.
Better costing information for planning, control or decision making.
More realistic pricing to cover fixed overhead being incurred by different
products.
Better profitability analysis of different products.
5.9
Z1
Z2
Department 1
480 minutes 12 =
40.0
480 minutes 16 =
30.0
Department 2
840 minutes 20 =
42.0
840 minutes 15 =
56.0
Department 1 is the limiting factor/bottleneck. It is the most binding constraint on

production due to its limitation of being able to produce less of both products than
department 2.
178 | P a g e
5.10
Selling price
Less:
Direct material
Direct labour
Variable overhead
Contribution per unit ()
Department 1 (minutes per unit)
Contribution per minute ()
Ranking
Z1
50.00
Z2
65.00
10.00
10.40
6.40
23.20
15.00
6.20
9.20
34.60
12
16
1.93
2.16
2nd
1st
Given there is no maximum sales demand for product Z2 the total of 480 minutes each
day for department 1 should be allocated to making this product. The maximum
contribution earned would therefore be 480 minutes x 2.16 contribution earned per
minute = 1,036.80 contribution per day. 480 minutes would make (480 minutes 16
minutes) 30 units of product Z2.
179 | P a g e
5.11
Tip: Throughput accounting aims to maximise contribution whilst minimising
conversion e.g. labour and overhead cost. It is essentially the same principle as
limiting factor analysis, but assumes the only true variable cost when calculating
throughput contribution is the material and component cost only of making a product.
Throughput Contribution
=
sales less material cost only the only true variable cost
Selling price
Less:
Direct material
Throughput contribution per unit ()
Throughput contribution per minute ()
Ranking
Z1
50.00
Z2
65.00
10.00
40.00
15.00
50.00
12
16
3.33
3.13
1st
2nd
throughput contribution earned would therefore be 480 minutes x 3.33 throughput
contribution earned per minute = 1,598.40 throughput contribution per day. 480
minutes would make (480 minutes 12 minutes) 40 units of product Z1.
180 | P a g e
5.12
Selling price
Direct material
Direct Labour
Contribution
Overhead allocated using ABC
W1 Receiving/inspecting
W (1200 10,000 units) x 280
X (1800 15,000 units) x 280
Y (2000 18,000 units) x 280
W2 Production/machine set up
W (240 10,000 units) x 1,500 per set up
X (260 15,000 units) x 1,500 per set up
Y (300 18,000 units) x 1,500 per set up
Profit per unit
200.0
0
50.00
30.00
120.0
0
183.00
40.00
35.00
175.00
35.00
30.00
108.00
110.00
33.60
33.60
31.11
36.00
26.00
50.40
48.40
25.00
53.89
W1 Receiving/inspecting
1,400,000 (1,200 + 1,800 + 2,000) = 280 per
requisition
W2 Production/machine set up
1,200,000 (240 + 260 + 300) = 1,500 per set up
5.13 Answer is $102,118
Costs that varied with number of parcels = $194,400 x 70% x 60% = $81,648
Cost per parcel last year = $81,648 /15,120 = $5.40
Parcel related cost for next year = $5.40 x 1.03 x 18,360 = $102,118
5.14 Answer is $59,699
Costs that vary with kilometres travelled = $194,400 x 70% x 40% = $54,432
Cost per km = $54,432 / 120,960 = $0.45
Distance related costs for next year = $0.45 x 1.03 x 128,800 = $59,699
5.15 Answer is B
An inventory management method that concentrates effort on the most important items
181 | P a g e
5.16 Answer is D
5.17 Answer is D
5.18 Answer is A
5.19 Answer is A
OAR = 5,775/550 = 10.50 per inspection
Absorbed (468 x 10.50)
Actual overhead
Over absorption
4,914
4,500
414
5.20 Answer is D
Number of batches (50,000/1,000 = 50) + (30,000/300 = 100) = 150 batches
Number of set ups (50 x 7) + (100 x 5) = 850
Therefore 55,250/850 = 65 a set up
5.21 Answer is D
Actual salaries
Over absorption
Overhead absorbed
344,000/16,000 hours
320,000
24,000
344,000
21.50 OAR
5.22 Answer is B
5.23 Answer is C
5.24 Answer is B
182 | P a g e
5.25 Answer is D
Total numbe of batches
Number of set ups
A
80,000/100
=800
B
100,000/50
=2,000
C
50,000/25
=2,000
800 x 3
=2,400
2,000 x 4
=8,000
2,000 x 6
=12,000
Total number of set ups = 2,400 + 8,000 + 12,000 = 22,400

Machine cost per set up = $150,000 / 22,400 = $6.70
Machine set up cost per batch B = $6.70 x 4 = $26.80
Machine set up cost per unit of B = $26.80 / 50 = $0.54
5.26 Answer
4th
Take action to adjust the capacity of resources to match the projected supply
3rd
Determine the resources that are required to perform organisational activities
1st
Estimate the production and sales volume by individual products and

customers
2nd
Estimate the demands for organisational activities
5.27 Answer
Cost
Purchase order processing costs
Classification
Product advertising costs
Factory rent and rates
Facility sustaining activities
Direct labour costs
Unit level activities
Product redesign costs
Material handling costs
183 | P a g e
5.28 Answer is $120

Number of batches = (50,000 / 250) + (25,000 / 100) + (20,000 / 400) = 500
Material cost per batch = $60,000 / 500 = $120
5.29 Answer
Cost per sales visit = $50,000 / 200 = $250
Cost per order = $70,000 / 700 = $100
Cost per normal delivery = $120,000 / 240 = $500
Cost per urgent delivery = $60,000 / 30 = $2,000
5.30 Answer
B
$000
$000
Sales visits
$500 x 30 = 15
$500 x 12 = 6
Orders processing
$400 x 43 =17.2
$400 x 30 = 12
Normal deliveries
$700 x 70 = 49
$700 x 45 = 31.5
Urgent deliveries
$3,000 x 25 = 75
$3,000 x 4 = 12
156.2
61.5
Costs
Total costs
5.31 Answer is D
184 | P a g e
5.32 Answer
Statements
True or False
If products are uniform and

customers are similar in their
demands, activity based costing
may not offer a significant
advantage over machine hours
when assigning overhead.
True
ABC is most effective when there are variations in
batch size, processes, or customer demands.
True
In activity based costing, the
For example, a setup cost of 900 is associated with
manufacturing overhead cost per
the batch of items that will be processed. A large
unit will depend partially on the quantity of items processed will mean a low setup cost
number of units in a batch.
per unit. A small quantity of items being processed
will mean a high setup cost per unit.
The cost to set up production
equipment is best allocated
directly to products via machine
hours.
False
Setup costs should not be allocated directly to
products via machine hours. Setup costs should be
allocated to the batch of products that will be run after
the setup occurs.
5.33 Answer is C
It is highly unlikely that machine hours will correlate with the indirect labor cost.
It is highly unlikely that direct labor hours will correlate with the indirect labor cost.
5.34 Answer
Costs allocated to service departments using the reciprocal costing method
Committed fixed costs
Direct costs of materials
Variable non-manufacturing costs
Manufacturing fixed overhead costs
ABC cost allocation systems can be used to allocate either variable or fixed
manufacturing overhead, to allocate joint costs, or to reallocate service department costs
to outputs. Direct costs of materials and labour do not need to be allocated to specific cost
objects.
185 | P a g e
5.35 Answer
Which of the following, if any, is true of an activity based costing system?
An activity based costing system will provide a more accurate apportionment
of overheads to products than absorption costing
An activity based costing system will cost less to administer than an
absorption costing system
The activity based costing system will be less detailed than an absorption
costing system
An activity based costing system is easier to administer than an absorption
costing system
5.36 Answer
Statements
True or False
Under ABC, indirect

manufacturing costs are
predominantly assigned on
the basis of direct machine
hours.
False
Setup cost is an example of a

batch-level cost.
In ABC the assumption is

that prodcuts use resources or
cause costs.
True
Setting up a machine is directly associated with the batch
of items that will be processed after the setup occurs.
False
It is activities and not products.
5.37 Answer is C
385,000 / 4.25 = 90,588, therefore 90,560
186 | P a g e
5.38 Answer is A
Since the equipment is automated, direct labour hours would be the least favorable basis.
ABC is the most favorable basis for allocating a variety of services provided by indirect
labour.
5.39 Answer is C
Rather than using a single allocation base (such as direct labor hours), activity based
costing uses a number of allocation bases for assigning costs to products (thus statement
A is false).
Generally, an activity based costing system is harder (rather than easier) to implement
and maintain than a traditional costing system (thus statement B is false).
Rather than eliminating waste by allocating costs to products that waste resources,
activity based management is a management approach that focuses on managing
activities as a way of eliminating waste and reducing delays and defects (thus statement
D is false).
Statement C is true.
5.40 Anwer is A
Batch level activities are activities that are performed each time a batch of goods is
handled or processed, regardless of how many units are in a batch. Further, the amount of
resources consumed depends on the number of batches run rather than on the number of
units in the batch.
Worker recreational facilities relate to the organization as a whole rather than to specific
batches and, as such, would not be considered a batch level activity. On the other hand,
purchase order processing, setting up equipment, and the clerical activities described are
activities that are performed each time a batch of goods is handled or processed, and, as
such, are batch level activities.
5.41 Answer is B
150,000 / (500 + 700) = 125
187 | P a g e
5.42 Answer is C
Determine the budgeted activity rate
Activity rate = 20,000 / 1,250 = 16.00
Determine the amount of overhead applied to actual activity of 3,000
Actual amount of overhead applied = 3,000 x $16.00 = 48,000
5.43 Answer is D
Product level activities are activities that relate to specific products that must be carried
out regardless of how many units are produced and sold or batches run. Human resource
management activities relate to the organization as a whole rather than to specific
products and, as such, would not be considered a product level activity. On the other
hand, advertising, testing of prototypes and parts administration are activities that relate
to specific products, and, as such, are product level activities.
5.44 Answer is C
$45,000 / 2,400 = $18.75
5.45 Answer is B
Alpha = ($24,000 / 1,200) x 800
Beta = ($88,000 / 1,100) x 400
Gamma = ($12,000 / 2,400) x 100
=
=
=
$16,000
$32,000
$500
Total overhead cost of product G = $16,000 + $32,000 + $500 = $48,500

Cost per unit of prduct G = $48,500 / 9,000 = $5.39
5.46 Answer is D
G = 45,000 / 6 = 7,500
H = 10,000 / 70 = 143
I = 25,000 / 130 = 192
188 | P a g e
5.47 Answer is B
Under traditional costing methods, overhead costs are allocated to products on the basis
of some measure of volume such as direct labour hours or machine hours. This results in
most of the overhead cost being allocated to high volume products. In contrast, under
activity based costing, some overhead costs are allocated on the basis of batch level or
product level activities. This change in allocation bases results in shifting overhead costs
from the high volume products to low volume products.
5.48 Answer
3
2
4
1

5.49 Answer is A
OAR = 145,000 / 10,000 = 14.50 per song
Happy songs = 10,000 3,312 = 6,688
Total cost for happy songs = 14.50 x 6,688 = 96,976
5.50 Answer
Use a single volume based cost driver
Assign overheads to products only based on the products' use of labour
Often reveal products that were under or overcosted by traditional costing systems
Typically use fewer cost drivers than more traditional costing systems
Have a tendency to distort product costs
5.51 Answer
Manufacturers
Financial-services firms
Book publishers
Hotels
None of the above, as all are able to use this costing system
189 | P a g e
5.52 Answer
ABC cannot be used by service businesses
ABC can help a company eliminate (or reduce) non-value added costs
ABC results in less cost averaging of various diversified activities compared to
traditional absorption costing
ABC results in more costs being classified as direct costs
ABC tends to reduce cost distortion among product lines
190 | P a g e
Chapter 6 Solutions - TQM techniques

6.1 Answer is A
6.2
Part (a)
Product A
Machine 1
50 units x 5.0 hrs
Product B
Product C
Capacity
Utilisation
250
Machine 2
50 units x 5.0 hrs
250
Machine 3
50 units x 2.5 hrs
125
50 units x 2.0 hrs
100
50 units x 5.5 hrs
275
50 units x 1.0 hrs
50
60 units x 1.5 hrs
90
60 units x 1.5 hrs
90
60 units x 0.5 hrs
30
440
615
205
400
400
400
110%
154%
51%
Part (b)
The bottleneck machine (or limiting factor) would be machine 2. It is the most binding
constraint on production e.g. the most restricting of all machines to meet the estimated
sales demand given. It has the highest utilisation rate of all three machines of 154%.
6.3
Part (a)
1) Identify a systems bottleneck or most limiting factor that restricts the flow of
throughput.
2) Focus attention on achieving higher throughput from the bottleneck e.g. exploit or
alleviate it.
3) Subordinate all other resources to this bottleneck e.g. operate the bottleneck
resource at 100% capacity, whilst running non-bottleneck resources at a speed
that matches this which may not be 100%.
4) Elevate the bottleneck e.g. try and increase throughput from it either by improving
its efficiency or procuring more of it if possible.
5) Repeat steps 1-4 as once the bottleneck is eliminated another will become
apparent and take its place.
191 | P a g e
Part (b)
Product A
Product B
Product C
36.00
28.00
18.00
Machine hours per unit
5.00
5.50
1.50
Contribution per hour
7.20
5.09
12.00
Ranking
Machine 2 hours used
Product C
Product A
2nd
3rd
1st
60 units x 1.5 hrs

50 units x 5.0 hrs
=
=
90.00
250.00
340.00
400.00
60.00
Capacity of machine 2
Remaining hours
The remaining 60 hours for machine 2 will be used to produce product B given the
maximum sales demand of the other two products have been satisfied. 60 hours 5.5
hours = 10.9 units of product B that would be produced (or 10 whole units).
6.4 Answer is L, J, K, M (in rank order)
SP
Material cost
Throughput contribution
Minutes on Machine X
Contribution
per unit of LF
Ranking
2,000
(410)
1,590
1,500
(200)
1,300
1,500
(300)
1,200
1,750
(400)
1,350
120
100
70
110
1,590/120
=13.25
1,300/100
= 13
1,200/70
= 17.14
1,350/110
= 12.27
6.5 Answer is D
192 | P a g e
6.6 Answer is A
.
Tip: Computer-integrated manufacturing (CIM) is manufacturing supported by
computers. The total integration of computer aided design, manufacturing and other
business operations and databases e.g. quality control and purchasing.
Tip: Flexible manufacturing system (FMS) consists of several machines along with
part and tool handling devices such as robots, arranged so that it can handle any
family of products or parts for which the system has been designed and developed.
Such systems aim to achieve greater economies of scope for the manufacturer, the
capability of economic production of small batches of a variety of products or parts
with minimal set up time. These systems are computerised and highly integrated.
Tip: EDI is a computer-to-computer data interchange (fixed point to point system).
An agreed format for parties, for the sending and receiving of information, this would
require investment from both parties and can be very costly. EDI is the electronic
invoicing, billing and payment of transactions between the organisation and its
suppliers or customers. An extranet is a form of internet based EDI. Both aim to
achieve a paperless system of information exchange.
FMS- an example of technology and an alternative layout

The idea of an FMS was proposed in England (1960s) under the name System 24, a
flexible machining system that could operate without human operators 24 hours a day
under computer control. From the beginning the emphasis was on automation rather than
the reorganization of workflow.
Early FMSs were large and very complex, consisting of dozens of Computer Numerical
Controlled machines (CNC) and sophisticate material handling systems. They were very
automated, very expensive and controlled by incredibly complex software. There were
only a limited number of industries that could afford investing in a traditional FMS as
described above.
Currently, the trend in FMS is toward small versions of the traditional FMS, called
flexible manufacturing cells (FMC).
Today two or more CNC machines are considered a flexible cell and two ore more cells
are considered a flexible manufacturing system.
193 | P a g e
6.7
Z1
Z2
Department 1
480 minutes 12 =
40.0
480 minutes 16 =
30.0
Department 2
840 minutes 20 =
42.0
840 minutes 15 =
56.0
Department 1 is the limiting factor/bottleneck. It is the most binding constraint on

production due to its limitation of being able to produce less of both products than
department 2.
6.8
Selling price
Less:
Direct material
Direct labour
Variable overhead
Ranking
Z1
50.00
Z2
65.00
10.00
10.40
6.40
23.20
15.00
6.20
9.20
34.60
12
16
1.93
2.16
2nd
1st
contribution earned would therefore be 480 minutes x 2.16 contribution earned per
minute = 1,036.80 contribution per day. 480 minutes would make (480 minutes 16
minutes) 30 units of product Z2.
194 | P a g e
6.9
Throughput Contribution
=
Selling price
Less:
Direct material
Z1
50.00
Z2
65.00
10.00
40.00
15.00
50.00
12
16
3.33
3.13
Ranking
1st
2nd
throughput contribution earned would therefore be 480 minutes x 3.33 throughput
contribution earned per minute = 1,598.40 throughput contribution per day. 480
minutes would make (480 minutes 12 minutes) 40 units of product Z1.
6.10 Answer is B
6.11 Answer is A
195 | P a g e
6.12 Answer is B
Tip: The JIT philosophy requires that products should only be produced if there is an
internal or external customer waiting for them. Traditionally manufacturers
stockpiled. JIT aims ideally for zero stock e.g. raw materials delivered immediately
at the time they are needed, no build up of work-in-progress during production and
finished goods only produced if there is a customer waiting for them.
1.
2.
3.
4.
Closer relationships with suppliers need to be maintained

Smaller more frequent deliveries need to be managed
Higher quality machines with regular maintenance required to avoid delays
Involvement and training of staff to maintain flexibility e.g. empowerment and
multi-skilling
Tip: Flexible manufacturing system (FMS) consists of several machines along with
part and tool handling devices such as robots, arranged so that it can handle any
family of products or parts for which the system has been designed and developed.
Such systems aim to achieve greater economies of scope for the manufacturer, the
capability of economic production of small batches of a variety of products or parts
with minimal set up time. These systems are computerised and highly integrated.
Tip: Materials requirement planning (MRP I) is an information system which
provides an automated list of components and materials required for the type and
number of products entered. This allows better production planning and stock
management.
6.13
=
Return per factory hour is similar to the concept of contribution maximisation; you
should notice the following calculation is similar to the contribution per unit of a
limiting factor used in short-term decision-making
Return per factory hour =
Sales less material cost only

Usage (in hours) of the bottleneck resource
196 | P a g e
Selling price
Direct materials
Throughput contribution per unit
200
41
159
150
20
130
150
30
120
Bottleneck (minutes)
12
10
159 / 12
= 13.25
130 / 10
= 13.00
120 / 7
= 17.14
795
780
1,028
Return per factory minute

Return per factory hour (x 60mins)
6.14 Answer is A
6.15 Answer is B
A marginal costing system would value inventory at variable production cost only not
full production cost.
Variable production costs = $20,000 + $6,300 + $4,700 = $31,000
Closing inventory = 400 units
Closing inventory should be valued as a proportion of variable production cots.
Therefore:
Value of closing inventory = $31,000 x (400 units / 4,000 units) = $3,100
6.16 Answer is D
The throughput accounting approach is essentially the same principle as marginal costing,
but values inventory at material cost only.
Direct materials = $20,000
Value of closing inventory = $20,000 x (400 units / 4,000 units) = $2,000
6.17
Return per factory hour is similar to the concept of contribution maximisation; you
should notice the following calculation is similar to the contribution per unit of a limiting
factor used in short-term decision-making
197 | P a g e
Return per factory hour =
Sales less material cost only

Usage (in hours) of the bottleneck resource
= ($12 - $5) / 0.75 hours = $9.33 per hour

Throughput accounting (TA) ratio demonstrates how much benefit or contribution per
hour we are receiving compared to our costs per hour when we manufacture a product. A
ratio of less than 1 means that costs per hour is greater than contribution per hour. A ratio
of greater than 1 means that contribution per hour is greater than costs per hour.
TA ratio =
Contribution (sales less material cost only) per hour

Conversion cost per hour (or cost per factory hour)
= $9.33 / ($144,000 / 12,000 hours) = $9.33 / $12 = 0.78

The TA ratio is less than 1 and so costs per hour are greater than contribution per hour
and therefore should not be produced.
6.18 Answer is D
This a throughput accounting question as indicated by reference to bottleneck resource
and product return per minute. We need to work out the throughput contribution first
and then throughput contribution per bottleneck resource or product return per
minute in this case.
Throughput contribution = selling price less material costs only
Throughput contribution = $45 - $14 = $31
Product return per minute = throughput contribution / time on bottleneck resource
Product return per minute = $31 / 10 mins = $3.10
6.19 Answer is C
Customer compensation costs are costs that have been incurred after the product has left
the company, and so therefore is an external failure cost.
Test equipment running costs are costs to do with the assessment of quality and so
therefore an appraisal cost.
198 | P a g e
6.20 Answer is A
Selling price
Less:
Direct material
Direct labour
Variable production overheads
Bottleneck machine (minutes per unit)

Ranking
W
180
X
150
Y
150
41
30
24
85
20
20
16
94
30
50
20
50
10
85/7
= 12.14
94/10
= 9.4
50/7
= 7.14
1st
2nd
3rd
W
180
X
150
Y
150
41
139
20
130
30
120
10
139/7
= 19.86
130/10
= 13
120/7
= 17.14
1st
3rd
2nd
6.21 Answer is B
Selling price
Less:
Direct material
Bottleneck machine (minutes per unit)

Ranking
6.22 Answer is D
199 | P a g e
6.23 Answer is C
Product D
Product E
Product F
12.00
14.00
10.00
20
25
15
12 / 20 = 0.60
14 / 25 = 0.56
10 / 15 = 0.667
2nd
3rd
1st
Product D
Product E
Product F
22.00
20.00
16.00
20
25
15
22 / 20 = 1.10
20 / 25 = 0.80
16 / 15 = 1.07
1st
3rd
2nd
Contribution per unit ($)

Time in Process A
(mins per unit)
Contribution per min ($)
Ranking
6.24 Answer is D
per unit ($)
Time in Process A
(mins per unit)
per min ($)
Ranking
6.25 Answer is D
A strong customer focus and flexibility to meet customer requirements

6.26 Answer is A
Examples of internal failure costs
6.27 Answer is D
Economically producing small batches of a variety of products with the same machines
6.28 Answer is A
Purchasing approach
200 | P a g e
6.29 Answer is D
A primary activity that refers to receipt, storage and inward distribution of raw materials
6.30 Answer is B
Internal supplier
6.31 Answer is D
Kaizen is a measure of quality
6.32 Answer is A
Mass production techniques
6.33 Answer is D
Training staff to reduce defects during the production process
6.34 Answer is B
Job
6.35 Answer is C
6.36 Answer is 3,000 minutes
Throughput time
= work-in-process (1,000 customer enquires) x cycle time (30 minutes average duration)
= 30,000 minutes total throughput time
6.37 Answer is services, qualtity and cost
6.38 Answer is B
Total productive maintenance
6.39 Answer is C
Focus factories
201 | P a g e
6.40 Answer is A
6.41 Answer is A
Removal of waste
6.42 Answer is D
Prevention and continuity
6.43 Answer is D
A firm's infrastructure
6.44 Answer is A
Quality circles
6.45 Answer is A
The value chains of suppliers, channels and the customer
6.46 Answer is D
Outsourcing
6.47 Answer is A
Single, multiple, delegated and parallel
6.48 Answer is D
Transaction
6.49 Answer is operational, routine and passive
6.50 Answer is D
Multiple sourcing
6.51 Answer is B
Multiple sourcing
202 | P a g e
6.52 Answer B
Feedback Control
6.53 Answer is regular inspection and routine servicing of equipment, supplier
quality assurance schemes, TQM culture of staff.
6.54 Answer is customer complaint departments, poor brand reputation, cost of free
repairs under gurantee.
6.55 Answer is C
Focus factory production
6.56 Answer is B
6.57 Answer is A
Continuous improvement by small incremental steps
6.58 Answer is D
Service
6.59 Answer is C
6.60 Answer is B
Work with a supplier to improve quality and reduce costs
6.61 Answer is C
A prevention of quality failures through equipment faults
6.62 Answer is D
Removal of waste
6.63 Answer is C
Inventory management
203 | P a g e
6.64 Answer is B
Purchasing and supply
6.65 Answer is A
204 | P a g e
Chapter 7 Solutions - Long-term decision making

The cashflows are the same each year for 5 years.
Net cash flows per annum = $101,000 - $30,000 - $5,000 = $66,000
Look up in the tables the cumulative discount factort for 5 years at 12%. This is 3.605.
PV of net cash flows = $66,000 x 3.605 = $237,930
Net present value = $237,930 - $150,000 = $87,930
The PV of the sales revenue = $101,000 x 3.605 = $364,105
The percentage change in the selling price that will result in the project being rejected is:
$87,930 / $364,105 = 24.15%
7.2 Answer is D
(1 + M) = (1 + R) x (1 + I)
(1 + M) = (1 + 0.06) x (1 + 0.03)
(1 + M) = 1.0918
M = 0.0918
M = 9.18%
7.3 Answer is C
The profitability index = net present value of the investment / initial investment
= $140,500 / $500,000
= 0.281
7.4 Answer is B
The first lease payment is paid in advance i.e. today in year 0 therefore the present value
of $300 is $300. Then work out the perpetuity of the rest of the lease payments.
PV of perpetuity = (1 / cost of capital) x amount
80,000 / 0.12 = 2,500
NPV = $300 + $2,500 = $2,800
205 | P a g e
7.5 Answer is D
Net Present Value of the project = $280,000
Present value of the annual cash inflow = $320,000 x 3.037 = $971,840
Sensitivity = $280,000/$971,840 = 28.8%
7.6 Answer is D
(1 + M) = (1 + R) x (1 + I)
(1 + 0.09) = (1 + R) x (1 + 0.03)
(1 + 0.09) / (1 + 0.03) = (1 + R)
1.0583 = (1 + R)
0.0583 = R
R = 5.83%
7.7 Answer is 25.2%
Sensitivity = NPV / PV of thr cashflow x 100%
Sensitivity = $98,200 / $389,340 = 25.2%
If the present value of the contribution was to decrease by more than $98,200 then the
project would cease to be viable. As a percentage this is:
Which represents a decrease in the annual contribution of $108,000 x 0.252 = $27,216
7.8 Answer is A
Net Present Value of the project = $180,000
Present value of the annual cash outflow = $100,000 x 3.312 = $331,200
Sensitivity = $180,000/$331,200 = 54.3%
7.9 Answer is $13,000
PV of perpetuity = (1 / cost of capital) x amount
$5,670 / 0.09 = $63,000
NPV = -$50,000 + $63,000 = $13,000
206 | P a g e
7.10 Answer is B
Sensitivity measures the percentage change in a key input needed to make a project break
even, in other words to have a project with a zero NPV.
In this question we are looking at the sensitivity of annual cash outflows. We need to
compare this to the projects NPV. Whatever key factor we are looking at we always
need to work out its PV when comparing it to the projects NPV.
PV = annual cash outflow x annuity factor at 12% for 5 years
PV = $50,000 x 3.605 = $180,250
Sensitivity = ($160,000 / $180,250) x 100% = 89% (nearest whole number)
7.11 Answer is 14%
We know that at a cost of capital of 15% the project has a negative NPV of $3,216, and at
10% a positive NPV of $12,304. The internal rate of return (IRR) is that cost of capital
where the NPV of a project is zero. This is achieved through trial and error and then
interpolation. If we have a cost of capital which yields a positive NPV, then we need to
find a cost of capital when applied to the project that will give a negative NPV.
In this question they have given us this already. We simply need to interpolate.
Using interpolation formula:
A + ( a
ab
[B - A] )
A = lower DF rate
B = higher DF rate
a = NPV of A
b = NPV of B
IRR = 10% + ( (12,304 / (12,304 - - 3,216) x [15% - 10%] ) = 14% (nearest 1%)
207 | P a g e
7.12 Answer is 11.32%

(1 + M) = (1 + R) x (1 + I)
M = Money cost of capital
R = Real cost of capital
I = General rate of inflation
1.18 = (1 + R) (1.06)
1.18/1.06 = 1 + R
1.1132 = 1 + R
1.1132 1 = R
0.1132 = R
R = 11.32% (nearest 0.01%)
7.13 Answer is invest $300,000 in L, $500,000 in K and $200,000 in J.
We need to work out NPV per 1 initially invested in the project, giving the NPV per
limiting factor (money) or profitability index. Funds will be allocated to those projects
that create the most NPV per 1 spent thus maximising the wealth of the company given
the level of funds available.
The question states that funds are divisible therefore we will be to fully invest all our
funds and have partial investments in those projects where we dont have enough to fully
invest.
Investment
J
K
L
Initial
investment
$400,000
$500,000
$300,000
NPV
$31,000
$43,000
$31,000
Profitability
Index
31/400 = 0.0775
43/500 = 0.086
31/300 = 0.103
Rank
3rd
2nd
1st
We only have available $1m so therefore invest as much as possible in L first then K and
then J if any monies remaining.
Therefore invest $300,000 in L, $500,000 in K and then $200,000 in J.
7.14 Answer is 18.74%
We know that at a cost of capital of 15% project K has an NPV of $43,000. The internal
rate of return (IRR) is that cost of capital where the NPV of a project is zero. This is
achieved through trial and error and then interpolation. If we have a cost of capital which
yields a positive NPV then we need to find a cost of capital when applied to project K
will give a negative NPV.
208 | P a g e
In order to achieve a negative NPV we must select a higher cost of capital than 15%
because this effectively increases the discounting effect on the cashflows and therefore
giving a negative NPV.
Choose the largest cost of capital given to you in the formulae sheet in the exam. This is
20% and will hopefully give a negative NPV. You do not have to choose a 20% you can
choose another cost of capital, for example 17% but it may not be large enough to give
you a negative NPV, and therefore you would have do the calculation again for a higher
cost of capital.
Year
Cashflow
0
1
2
3
($500,000)
$70,000
$90,000
$630,000
Discount factor
at 20%
1.000
0.833
0.694
0.579
NPV
Present value
($500,000)
$58,310
$62,460
$364,770
$14,460

A + ( a
ab
[B - A] )
A = lower DF rate
B = higher DF rate
a = NPV of A
b = NPV of B
IRR = 15% + ( (43,000 / (43,000 - - 14,460) x [20% - 15%] ) = 18.74%

7.15 Answer is 3 years and 4 months
Year
0
1
2
3
4
5
Cashflow
(400,000)
100,000
120,000
140,000
120,000
100,000
Cumulative
(400,000)
(300,000)
(180,000)
(40,000)
80,000
180,000
Payback period
= 3 years + (12 months x 40,000/(40,000 + 80,000))
= 3 years and 4 months.
209 | P a g e
7.16 Answer is 4 years and 5 months

Year
Cashflow
DF @ 10%
PV
0
1
2
3
4
5
(450,000)
130,000
130,000
130,000
130,000
150,000
1
0.909
0.826
0.751
0.683
0.621
(450,000)
118,170
107,380
97,630
88,790
93,150
Cumulative
PV
(450,000)
(331,830)
(224,450)
(126,820)
(38,030)
55,120
Discounted payback period

= 4 years + (12 months x 38,030/(38,030 + 55,120))
= 4 years and 5 months.
7.17 Answer is 15.28%
We know that at a cost of capital of 10% investment C has an NPV of $48,000. The
internal rate of return (IRR) is that cost of capital where the NPV of a project is zero.
This is achieved through trial and error and then interpolation. If we have a cost of capital
which yields a positive NPV then we need to find a cost of capital when applied to
investment C will give a negative NPV.
cost of capital.
Year
Cashflow
DF @ 20%
PV
(350,000)
x1
(350,000)
50,000
x 0.833
41.650
110,000
x 0.694
76,340
130,000
x 0.579
75,270
150,000
x 0.482
72,300
100,000
x 0.402
40,200
NPV = (44,240)
210 | P a g e

A + ( a
ab
[B - A] )
A = lower DF rate
B = higher DF rate
a = NPV of A
b = NPV of B
IRR = 10% + ( (48,000 / (48,000 - - 44,240) x [20% - 10%] ) = 15.20%

7.18 Answer is C
We need to work out NPV per 1 initially invested in the project, giving the NPV per
limiting factor (money) or profitability index. Funds will be allocated to those projects
that create the most NPV per 1 spent thus maximising the wealth of the company given
the level of funds available.
The question states that funds are divisible therefore we will be to fully invest all our
funds and have partial investments in those projects where we dont have enough to fully
invest.
Furthermore J and L are mutually exclusive meaning we can only select one or the other
of these two projects, and so therefore we shall select the one with the higher profitably
index.
Investment
J
K
L
M
N
Initial
investment
$400,000
$350,000
$450,000
$500,000
$600,000
NPV
$125,000
$105,000
$140,000
$160,000
$190,000
Profitability
Index
125/400 = 0.313
105/350 = 0.300
140/450 = 0.311
160/500 = 0.320
190/600 = 0.317
Rank
3rd
5th
4th
1st
2nd
We only have available $1m to invest so therefore invest as much as possible in M first
then N and then J if any monies remaining.
Therefore invest $500,000 in M, $500,000 in N.
211 | P a g e
7.19 Answer is 2.6 years

Year
0
1
2
3
Cashflow
($80,000)
$20,000
$30,000
$50,000
Cumulative
($80,000)
($60,000)
($30,000)
$20,000
Payback period
= 2 years + (12 months x 30,000/(30,000 + 20,000))
= 2.6 years.
7.20 Answer is 150,000
A perpetuity is a constant amount received or paid forever.
(1 / r) x amount = PV of perpetuity
r = cost of capital
80,000 / 0.08 = 1,000,000
NPV = - 850,000 + 1,000,000 = 150,000
7.21 Answer is C
The profitability index = NPV / initial investment
Therefore: $140,500 / $500,000 = 0.281 or 0.28
7.22 Answer is C
Sensitivity = (NPV / PV of key input) x 100%
Therefore: ($320,000 / $630,000) x 100% = 50.79% or 51%
7.23 Answer is 34%
ARR % =
Average profit over the life of the project

Average investment
x 100
[where average investment = (Opening Investment + Closing Investment)/2]
Cashflows
Depreciation
Profit
Average profit
ARR
($000s)
80 + 90 + 100 + 60 + 40 =
($000s)
370
(200)
170
170 / 5 =
34
(34 / 100) x 100%
34%
212 | P a g e
7.24 Answer is 26%

We know that at a cost of capital of 10% the investment has an NPV of $87,980. The
internal rate of return (IRR) is that cost of capital where the NPV of a project is zero.
This is achieved through trial and error and then interpolation. If we have a cost of capital
which yields a positive NPV then we need to find a cost of capital when applied to the
investment will give a negative NPV.
cost of capital.
Year
Cashflow
DF @ 20%
PV
0
$
(200,000)
x1
(200,000)
1
$
80,000
x 0.833
66,640
2
$
90,000
x 0.694
62,460
3
$
100,000
x 0.579
57,900
4
$
60,000
x 0.482
28,920
5
$
40,000
x 0.402
16,080
NPV = $32,000
In this case we still have a positive NPV even at a cost of capital of 20%. This means that
our IRR lies beyond 20%. Ideally we would recalculate at a higher cost of capital to
obtain a negative NPV, however the examiner has deemed this not necessary and you
need only make a sensible attempt to obtain an appropriate NPV. Furthermore you should
get a close enough approximation to the IRR when you use the interpolation formula. We
now use the interpolation formulae as normal.
A + ( a
ab
[B - A] )
A = lower DF rate
B = higher DF rate
a = NPV of A
b = NPV of B
IRR = 10% + ( (87,980 / (87,980 32,000) x [20% - 10%] ) = 26%
213 | P a g e
7.25 Answer is 11.11%

(1 + M) = (1 + R)(1 + I)
(1 + 0.2) = (1 + R)(1 + 0.08)
1.2 / 1.08 = 1+ R
1.1111 = 1 + R
0.1111 = R
Real cost of capital = 11.11%
7.26 Answer is 82.79%
Sensitivity measures the percentage change in a key input needed to make a project break
even, in other words to have a project with a zero NPV.
In this question we are looking at the sensitivity of direct material cost. We need to
compare this to the projects NPV. Whatever key factor we are looking at we always
need to work out its PV when comparing it to the projects NPV. We are given the PV of
direct material cost being $825,000.
Sensitivity = ($683,000 / $825,000) x 100% = 82.79% (2 decimal places)
7.27 Answer is 1.5 years
We need to add back annual depreciation to profit to obtain the annual cash flow to
calculate payback.
Annual depreciation = ($400,000 - $50,000) / 5 = $70,000
0
1
2
Profit
($400,000)
$175,000
$225,000
Depreciation
Cash flow
$70,000
$70,000
$245,000
$295,000
Cumulative cash flow

(400,000)
($155,000)
$140,000
Payback occurs between years 1 and 2.

Payback = 1 year + (155,000 / (155,000 + 140,000)) = 1.5 years (nearest 0.1 years)
214 | P a g e
7.28 Answer is D
Sensitivity = (NPV / PV of key input) x 100%
Therefore: ($42,500 / $385,000) x 100% = 11.04% or 11%
7.29 Answer is A
(1 + M) = (1 + R) x (1 + I)
(1 + M) = (1.06) (1.04)
1 + M = 1.1024
M = 0.1024
M = 10.24%
7.30 Answer is 4 years
Year
0
1
2
3
4
Cashflow ($)
(15,000)
2,500
3,000
5,500
4,000
Cumulative ($)
(15,000)
(12,500)
(9,500)
(4,000)
0
Payback period = 4 years

7.31 Answer is 13.33%
ARR % =
Average profit over the life of the project

Average investment
x 100
[where average investment = (Opening Investment + Closing Investment)/2]
Cash flows
Depreciation
Profit
Average profit
Average investment
ARR
($)
2,500 + 3,000 + 5,500 + 4,000 + 3,000 =
15,000 3,000 =
($)
18,000
(12,000)
6,000
6,000 / 5 =
1,200
(15,000 + 3,000) / 2 =
9,000
(1,200 / 9,000) x 100% =
13.33%
215 | P a g e
7.32 Answer is investments X and Z

Investments are not divisible therefore we need to select the combination of investments
that will give us the most NPV. Any combination of 2 investments chosen will not
exceed our cash available to invest of $350,000. Therefore the answer must be that two
investments with the most NPV.
Therefore:
Investments X and Z giving an NPV of $75,000 + $91,000 = $166,000
7.33 Answer is A
Sensitivity measures the percentage change in a key input (for example initial outlay,
direct material, direct labour, residual value) needed to make a project break even, in
other words to have a project with a zero NPV. Whatever key factor we are looking at we
always need to work out its PV when comparing it to the projects NPV.
Sensitivity = NPV / PV of key input
In this question we are looking at the sensitivity of initial outlay which is $250,000.
Therefore:
Sensitivity = ($46,000 / $250,000) x 100% = 18.4%
7.34 Answer is C
In this question we are looking at the sensitivity of variable costs which is $40,000 per
annum being material and labour costs combined. This cost is the same amount being
incurred every year for the life of the project (being 5 years), therefore we can use
cumulative or discount factors (CDF) to work this out. The CDF for 5 years at 10% is
3.791 according to the tables.
216 | P a g e
Therefore:
NPV of variable costs = $40,000 x 3.791 = $151,640
Sensitivity = ($50,000 / $151,640) x 100% = 32.97% or 33%
7.35 Answer is $111.10
A perpetuity is a constant amount received or paid forever.
Amount
r
r = cost of capital
n = time period
The first lease payment is made in advance i.e. paid today $4,000
PV of rest of lease in perpetuity $4,000 / 0.12 = $33,333
NPV of lease payments = $4,000 + $33,333 = $37,333
7.36 Answer is abandon project.
Year
1
2
3
$
(90,000)
60,000
40,000
DF 12%
0.893
0.797
0.712
NPV
PV
(80,370)
47,820
28,480
(4,070)
Project should be abandoned as it gives a negative NPV.
217 | P a g e
7.37 Answer is C
In this question we are looking at the sensitivity of annual net cash inflow which is
$100,000 for 5 years. We need to discount this to bring this back to its present value
today.
Therefore:
Sensitivity = ($320,000 / $100,000 x 3.791) x 100% = 84.4%
7.38 Answer is the maximum NPV = $28.85m
Project
Investment
A
B
C
D
E
F
G
$m
10.0
40.0
20.0
40.0
50.0
20.0
20.0
Net present
value
$m
4.20
6.10
8.50
13.70
3.80
4.90
4.33
Project
Investment
C
A
D
F
$m
20.0
10.0
40.0
10.0
80.0
Profitability index
Ranking
0.4200
0.1525
0.4250
0.3425
0.0760
0.2450
0.2165
2
6
1
3
7
4
5
Net present
value
$m
8.50
4.20
13.70
2.45
28.85
Ranking
1
2
3
4
218 | P a g e
7.39
Year
0
1
2
3
Cash flow
$
(40,000)
16,800
18,000
24,000
NPV
Discount factors
Cash flow
$
(40,000)
16,800
34,000
NPV
Discount factors
Cash flow
$
(40,000)
41,600
NPV
Discount factors
1.000
0.893
0.797
0.712
Present value
$
(40,000)
15,002
14,346
17,088
6,436
7.40
Year
0
1
2
1.000
0.893
0.797
Present value
$
(40,000)
15,002
27,098
2,100
7.41
Year
0
1
1.000
0.893
Present value
$
(40,000)
37,149
(2,851)
7.42 Answer is A
7.43 Answer is A
7.44 Answer is C
7.45 Answer is B
5.50 x 2000 = 11,000 contribution per annum T1 to T4
(1 + M) = (1 + i) (1 + r)
(1 + 0.1) = (1 + 0.05) (1 + r)
(1 + 0.1) = (1 + r) = 1.0476
(1 + 0.05)
Therefore the real rate of return is 4.76%, we can use this to discount cash flows and
therefore ignore inflation.
219 | P a g e
T1 1/1.0476 =
T2 1/(1.0476)2 =
T3 1/(1.0476)3 =
T41/(1.0476)4 =
0.955
0.912
0.870
0.830
3.567 x 11,000 = 39,237-30,000 T1 = + 9,237
Alternative method
Use money rate of 10% and inflate cash flows
11,000 x 1.05
11,000 x (1.05)2
11,000 x (1.05)3
11,000 x (1.05)4
=
=
=
=
10% DF
11,550 x 0.909 T1
12,128 x 0.826 T2
12,734 x 0.751 T3
13,371 x 0.683 T4
=
=
=
=
10,499
10,018
9,563
9,132
39,212
(30,000) T1
+9,212
7.46 Answer is C
Real cost of capital to break-even
30,000 = 11,000 x 4yr annuity
30,000/11,000 = 2.727
This represents a 4yr annuity of between 17% and 18% (2.743 to 2.690)
Therefore 17% + (1% x ((2.743-2.727)/(2.743-2.690)) = 17.3%
(1 + M) = (1 + i) (1 + r)
(1 + M) = (1 + 0.02) (1 + 0.173) = 1.196 or 19.6%
220 | P a g e
Alternative method
Use money cost of capital, inflate cash flows and find the internal rate of return
10% DF
11,550 x 0.909 T1
12,128 x 0.826 T2
12,734 x 0.751 T3
13,371 x 0.683 T4
=
=
=
=
10,499
10,018
9,563
9,132
39,212
(30,000) T1
+9,212
20% DF
11,550 x 0.833 T1
12,128 x 0.694 T2
12,734 x 0.579 T3
13,371 x 0.482 T4
=
=
=
=
9,346
7,942
6,759
5,739
29,786
(30,000) T1
(124)
IRR = 10% + (10% x (9212/(9212 + 214)) = 19.8%
221 | P a g e
222 | P a g e
Chapter 8 Solutions - Performance management and transfer pricing

8.1 Answer is 52.38 days
Trade receivable at the end of this year = $862,860 x 55/365 = $130,020
Credit sales for next year = $862,860 x 1.05 = $906,003
Trade receivable days at end of next year = $130,020 / $906,003 x 365 = 52.38 days
8.2 Answer is D
Annual purchases this year = $547,800/55 x 365 =$3,635,400
Annual purchases next year = $3,635,400 x 1.15 = $4,180,710
Trade payables outstanding = $4,180,710 x 50/365 = $572,700
8.3 Answer is A
Sales revenue for the year
Plus cash received from last year
Less trade receivables at end of year ($1,500,000/365 x 60)
Cash received from customers
$1,500,000
$242,000
($246,575)
$1,495,425
8.4 Answer is A
[$682,000/365] x 60 = $112,110
[$112,110 / (682,000 x 1.15)] x 365 = 52.17 days
8.5 Answer is (i) 44.6 days (ii) 57.8 days (iii) 63.9 days
Working capital ratio
Inventory days
Receivables days
Payables days
Calculation
220/1800 x 365
350/(0.85 x 2,600) x 365
260/(0.90 x 1,650) x 365
Days
44.6
57.8
63.9
8.6 Answer is C
Flexible budgets are amended or flexed if the actual level of activity turns out to be
different from the budgeted level of activity. A flexible budget is therefore flexed to
correspond to the actual activity level for a period. When a budget is flexed it would give
an appropriate level of revenue and cost as a yardstick to compare on a like for like basis
to actual results, meaningful variances or exceptions to the budget, can then be
highlighted for management attention.
223 | P a g e
8.7 Answer is B
A method of budgeting whereby all activities are re-evaluated each time a budget is
formulated.
8.8 Answer is D
8.9 Answer is C
8.10
Tip: Trade receivable days
Year end trade receivables
Sales (or turnover)
365 days
This is the average length of time taken by customers to pay.

Interpretation of trade receivable days
A long average collection means poor credit control and hence cash flow problems
may occur. The normal stated credit period is 30 days for most industries. Changes
in the ratio may be due to improving or worsening credit control.
(200 3,000) x 365 = 24 days

Tip: Trade payable days
Year end trade payables
x
Purchases (or cost of sales)
365 days
This is the length of time taken to pay suppliers. The ratio can also be calculated
using cost of sales, as purchases are not usually stated in the financial statements.
Interpretation of trade payable days
High trade payable days can be good for an organisation, as credit from suppliers
represents free credit. If its too high there is a risk of suppliers not extending credit
in the future and goodwill maybe lost. High trade payable days may also indicate that
the business has no cash to pay suppliers which could indicate insolvency problems.
(280 1,600) x 365 = 64 days

224 | P a g e
Tip: Inventory days

Inventory
Cost of sales
365 days
This ratio shows how long the inventory stays with the company before it is sold. The
lower the ratio the more efficient the company is trading, but this may result in low
levels of inventory to meet demand. A lengthening inventory period may indicate a
slow down in trade and an excessive build up of inventories, resulting in additional
cost e.g. obsolesce and storage.
(300 1,600) x 365 = 68 days

8.11
Tip: Current or (working capital) ratio
Current Assets
Current Liabilities
(times)
The current ratio measures short term solvency or liquidity; it shows the extent to
which the claims of short-term creditors are covered by current assets. The normal is
around 2:1 but does vary within different industries. A low ratio may indicate
insolvency.
(550 280) = 1.96 times

Tip: Quick (or acid test) ratio
Current assets less inventory
Current liabilities
(times)
This ratio measures the immediate solvency of a business as it removes inventory out
of the equation. Inventory is the item within current assets least representing cash, it
needs to be sold to be liquidated. The normal ratio is around 1: 1 but does vary
within different industries.
(250 280) = 0.89 times

225 | P a g e

Forecast trade receivable days
= forecast trade receivables as at 31/03/07 / forecast sales x 182.5 days (6 months)
Forecast trade receivables
$
68,000
250,000
(2,500)
(3,400)
(252,100)
60,000
Bal b/f 30/09/06

Forecast sales
Less returns
Less bad debts 5% x 68,000
Less cash collected
Bal c/f 31/03/07
Forecast trade receivable days = $60,000 / ($250,000 - $2,500) x 182.5 days = 44.24 days
8.13 Answer is B
Revision - trade receivable days (turnover)
Year end trade receivables
Credit sales
365 days
Therefore year end trade receivables = Trade receivable days / 365 x credit sales
DYs trade receivables at the beginning of the period
$22,000
DYs trade receivables at the end of the period

49 days / 365 days x $290,510
$39,000
Bal b/f
Credit sales
Total
Trade receivables control account

$
22,000 Bal c/f
290,510
Cash received (bal
fig)
312,510
Total
$
39,000
273,510
312,510
226 | P a g e
8.14 Answer is 0.84:1

Quick ratio
=
=
=
(current assets inventory) / current liabilities

(70,000 + 10,000) / (88,000 + 7,000)
0.84
8.15 Answer is $345,379

Step 1
Step 2
Step 3
Step 4
Calculate year end inventories using inventory day ratio

Calculate purchases using T account for inventory
Use the purchases figure from step 2 to find year end trade payables
Do trade payables T account to calculate cash paid
Working 1
Inventory in $ on 31/10/07
Inventory days
Inventory
= Inventory / cost of sales x 365 days

= Inventory days x cost of sales / 365 days
= 60 x $350,000 / 365
= $57,534
Inventory
$
56,000 Bal c/f (W1)
Bal b/f
Purchases (bal fig)
Working 2
351,534 Income statement COS
350,000
407,534
407,534
Trade payables in $ on 31/10/07
Trade payable days

Trade payables
Bal c/f (W2)

Cash paid (bal fig)
Total
$
57,534
= Trade payables / purchases x 365 days

= Trade payable days x purchases / 365 days
= 50 x $351,534 / 365
= $48,155
Trade payable
$000
48,155 Bal b/f
Purchases
345,379
$000
42,000
351,534
393,534
393,534
Total
227 | P a g e

We can use the trade payable days ratio to work out the amount of trade payables at the
year end.
Therefore:
Trade payables at year end = ($474,500 / 365) x 45 days = $58,500
Purchases will increase by 10% next year.
Therefore:
$474,500 x 1.1 = $521,950
Trade payable days at the end of next year = $58,500 / $521,950 x 365 = 40.9 days
8.17
(i)
The answer is 24.3 days
Trade receivable days = Trade receivables / sales x 365
= 800 / 12,000 x 365
= 24.3 days
(ii)
The answer is 63.1 days
Opening stock + Purchases Closing stock = Cost of sales
1,120 + Purchases 1,200 = 6,400
Purchases = 6,480
Trade payable days
= Trade payables / purchases x 365

= 1,120 / (6,480) x 365
= 63.1 days
(iii) The answer is 68.4 days

Inventory days
= Inventories / cost of sales x 365
= 1,200 / (6,400) x 365
= 68.4 days
228 | P a g e
8.18 Answer is A
Marginal cost to the group
XA (spare capacity therefore at marginal cost)
XB (Full capacity therefore cost to the group is the market price)
XC (spare capacity therefore at marginal cost)
Price quoted
20,000
XC purchases (included in this price) from XB
(12,000)
Cost of own work for XC (including mark up of 70%)
8,000
5,000
8,000
XC variable cost 8,000/170% x 100% =
4,706
XB (Full capacity therefore cost to the group is the market price)

Supply of component from XB to XC
Marginal cost to the group
12,000
29,706
8.19 Answer is B
8.20 Answer
Supplier perspective
Investor perspective
Innovation and learning perspective
Internal perspective
Employee perspective
Environment perspective
Government perspective
Minority shareholder perspective
8.21 Answer is A
8.22 Answer is D
HO charge 360,000 x 10% =
Residual income
Profit
Depreciation and fixed cost (23.5k + 45k)
Contribution
36,000
64,700
100,700
68,500
169,200
169,200/50,000 units = 3.38 + variable cost per unit 5 = 8.38
229 | P a g e
8.23 Answer is B
The first 10,000 units are spare capacity therefore the minimum price to the seller would
be the marginal cost of 13. Thereafter the last 5,000 units would have to be supplied by
turning away existing customers and this would cost the company 40 a unit (or when at
full capacity 13 marginal cost + lost contribution per unit if not sold to external
customers (40-13 =27) = 40 external price).
8.24 Answer is C
Marginal cost of Division B
Transfer price (4 x 40) + 50% =
Division B own variable cost
Total marginal cost
240
45
285
Profit will be maximised where MR = MC, this will be at 11 units.

8.25 Answer is B
ROI =
Profit
Capital employed
12% (0.12) =
Profit
1,500,000
Profit therefore was 12% 1,500,000 = 180,000

Add back fixed overhead of 400,000 = 580,000 total contribution
580,000 total contribution/30,000 units = 19.33 a unit
8.26 Answer is C
X 13,000/40,000 = 32.5% ROI REJECT as it does not meet the target of 40%
Y 5% discount will lose profit of 5% x 1m x 30% = 15,000 but eliminate 40,000 of
debtors. 15,000/40,000 = 37.5% higher than the target of 30% REJECT as this would
cause a fall in the average ROI
Z 150,000/750,000 = 20% ACCEPT as it is lower than the target of 25% so would
improve the average ROI by selling the building.
230 | P a g e
8.27 Answer is D
Division X would lose contribution of 70 - 20 = 50 a unit therefore profits decline
It would cost the group an extra 65-20* = 45 a unit therefore profits decline
* the group saves 20 a unit but pays 65 a unit instead.
8.28 Answer is B
Add up all the costs and then mark up by 20%. Therefore:
12 + 15 + 34 + 89 + 10 = 160 x 1.2 = 192
8.29 Answer is A
Under dual pricing the seller will get what they want which is the market price, and the
buyer will get what they want, to buy at marginal cost.
8.30 Answer is D
Add up all the variable costs and then mark up by 35%. Therefore:
23 + 53 + 81 + 35 + 45 = 237 x 1.35 = 319.95
8.31 Answer is C
8.32 Answer is C
8.33 Answer is D
Vinod can sell everything externmally and so has no incentive to accept anything lower.
8.34 Answer is A
Selling price less incremental costs = 600 - 150 - 250 = 200
8.35 Answer is B
800 - 400 - 220 = 180 x 100 units = 18,000
8.36 Answer is D
Roti current cost to make is 20 per unit versus 25 to buy, so this will cost Roti an extra
5 per unit to buy in, meaning it will be 5 worse off.
231 | P a g e
8.37 Answer is A
The minimum price that BB will sell for is the incremental cost of 45. Since the division
has no outside market, there is no opportunity cost to consider.
8.38 Answer is C
Transfer price = 300 x 1.6 = 480
Total cost in Dilwalle = 480 + 250 = 730
8.39 Answer is C
The transfer price under a 2 part tariff pricing system is the marginal cost to manufacture.
8.40 Answer is B
Under dual pricing you give the selling division the market price and the buying divison
marginal cost to manufacturtre. Therefore Tpau = 50 and Erasure = 15.
8.41 Answer is D
8.42 Answer is C
8.43 Answer is B
8.44 Answer is A
The marginal cost to manufacture of 15 perunit for the first 4,000 units and then for the
next 2,000 units at the market price of 20 as Ace would then be at full capacity.
8.45 Answer is A
8.46 Answer is A
8.47 Answer is C
8.48 Answer is B
232 | P a g e
8.49 Answer
Rresidual income will result in division managers making decisions that are in
their own best interest and not in the best interest of the company as a whole.
Residual income incorporates a companys cost of capital.
Residual income is a percentage measure and not an absolute measure.
8.50 Answer is C
8.51 Answer
Should not be acquired because it produces $120,000 of residual income
Should be acquired because after the acquisition, the division's ROI and
residual income are both positive numbers
Should not be acquired because the division's ROI is less than the corporate
ROI before the investment is considered
Should be acquired because it produces $120,000 of residual income for the
division.
Should not be acquired because it reduces divisional ROI
8.52 Answer is A
ROI of Petrol = (60,000 / 500,000) x 100% = 12%
ROI of investment = (8,250 / 75,000) x 100% = 11%
RI = 8,250 (5% of 75,000) = 4,500
8.53 Answer is D
1,000,000 - (% x 8,000,000) = 200,000
- (% x 8,000,000) = -800,000
% x 8,000,000 = 800,000
% = 800,000 / 8,000,000
% = 0.1
Therefore 10%
233 | P a g e
8.54 Answer is B
Profit = 13% of 600,000 = 78,000
RI = 78,000 (7% of 600,000) = 36,000
8.55 Answer is A
8.56 Answer
New products launched compared to competitors
Health and safety training days per employee
Share price growth
Percentage of staff suggestions for improvement used by management
8.57 Answer is A
ROI = (80,000 / 220,000) x 100% = 36%
RI = 80,000 - (220,000 x 25%) = 25,000
234 | P a g e
8.58 Answer
Dividend per share
Share price growth
Return on investment
Staff turnover
8.59 Answer is D
8.60 Answer
Income taxes and import duties are an important consideration when setting a
transfer price for companies that pursue international commerce
Transfer prices cannot be used by organizations in the service industry
Transfer prices are totally cost based in nature not market based
235 | P a g e
236 | P a g e
Chapter 9 Solutions - Management control and risk

9.1 Answer is $7,000
Expected value of profit with marketing campaign
($300,000 x 0.90) + (-$80,000 x 0.1) = $262,000 - $50,000 = $212,000
Expected value of profit without marketing campaign
($300,000 x 0.75) + (-$80,000 x 0.25) = $205,000
It is therefore worthwhile for the company to undertake the marketing campaign as the
increase in the expected value of profit is $7,000
We need to work out the probability of earning more than or equal to a contribution of
$40. Therefore we need to select those outcomes which will yield this and select their
respective probabilities to multiply to make the combined probabilities.
The following combinations comply with our requirements:
Selling price
$60
$64
$64
$68
$68
$68
Total
Variable
cost
$20
$20
$24
$20
$24
$26
Contribution
$40
$44
$40
$48
$44
$42
Selling
probability
0.30
0.25
0.25
0.45
0.45
0.45
Variable cost
probability
0.25
0.25
0.40
0.25
0.40
0.35
Combined
probability
0.0750
0.0625
0.1000
0.1125
0.1800
0.1575
0.6875
P(earning more than or equal to $40 contribution) = 0.6875 or 68.75%

9.3 Answer is $680,000
The expected value of cost of the warranty claims is:
$2,000,000 x 15%
$6,000,000 x 3%
$10,000,000 x 2%
Total
=
=
=
$300,000
$180,000
$200,000
$680,000
237 | P a g e
9.4 Answer is $110

The minimum profit at a selling price of $80 is $50,000
Therefore if the manager wants to maximise the minimum profit a selling price of $110
would be chosen.
9.5 Answer is $100
A regret matrix can be produced as follows:
Competitor
Reaction
Strong
Medium
Weak
Selling price
$80
$10,000
$30,000
$10,000
$90
$0
$20,000
$0
$100
$10,000
$10,000
$10,000
$110
$5,000
$0
$20,000
The maximum regret for:

$80 is $30,000
$90 is $20,000
$100 is $10,000
$110 is $20,000
Therefore if the manager wants to minimise the maximum regret a selling price of $100
would be chosen.
9.6 Answer is B
9.7 Answer is B
This is looking at the best of the worst case scenairios.
The minimum outcome for a fee of $600 is $360k
The minimum outcome for a fee of $1,000 is $320k
Therefore if the committee wants to maximise the minimum cash inflow it will set a fee
of $800.
238 | P a g e
9.8 Answer is A
Membership Fee
$600
$800
$900
$1,000
Membership level
Low
Average
High
$000
$000
$000
40
0
0
0
40
60
40
75
45
80
100
120

$600 is $40k
$800 is $60k
$900 is $75k
$1,000 is $120k
Therefore if the manager wants to minimise the maximum regret a fee of $600 a selling
price of $100 would be set.
9.9 Answer is C
9.10 Answer is C
Staffing mix
X
Y
Z
Deluxe
$5,000
$15,000
$35,000
Fee level
High
Standard
$0
$2,500
$5,000
$0
$20,000
$7,500
Low
$20,000
$5,000
$0

Deluxe is $35,000
High is $20,000
Standard is $7,500
Low is $20,000
Therefore the standard fee strategy minimises the maximum regret.
239 | P a g e
9.11 Answer is 90%

The fixed costs will remain the same therefore the contribution has to exceed $2,880,000.
The outcomes that comply with this and the probability of them occurring are given
below:
100,000 x ($48 - $19) = $2,900,000 Joint probability is 0.40 x 0.75 =
0.30
0.15
0.45
0.90
The probability therefore that the contribution will exceed $2,880,000 is 90%.
9.12 Answer is B
The maximum regret at selling price:
$40 is $20,000
$45 is $10,000
$50 is $20,000
$55 is $30,000
Therefore if the manager wants to minimise the maximum regret, a selling price of $45
will be selected.
9.13 Answer is A
9.14 Ansswer is (i) $490,000, $345,000, $505,000 (ii) Value of PI = $25
(i)
Expected values ($000)
Project A ($400 x 0.3) + ($500 x 0.5) + ($600 x 0.2) = $490
Project B ($300 x 0.3) + ($350 x 0.5) + ($400 x 0.2) = $345
Project C ($500 x 0.3) + ($450 x 0.5) + ($650 x 0.2) = $505
(ii)
Value of perfect information ($000)
If weak select Project C = ($500 x 0.3) = $150
If average select Project A = ($500 x 0.5) = $250
If good select Project C = ($650 x 0.2) = $130
Value of perfect information is ($530 $505) = $25
240 | P a g e
9.15 Answer is D
The maximum regret at a selling price
$140 is $50,000
$160 is $60,000
$180 is $40,000
$200 is $30,000
Therefore if AP wants to minimise the maximum regret it will select a selling price of
$200
9.16 Answer is A
Year 1 cash flows
Probability
$20,000
$14,000
$9,000
0.20
0.50
0.30
High
Medium
Low
Expected value
Year 1
$4,000
$7,000
$2,700
$13,700
Discount the expected value at 10%:

$13,700 x 0.909 = $12,453
9.17 Answer is C
(120,000 units x 0.6*) + (80,000 units x 0.4) = 104,000 units
* The probability of being dry is 0.4 therefore the probability of being rainy is (1.0 0.4)
= 0.6. The sum of your probabilities must always come to 1.0.
Tip: An expected value works out a long-run average based upon a decision repeated
over and over again, based upon the values forecast and probability assigned to each
value.
Example
An ice cream sales van if it is hot will earn 10,000 a day in sales and if it is cold only
2,000 a day in sales, the probability of the weather cycle all year round is 10% hot and
90% cold.
241 | P a g e
Solution
An expected value calculates a long-run average value assuming the decision is repeated
over and over again e.g. the ice cream van does not just go once but many times over and
over again.
Long-term expected value
(10,000 a day x 1 day) + (2,000 a day x 9 days) = 28,000 total sales over 10 days
28,000/10 days = average sales or expected value of 2,800 a day in sales
or
(10,000 x 0.1) + (2,000 x 0.9) = 2,800 expected value a day in sales
9.18
Project
L
M
N
O
P
(500 x 0.2) + (470 x 0.5) + (550 x 0.3) =

(400 x 0.2) + (550 x 0.5) + (570 x 0.3) =
(450 x 0.2) + (400 x 0.5) + (475 x 0.3) =
(360 x 0.2) + (400 x 0.5) + (420 x 0.3) =
(600 x 0.2) + (500 x 0.5) + (425 x 0.3) =
EV
$500,000
$526,000
$432,500
$398,000
$497,500
Project M should be undertaken as it has the highest expected value.

9.19
Market conditions
Poor
Good
Excellent
EV with perfect information
EV without perfect information
Value of perfect information
Best projects
in market
condition
P
M
M
Probability
Net cash
inflows
EV
0.20
0.50
0.30
$600,000
$550,000
$570,000
$120,000
$275,000
$171,000
$566,000
($526,000)
$40,000
242 | P a g e
9.20
Answer is 45%
We need to work out the probability of earning more than a weekly contribution of
$20,000. Therefore we need to select those outcomes which will yield this and select their
respective probabilities.
We are producing 1,000 units per week so therefore contribution must be greater than
$20 per unit, in order for us to earn more than $20,000 per week.
Selling price
$50
$60
$60
Total
Selling
probability
0.45
0.25
0.25
Variable cost
$20
$30
$20
Variable cost
probability
0.55
0.25
0.55
Combined
probability
0.25
0.06
0.14
0.45
P(earning more than $20,000 contribution per week) = 0.45 or 45%

9.21 Answer is D
To find the monthly expected value we must multiply the probabilities by their respective
unit sales values or unit variable cost values. This will give us our expected unit sales and
variable cost values.
Expected unit sales value = (20 x 0.25) + (25 x 0.40) + (30 x 0.35) = 25.50
Expected unit variable cost value = (8 x 0.20) + (10 x 0.50) + (12 x 0.30) = 10.20
Subtract the expected variable cost value from the sales value which would result in the
monthly unit contribution.
Expected unit contribution = 25.50 - 10.20 = 15.30
Total expected monthly contribution = 1,000 units x 15.30 = 15,300
243 | P a g e
9.22 Answer is C
In order to achieve a monthly contribution of greater than 13,500 and we expect to sell
1,000 units then each unit must sell for more than 13.50. We should select the
combinations which offer us that and then add up their respective probabilities.
Selling price
20
20
20
25
25
25
30
30
30
Variable cost
8
10
12
8
10
12
8
10
12
Contribution
12
10
8
17
15
13
22
20
18
Select
No
No
No
Yes
Yes
No
Yes
Yes
Yes
Probability
0.4 x 0.2 = 0.08

0.4 x 0.5 = 0.20
0.35 x 0.2 = 0.07
0.35 x 0.5 = 0.175
0.35 x 0.3 = 0.105
P(Monthly contribution exceeds 13,500) = 0.08 + 0.20 + 0.07 + 0.175 + 0.105 = 0.63
9.23 Answer is make 12 batches
The key point to understand here is that you need to find the solution that will minimise
the maximum opportunity cost or if you like regret. We need to first find what
contributions can be earned by the different combinations.
Sold
Made
10
11
12
10
500
500 20 = 480
500 40 = 460
11
500
550
550 20 = 530
12
500
550
600
Now we work out how much contribution we would lose for those items we did not
make. Please note this is the 50 contribution per batch and the 20 negative contribution
per batch.
Sold
Made
10
11
12
10
0
20
40
11
50
0
20
12
100
50
0
Compare the best outcomes in the first table with the maximum opportunity cost or regret
in the second for each batch of bread made. Select the batch with the most amount of
contribution left.
244 | P a g e
10 batches = 500 100 = 400

11 batches = 550 50 = 500
12 batches = 600 40 = 540
Therefore the answer is to make 12 batches as this will minimise the opportunity cost or
regret.
9.24 Answer is expected value = $1,394,000, S.D. = $171,930
Variable
costs
($000)
560
560
560
780
780
780
950
950
950
Fixed
costs
($000)
440
640
760
440
640
760
440
640
760
Total cost
(x)
($000)
1,000
1,200
1,320
1,220
1,420
1,540
1,390
1,590
1,710
Probability
(p)
Expected
value
(px)
45
198
118.8
91.5
390.5
231
41.7
174.9
102.6
(000s)
_
(x - x)
155,236
37,636
5,476
30,276
676
21,316
16
38,416
99,856
0.3 x 0.15 = 0.045

0.3 x 0.55 = 0.165
0.3 x 0.3 = 0.090
0.5 x 0.15 = 0.075
0.5 x 0.55 = 0.275
0.5 x 0.3 = 0.150
0.2 x 0.15 = 0.03
0.2 x 0.55 = 0.110
0.2 x 0.3 = 0.060
_
Expected value or arithmetic mean = x = (px) = $1,394,000
_
Therfore to work out (x x) for the first row in table = (1,000 - 1,394) = 155,236
_
p(x - x) = 29,560,000,000
(000s)
_
p(x - x)
6,986
6,210
493
2,271
186
3,197
0
4,226
5,991
p=1
_
Standard deviation or S.D. = p(x - x) / p = 29,560,000,000 / 1= $171,930
9.25 Answer is $212,500
Fixed
costs ($)
100,000
130,000
160,000
Probability
0.35
0.45
0.20
Total EV
Expected
value ($)
35,000
58,500
32,000
125,500
245 | P a g e
Variable
costs ($)
70,000
90,000
110,000
Probability
0.40
0.35
0.25
Total EV
Expected
value ($)
28,000
31,500
27,500
87,000
Expected value for total costs = $125,500 + $87,000 = $212,500

9.26
Part (i)
The maximin rule states that we should consider the worst consequence of each possible
course of action and choose the one that has the least bad consequence.
Therefore in the scenario the worst consequence is having bad weather and the least bad
consequence would be to purchase 1,000 burgers as this gives the most profit being
$1,000.
Part (ii)
The key point to understand here is that you need to find the solution that will minimise
the maximum opportunity cost or if you like regret.
We work out how much contribution we would lose for those burgers we did not sell. For
example if we have actual bad weather then we would sell 1,000 burgers and had we
purchased 1,000 burgers then the profit earned would be $1,000 (according to the table in
question) with no regret or cost of unsold burgers, net regret being $0.
If however the actual weather was bad then again we would sell 1,000 burgers but this
time we had purchased 2,000 burgers then the profit earned would be $0 but regret or
cost would $1,000, net regret being $1,000.
We can apply the same logic if we had purchased 3,000 or 4,000 burgers. See table
below:
No of burgers purchased
If actual weather is:
Bad
Average
Good
1,000
$0
($4,000)
($9,000)
2,000
($1,000)
($1,000)
($6,000)
3,000
(2,000)
$0
($3,000)
4,000
($4,000)
($1,000)
$0
246 | P a g e

1,000 burgers is $9,000
2,000 burgers is $6,000
3,000 burgers is $3,000
4,000 burgers is $4,000
Therefore to minimise the maximum regret he should purchase 3,000 burgers.
9.27 Answer is 36.25%
We need to work out the probability of earning net cash flows $90,000 or more.
Therefore we need to select those outcomes which will yield this and select their
respective probabilities. The combinations which will comply are:
Cash
inflows
$140,000
$160,000
$160,000
$160,000
Total
Probability
0.45
0.25
0.25
0.25
Cash
outflows
$50,000
$50,000
$60,000
$70,000
Probability
Combined
probability
0.45 x 0.25 = 0.1125
0.25 x 0.25 = 0.0625
0.25 x 0.35 = 0.0875
0.25 x 0.40 = 0.1
0.3625
0.25
0.25
0.35
0.40
P(earning net cash flows of $90,000 or more) = 0.3625 or 36.25%

9.28 Answer is $140,000
Project
A
B
C
(400 x 0.3) + (500 x 0.2) + (700 x 0.5) =

(800 x 0.3) + (300 x 0.2) + (200 x 0.5) =
(500 x 0.3) + (600 x 0.2) + (400 x 0.5) =
EV
$570,000
$400,000
$470,000
Project A has the highest expected value being $70,000.

To calculate the value of perfect information with respect to the preferences:
Preferences
1
2
3
Best projects
in
preferences
B
C
A
Probability
Net cash
inflows
EV
0.3
0.2
0.5
$800,000
$600,000
$700,000
$240,000
$120,000
$350,000
$710,000
($570,000)
$140,000
247 | P a g e
9.29 Answer is B
Risk averse managers (maximin managers or pessimist) assume always the worse
outcome will arise, therefore aim to maximise the returns from the worst outcomes.
Therefore, the marketing manager would choose selling price of $60 as the worst case
scenario is $30,000 contribution being earned which is the best of all the worst case
scenarios.
9.30 Answer is D
The expected value of the decision:
EV of development succeeding + EV of development not succeeding
If development is successful then the company will market the product and therefore we
need to work out the EV of marketing success.
Marketing success rate
Very
Reasonably
Unsuccessful
EV
$87,500
$31,500
-$11,200
$107,800
(250,000 x 0.7 x 0.5) =

(150,000 x 0.7 x 0.3) =
(-80,000 x 0.7 x 0.2) =
Total EV of marketing
If development is unsuccessful then we need to work out the EV of development costs

only. This is because there will be no expenditure on marketing for an unsuccessful
development.
The expected value of the development costs = -$150,000 x 0.3 = -$45,000
The EV of the decision = $107,800 + -$45,000 = $62,800
9.31 Answer is EV = $3,975 and standard deviation = $804.29
This is a probability distribution and therefore the squared deviations (column 5 below)
have to be weighted by the probabilities. We cannot do the usual operation of dividing
the squared deviations by the number of data items (being 3 in this case) as the three
NPVs do not have equal chance of occurrence and therefore must be reflected in the
calculation.
NPV($)
2,800
3,900
4,900
Probability
0.25
0.40
0.35
_
EV or x ($)
700
1,560
1,715
3,975
_
x-x
-1,175
-75
925
_
(x x)
1,380,625
5,625
855,625
Weighted
Deviations
345,156.25
2,250
299,468.75
646,875
The expected value = $3,975

Standard deviation = 646,875 = $804.29
248 | P a g e
9.32 Answer is A
Managers attitude to risk
Risk averse managers (maximin managers or pessimist) assume always the worse
outcome will arise, therefore aim to maximise the returns from the worst outcomes.
Risk seeking managers (maximax managers or optimist) go for the best outcome
ignoring the probability of actually attaining it, when making decisions, therefore aim to
maximise the maximum or best return from a decision.
Risk neutral managers go for the most likely return and will use expected values in
order to make a decision.
Risk spreading is not a managers attitude to risk.
9.33 Answer is Deefield
The minimax regret criterion is to find the solution that will minimise the maximum
opportunity cost or regret of decisions made. The question gives us the regret or
opportunity cost we would suffer if we chose any of the venues. For each venue we need
to select the most regret that we would suffer, and then from this select the venue with the
lowest of these maximum regrets, i.e. minimise the maximum regrets.
Ayefield maximum regret = $810,000
Beefield maximum regret = $590,000
Ceefield maximum regret = $480,000
Deefield maximum regret = $450,000
Deefield should be picked as the venue to stage the event as it minimises the maximum
regrets.
9.34 Answer is A
The maximin rule states that we should consider the worst consequence of each possible
course of action and choose the one that has the least bad consequence. Therefore in the
scenario the worst consequence is having a poor market condition and the outcomes are:
Project A
Project B
Project C
Project D
$440,000
$400,000
$360,000
$320,000
The best of the worst outcomes is project A.
249 | P a g e
9.35 Answer is B
The maximax rule states go for the best outcome ignoring the probability of actually
attaining it, when making decisions, therefore aim to maximise the maximum or best
return from a decision.
Therefore go for project B as it gives the highest possible return of $580,000.
9.36 Answer is $871,780
NPV
Probability
2
3
4
30%
20%
50%
Deviation from
expected value
$m
-1.2
-0.2
0.8
Squared deviation
$m
1.44
0.04
0.64
Weighted
amounts
$m
0.432
0.008
0.320
Total weighted amounts = $0.432m + $0.008m + $0.320m = $0.760m

Standard deviation = $0.760m = $0.871780m or $871,780
9.37 Answer is D
9.38 Answer is B
9.39 Answer is C
Expected value of project A is (1.5m x 0.4) + (3m x 0.6) = 2.4m
Expected value of project B is the same as project A therefore the expected value of
Project B is:
(0.8m x g) + (3.2m x (1 g)) = 2.4m
0.8g +3.2m - 3.2g = 2.4
-2.4g + 3.2 = 2.4
-2.4g = -0.8
g = 0.333
250 | P a g e
9.40 Answer is A
4 x 15k = 60k
0.4
A (10k)
96k
86k
0.6
8 x 15k = 120k
4 x 15k = 60k
A = Attend show
N = Not attend show
The decision to go to the show yields contribution after the 10,000 running cost of
86,000, compared to the contribution of selling 4 cars without going to the show
generating 60,000 contribution. The expected net gain therefore would be 86,000 60,000 = 26,000.
251 | P a g e
252 | P a g e
Mock Exam 1
M1.1
An opportunity cost is the cost of
A
B
C
D
Unplanned new business

Obtaining new business opportunities
Lost business
The next best alternative course of action
M1.2
Which of the following costs is not relevant when considering the closure of a department
within a factory?
A
B
C
D
Variable overheads
Fixed overheads
Direct materials
Direct labour
M1.3
Which of the following may form the basis for the price a company (working at full
capacity) should charge for a one-off order?
A
B
C
D
Variable costs
Direct and indirect costs
Opportunity costs plus marginal costs
Direct labour plus materials costs
M1.4
In a make versus buy decision which of the following factors is not relevant?
A
B
C
D
Opportunity cost of alternative activities

Reliability of supplier
Reliability of bought-in products
Fixed production costs
253 | P a g e
M1.5
A department makes a product whose contribution per unit is 1,000, and which takes 20
hours machine time. A component used in this product with a marginal cost of 300
(taking 5 hours of machine time) could be purchased from an external supplier. The
department is working at full capacity. What is the maximum price that the company may
pay to buy the component from an external supplier?
A
B
C
D
550
600
575
500
M1.6
Jermery Sparkson makes cars. It took him 1,200 hours to make his first car. He estimates
that there is a learning curve of 80% to be had here. What is the average time that he
would take to make 25 cars? State your answer to 1 decimal place.
M1.7
James Hamilton makes electronic sheep. It took him 17 hours to make the first one and
he estimates that the learning curve is 75%. He has had an order in for 500 sheep. James
says that will not be able to make them any quicker by the time he has made the 150 th
sheep. How much time is needed to make the 500 sheep?
M1.8
What does the y represent in the learning curve formula y=ax
Select ALL that apply
The average time for x units
Total time for x number of untis
Index of learning
The average index of learning
Time taken for the first unit
254 | P a g e
The following information relates to M1.9 and M1.10

Tom and Jerry make ice cream and have set up in London to mass produce tutti fruitti ice
cream. 20 staff who will work a standard 60 hrs a week will make this ice cream.
Production has only just started but the workforces are keen to learn quickly.
The first ice cream was made but in their excitement of eating it they forgot to write
down how long it took. The fifth ice cream however was recorded and the average time
for all units up to this point was 20 hours. Tom and Jerry reckon that there is a 70%
learning rate for staff.
M1.9
Calculate the time taken for the first ice cream made (round your answer to the neares
hour).
M1.10
Calculate the total time for the 10th to the 14th ice cream only.
M1.11
A rival company Tomsang plc has also launched an uncannily similar product to Pear plc
but it is a mobile phone that can be inserted under your hairline next to your skull which
gives you direct axccess to all special offers by Tomsang plc!
The marginal cost for each device is 35 and the amount that can be sold at 100 is 1,000
units. The quantity demanded will increase by 100 units for every 50 decrease and the
likewise a 50 increase will result in a decrease in quantity demanded by 100 units.
Calculate the optimum selling price.
255 | P a g e
M1.12
A new cycle has been developed which has ability to transform into a car! Market
research has told the company that even though it has this fantastic facility no one will be
willing to buy at a prince of 700. Every 40 reduction however will sell 100 more
cycles. Marginal cost is 60.
The profit maximising output is:
A
B
C
D
E
F
G
600 units
750 units
850 units
925 units
950 units
975 units
None of the options
M1.13
Which of the following best describes the difference between penetration pricing and loss
leader pricing?
A
Penetration pricing is suitable only for consumer products whereas loss leader
pricing can be used for consumer and commercial products.
Loss leader pricing is suitable only for consumer products whereas penetration
pricing can be used for consumer and commercial products.
Loss leader pricing is likely to be used in the short term whereas penetration
pricing may be used in the long term.
Penetration pricing is likely to be used in the short term whereas loss leader
pricing may be used in the long term.
256 | P a g e
M1.14
DVDs are often sold with a region code attached. This means that the DVD can be played
on players that have been designed for that region. For example, DVDs carrying region
code 1 can be played in only in America and those with code 2 can be played only in
Europe. This is intended to prevent a consumer from buying a DVD in, say, America and
playing it in Europe.
Film producers often stagger the launch of new DVDs, with most being sold in America
before they go on sale elsewhere. Initial sales in each region are at a relatively high price;
this is reduced once interest in the film diminishes.
Which pricing strategy is most consistent with the use of codes to ensure high prices in
new markets?
A
B
C
D
Discount pricing
Market skimming
Penetration pricing
Premium pricing
M1.15
A company is deciding whether to develop a new product. The development of the
product would require an investment of $2 million, on which the company would require
an annual return of 15%.
Market research anticipates an annual demand of 55,000 units if the unit selling price is
$18.
Calculate the target cost per unit.
257 | P a g e
M1.16
Which types of budget is described in each of the following?
A budget that is set prior to the control period and not subsequently
changed in response to changes in activity, costs or revenues
A budget that is continuously updated by adding a further accounting
period when the earliest accounting period has expired
A budget that is changed in response to changes in the level of
activity
A budget that is based on the previous budget or actual results for
changes in the activity and inflation
Place each of the following options against ONE of the above
Rolling, Flexible, Incremental, Fixed
M1.17
Which of the following sentences is the best representation of the behavioural aspects of
budgeting?
A
B
C
D
If budget targets are unrealistic there may be a negative reaction from individuals
It is seldom necessary to involve employees in the budgetary process
Budgets will always improve motivation
Budgets will always improve participation
M1.18
Which of the following sentences is the best description of zero-base budgeting?
A
Zero-base budgeting starts with the figures of the previous period and assumes a
zero rate of change
Zero-base budgeting requires a completely clean sheet of paper every year, on

which each part of the organisation must justify the budget it requires
Zero-base budgeting is a technique applied in government budgeting in order to

have a neutral effect on policy issues
Zero-base budgeting is a short-term planning technique targeted at zero profit or

loss
258 | P a g e
M1.19
The salaries of the finance department staff in a manufacturing company are from:
A
B
C
D
Unit level activity

Facility level activity
Product sustaining activity
Batch level activity
M1.20
Place the following costs in the correct coulumn for batch level activity and facility level
activity, select all that apply.
Shipping
Plant depreciation
Inspection
Quality assurance
Plant maintenance
Direct materials
Material handling
Property taxes
Insurance
Batch Level Activity
Facility Level Activity
259 | P a g e
The following information applies to M1.21 and M1.22:

Battersea tyres uses an activity based costing system to compute the cost of making
premium tyres and delivering the tyres to garages. Staff costs are 80,000 and make and
deliver the tyre. Other general overheads are 70,000.
These costs are allocated as follows:
Staff costs
General overheads
Tyre manufacture
70%
50%
Delivery
20%
30%
Other
10%
20%
There will be 40,000 tyres and 6,000 deliveries in the year.

M1.21
What is the staff costs and general overheads that would be charged to each tyre?
A
B
C
D
0.88
1.40
2.28
Some other amount
M1.22
What is the staff costs and general overheads that would be charged to each delivery?
A
B
C
D
6.17
2.67
3.50
Some other amount
M1.23
SRK combines all manufacturing overheads into one single cost pool and allocates this
overhead to products based on machine hours.
Activity based costing would show that with SRKs current procedures:
A
B
C
D
The low volume products have too much overheads in them

The high volume products have too much overheads in them
All products have too much overheads in them
The high volume products do not have enough overheads in them
260 | P a g e
M1.24
JJB is changing from a traditional costing system to an activity based system. Which of
the following costs would change from indirect to direct?
A
B
C
D
Direct materials
Factory supplies
Production setup
Production setup, finished-goods inspection, and product shipping
M1.25
A hospital administrator is in the process of implementing an activity-based-costing
system. Which of the following tasks would not be part of this process?
A
B
C
D

Assignment of cost to services provided
None of the above
M1.26
Consider the following; all figures are in 000s:
Direct materials = 4,120
Plant rent = 1,734
New technology design engineering = 3,111
Materials receiving = 400
Manufacturing set up = 150
Machinery depreciation = 56
General management salaries = 2,563
Determine the cost of unit level, batch level, product sustaining, and facility level
activities.
M1.27
A bottleneck is described as a:
A
B
C
D
Limited resource
Unlimited resource
Expensive resource
Inferior resource
261 | P a g e
M1.28
The TA ratio is described as:
A
B
C
D
Throughput contribution per hour / conversion cost per hour

Conversion cost per hour / throughput contribution per hour
Throughput contribution per hour / bottleneck resource usage
Bottleneck resource usage / throughput contribution per hour
M1.29
Throughput contribution is:
A
B
C
D
Sales less variable costs

Sales less material costs
Sales less fixed costs
Sales labour costs
M1.30
Which of the following is a primary activity according to Porters value chain analysis?
A
B
C
D
Infrastructure
Procurement
Technology
Inbound logistics
M1.31
Which of these is NOT a primary activity according to Porters value chain analysis?
A
B
C
D
Procurement
Marketing and sales
Service
Operations
262 | P a g e
M1.32
Company A has entered into a contract with company B to provide them with 17,000
handmade leather bound calculators. The contract stipulates that if B manages to end up
charging A below what was originally quoted then savings would be split 30:70 to wards
company B. This is an example of:
A
B
C
D
Outsourcing
Supplier chain management
A gain sharing arrangement
Product differentiation
M1.33
In the context of quality costs, free replacements to customers and training costs are
classified as:
A
B
C
D
Free replacements
External failure cost
External failure cost
Internal failure cost
Internal failure cost
Training costs
Appraisal cost
Prevention cost
Appraisal cost
Prevention cost
M1.34
A company operates a throughput accounting system. The details per unit of Product C
are:
Selling price
Material cost
Labour cost
Overhead costs
Time on bottleneck resource
$28.50
$9.25
$6.75
$6.00
7.8 minutes
The throughput contribution per hour for Product C is:

A
B
C
D
$50.00
$122.85
$121.15
$148.08
263 | P a g e
M1.35
JJ Ltd manufactures three products: W, X and Y. The products use a series of different
machines but there is a common machine that is a bottleneck.
The standard selling price and standard cost per unit for each product for the forthcoming
period are as follows:
Selling price
200
150
150
Cost
Direct materials
Labour
Overheads
Profit
41
30
60
69
20
20
40
70
30
36
50
34
Bottleneck machine
minutes per unit
10
40% of the overhead cost is classified as variable

Using a throughput accounting approach, what would be the ranking of the products for
best use of the bottleneck?
M1.36
Which of the following is not a likely example of a bottleneck when planning for
production capacity
A
B
C
D
Resources available
Physical space
Lead time to organise expansion
Sales demand
264 | P a g e
M1.37
Complete the following missing activities for the value chain digram below. Select
FOUR answers (A to G) from the information below the table.
Margin
Activities
Secondary
Technology
Infrastructure
B
Procurement
Inbound
Logistics
Outbound
Logistics
After
Sales
Service
Margin
Primary
Marketing
and
Sales
Human
Resource
Management
Finance
Information
Technology
Operations
Innovation
Infrastructure
M1.38
Which ONE of the following would NOT be considered part of the lean philosophy
approach?
A
B
C
D
Centralisation of management decision making

Involvement of staff in the operation
The drive for continuous improvement
265 | P a g e
M1.39
Which of the following are NOT likely to be factors that can restrict productive capacity
of a firm? Select THREE only.
Physical space
JIT systems
Efficiency
Waste
Over-production
Outsourcing
Defects
Resource availability
M1.40
According to Cousins strategic supply wheel, which one of the following is NOT an
interconnected component of this model?
A
B
C
D
Good relationships with suppliers

Performance measures
Cost-benefit analysis
Vertical integration
M1.41
According to Rock and Long an organisation can take a position in terms of how it
strategically places its purchasing department, which of the following is NOT a view of
this strategic positioning tool?
A
B
C
D
Passive
Independent
Ignored
Integrative
M1.42
When the supplier sourcing strategy of an organisation is to outsource purchasing
decisions to an external third party organisation, this strategy would be best described as?
A
B
C
D
Single sourcing strategies

Multiple sourcing strategies
Delegated sourcing strategies
Parallel sourcing strategies
266 | P a g e
M1.43
Optimised production technologies (OPT) is an operations management system which
aims to
A
B
C
D
improve distribution networks

improve supply sourcing alternatives
integrate operations and quality assurance
reduce production bottlenecks
M1.44
CIMA's definition of just-in-time (JIT) production is:
A
A system which is driven by demand for finished products, whereby each

component on a production line is produced only when needed for the next stage.
A system in which material purchases are contracted so that the receipt and usage
of material, to the maximum extent possible, coincide.
A system where the primary goal is to maximise throughput while simultaneously

maintaining or decreasing inventory and operating costs.
A system that converts a production schedule into a listing of the materials and
components required to meet that schedule, so that adequate stock levels are
maintained and items are available when needed.
M1.45
An example of a soft capital rationing issue is:
A
B
C
D
Head office imposed restrictions on next years budget

The bank is unwilling to extend the overdraft
A drop in the share price has meant that a rights issue was not widely taken up.
A company cannot issue debentures because it is not listed
M1.46
Discounted payback involves:
A
B
C
D
Applying a discount rate to cashflows

Finding when the project has an NPV of zero
Only considering conventional cashflows
Creating a relative figure rather than an absolute figure
267 | P a g e
M1.47
Replacement theory seeks to:
A
B
C
D
Compare two projects with different timescales

Compare two projects with initial cash outflows
Compare two projects that are discounted at different rates
Compare two projects that no cash inflows
M1.48
When the cost of capital is increased which one of the following about NPV and payback
is true?
A
B
C
D
The NPV will increase and the payback period will increase
The NPV will decrease and the payback period will increase
The NPV will decrease and the payback period will decrease
The NPV will decrease and the payback period will remain constant
M1.49
For investment appraisal decisions the calculation of payback period
A
B
C
D
Considers that all cash flows received over the projects life have equal value
Considers that all cash flows received in earlier years have more value
Considers that all cash flows received in later years have more value
Considers that all cash flows received in earlier years have less value
M1.50
The following information exists about a project:
NPV at 10% +$8,900
NPV at 15% - $1,600
What would be the internal rate of return for the project (to 1 decimal place)?
268 | P a g e
M1.51
A company in the next period needs to make 1,000 units of products A and 3,000 units of
product B and C. All three products are made using the same machines; machine
capacity next period will be a maximum of 20,000 hours.
Internal if product made in house ($)
Machine hours if made in house
Market price if purchased from a supplier ($)
A
10
5
20
B
15
5
32
C
5
7
9
In order to minimise internal cost how many units of product C should be purchased from
an external supplier?
A
B
C
D
None
1,167 units
2,800 units
3,000 units
M1.52
When the cost of capital is decreased which one of the following about NPV, IRR and
payback is true?
A
B
C
D
The NPV will increase, the payback period will increase and IRR will increase
The NPV will decrease, the payback period will increase and IRR will decrease
The NPV will increase, the payback period will decrease and IRR will increase
The NPV will increase, payback will remain constant and IRR will remain
constant
M1.53
ROI is most appropriately used to evaluate the performance of:
A
B
C
D
Revenue centre managers

Both profit centre managers and investment centre managers
Investment centre managers
Profit centre managers
M1.54
Which of the following is not used in the calculation of divisional ROI?
A
B
C
D
Divisional income
Sales margin
Earnings per share
Sales revenue
269 | P a g e
M1.55
What does the ROI show?
A
B
C
D
The percentage of each in sales that is invested in assets

The sales generated from each of profit
How effectively a company used its invested capital
The invested capital from each of income
M1.56
Champion had sales and costs of 1,000,000 and 350,000 respectively. If total capital
was 7,000,000, what is the ROI?
A
B
C
D
14.3%
5%
9.3%
12%
M1.57
King Khan Ltd had a sales margin of 10%, sales of 20,000, and invested capital of
100,000. The company's ROI was:
A
B
C
D
5%
2%
20%
6%
M1.58
Marketers have to wrestle with the Big Data problem when trying to exploit new and
innovative forms of information processing to gain enhanced insight and decision making
within marketing decisions. According to Gartner which ONE of the following would
NOT be a definition of the Big Data problem?
A
B
C
D
Volume
Velocity
Veracity
Variety
270 | P a g e
M1.59
A company can choose from three mutually exclusive projects. The net cash flows from
the projects will depend on market demand. All of the projects will last only for one
year. The forecast net cash flows, their associated probabilities and the expected value of
the projects are given below:
Market demand
Probability
Weak
0.3
Average
0.5
Good
0.2
Expected value
1
Project A
Project B
Project C
$400
$300
$500
$500
$350
$450
$600
$400
$650
$490
$345
$505
The maximum amount that should be paid for perfect information regarding market
demand is $
M1.60
A decision maker using the maximin decision criterion will:
A
Assume that risk can be ignored and will choose the outcome with the highest
expected value.
Assume that he will regret not having chosen another alternative and will
therefore minimise the possible loss under this assumption.
Assume that the worst outcome will always occur and will select the largest
payoff under this assumption.
Assume that the best payoff will always occur and will therefore select the option
with the maximum payoff.
271 | P a g e
272 | P a g e
Mock Exam 1 - Answers

M1.1 Answer is D
M1.2 Answer is B
M1.3 Answer is C
M1.4 Answer is D
M1.5 Answer is A
The maximum price is the material cost of buying in the material and the machine time
taken to process. This machine time will result in lost contribution of the the current
products being made as the company is at full capacity.
Each machine hour is worth 1,000 / 20 = 50 of lost contribution
Therefore the maximum price to pay to buy in the component:
300 + (50 x 5 hours) = 550
M1.6 Answer is 425.8 hrs
r = 0.8, therefore b = log 0.8 / log 2 = -0.3219
y = 1,200 (25) (to the power of -0.3219)
y = 425.8 hrs
The learning curves ceases at 150 sheep and after that every sheep takes the same time to
make.
b = log 0.75 / log 2 = -0.4150
Average time to make 150 sheep = 17 (150) (to the power of -0.4150) = 2.125 hrs
Total time to make 150 sheep = 2.125 x 150 = 318.75 hrs
Average time to make 149 sheep = 17 (149) (to the power of -0.4150) = 2.131 hrs
Total time to make 149 sheep = 2.131 x 149 = 317.519 hrs
Time taken for the 150th sheep = 318.75 317.519 = 1.231 hrs
Total time for 500 sheep = 318.85 + (350 sheep x 1.231 hrs) = 749.7 hrs
273 | P a g e
M1.8 Answer
The average time for x units
Total time for x number of untis
Index of learning
The average index of learning
Time taken for the first unit
M1.9 Answer is 46 hours
Log 0.7/log 2 = -0.5146
20 hours = a x 5 (to the power of 0.5146)
20 = a x 0.4368
a = 20 / 0.4368
a = 46 hours
M1.10 Answer is 24.95 hours
Time for the first 14 units (46 x 14 (to the power of 0.5146) x 14 = 165.61 hours
Time for the first 10 units (46 x 10 (to the power of 0.5146) x 10 = (140.66) hours
Time for the 14th to 10th unit
24.95 hours
M1.11 Answer is 317.50
P = 100
Q = 1,000
b = 50/100 = 0.5
a=?
Use the price function to solve for a:
P = a - bQ
100 = a 0.5(1,000)
100 = a 500
600 = a
Therfore price function:
P = 600 0.5Q
274 | P a g e
Profit max positon is when MR = MC

MR = 600 2(0.5)Q
MR = 600 Q
MC = 35
Therfore:
600 Q = 35
-Q = 35 - 600
-Q = -565
Q = 565
Optimal quatity demanded is 565
Selling price:
P = 600 0.5Q
P = 600 0.5 (565)
P = 600 282.5
P = 317.5
Optimal selling price is 317.50
M1.12 Answer is G
We have been given the value of a being maximum price which in this case is 700
b = 40/100 = 0.4
P = 700 0.4Q
MR = 700 2(0.4)Q
MR = 700 0.8 Q
MC = 60
Profit max is when MR = MC
700 0.8 Q = 60
-0.8 Q = -640
Q = 800
Profit max quantiy is therefore 800 units
275 | P a g e
M1.13 Answer is D
M1.14 Answer is B
M1.15 Answer is $12.54
15% of $2,000,000 = $300,000 required annual return
Annual return per unit = $300,000 / 55,000 units = $5.45
Therefore target cost per unit = $18 - $5.45 = $12.54
M1.16 Answer
Fixed
A budget that is set prior to the control period and not subsequently
changed in response to changes in activity, costs or revenues
Rolling
A budget that is continuously updated by adding a further accounting

period when the earliest accounting period has expired
Flexible
A budget that is changed in response to changes in the level of

activity
Incremental
A budget that is based on the previous budget or actual results for

changes in the activity and inflation
M1.17 Answer is A
M1.18 Answer is B
M1.19 Answer is D
M1.20 Answer
Batch Level Activity
Shipping
Inspection
Quality assurance
Material handling
Facility Level Activity

Property taxes
Insurance
Plant depreciation
Plant maintenance
Direct materials is a unit level activity and therefore not included in the above.
276 | P a g e
M1.21 Answer is C
Staff costs = 80,000 x 70% = 56,000
General overheads = 70,000 x 50% = 35,000
Total cost for tyres = 56,000 + 35,000 = 91,000
Cost per tyre = 91,000 / 40,000 = 2.28
M1.22 Answer is A
Staff costs = 80,000 x 20% = 16,000
General overheads = 70,000 x 30% = 21,000
Total cost for delivery = 16,000 + 21,000 = 37,000
Cost per delivery = 37,000 / 6,000 = 6.17
M1.23 Answer is B
M1.24 Answer is D
M1.25 Answer is D
M1.26 Answer
Unit level costs = direct materials = 4,120
Batch level costs = materials reciving + manufacturing set up = 550
Product sustaining costs = new technology design engineering = 3,111
Facility level costs
= plant rent + machinery depreciation + general management salaries = 4,353
M1.27 Answer is A
M1.28 Answer is A
M1.29 Answer is B
M1.30 Answer is D
M1.31 Answer is A
M1.32 Answer is C
M1.33 Answer is B
277 | P a g e
M1.34 Answer is D
Throughput contrbution = $28.50 - $9.25 = $19.25
Return per hour = ($19.25 / 7.8) x 60 = $148.08
M1.35 Answer
Tip: The throughput accounting approach aims to maximise contribution whilst
minimising conversion e.g. labour and overhead cost. It is essentially the same
principle as marginal costing, but assumes the only true variable cost when
calculating throughput contribution is the material and component cost only of
making a product. This system also values inventory at material cost only.
=
Selling price
Direct materials
Throughput contribution per unit
Bottleneck (minutes)
Throughput contribution per minute
Ranking
200
41
159
150
20
130
150
30
120
10
17.67
13.00
17.14
First
Third
Second
M1.36 Answer is A
M1.37 Answer
A = Infrastructure
B = Human Resource Management
C = Operations
D = Marketing and Sales
M1.38 Answer is A
Centralisation of management decision making
278 | P a g e
M1.39 Answer
JIT systems
Over-production
Outsourcing
M1.40 Answer is D
M1.41 Answer is C
Ignored
M1.42 Answer is C
Delegated sourcing strategies
M1.43 Answer is D
Reduce production bottlenecks
M1.44 Answer is A
M1.45 Answer is A
M1.46 Answer is A
M1.47 Answer is A
M1.48 Answer is D
M1.49 Answer is B
279 | P a g e
M1.50 Answer is 14.2%

The IRR method
This is achieved through trial, error and interpolation. If we have a cost of capital which
yields a positive NPV then we need to find a cost of capital when applied that will give a
negative NPV.
IRR =
A + ( a
ab
[B - A] )
A = lower DF rate
B = higher DF rate
a = NPV of A
b = NPV of B
IRR = 10% + ($8,900 ($8,900 + $1,600)) x (15% - 10%)

IRR = 10% + 4.2%
IRR = 14.2%
M1.51 Answer is D
Clearly each product would be cheaper to make internally but there is a shortage of
machine hours, therefore this problem is like limiting factor analysis but rather than
attempting to maximise contribution, you are instead attempting to minimise cost.
External cost per unit

Hours required per unit
External per hour
Ranking
A
20.00
B
32.00
C
9.00
4.00
6.40
1.29
Second
First
Third
280 | P a g e
The external cost per hour of making product B is highest, so to minimise cost use all
machine hours on this product first, then product A and then product C.
B 3,000 units x 5 hours = 15,000 hours
Hours left 20,000 hours less 15,000 hours = 5,000 hours!
Given product A is the second most expensive you make these products next.
Product A made = 5,000 hours 5 hours per product = 1,000 units made.
You have now run out of machine hours therefore would have to buy all of product C
from a supplier but this would minimise cost!
M1.52 Answer is D
M1.53 Answer is C
M1.54 Answer is D
M1.55 Answer is C
M1.56 Answer is C
1,000,000 - 350,000 / 7,000,000 = 9.3%
M1.57 Answer is B
10% of 20,000 = 2,000 / 100,000 = 2%
M1.58 Answer is C
M1.59 Answer is $25
If we had perfiect information then expected value is:
Market conditions
Weak
Average
Good
Best projects
in market
condition
C
A
C
Probability
Net cash
inflows
0.3
0.5
0.2
$500
$500
$650
EV
$150
$250
$130
$530
($505)
$25
M1.60 Answer is C
281 | P a g e
282 | P a g e
Mock Exam 2
M2.1
Which of the following if any is a relvant cost?
The cost of inventory when looking at selling it or retaining it
The cost of a speciasl gas installation for an asset when looking at its purchase
The salary of a manager who will be transferred to the West Nottingham branch
after the closure of the East Nottingham branch
M2.2
Which of the following if any best describes a relevant cost?
A past cost that is the same compared to other alternatives
A past cost that is different from alternatives
A future cost that is the same compared to other alternatives
A future cost that is different from alternatives
A cost that is based on past experience
M2.3
In the short-term decision-making which of the following if any would be a relevant cost?
The original cost of materials already in the store which will be used on the
project
Depreciation of existing fixed assets
Specific development costs incurred
General expenditure already incurred
Cost of specific materials which will be purchased
M2.4
The decision-making process requires:
A
B
C
D
The use of large amounts of historical data

A disregard of non-relevant costs
A disregard of forecasts
Analysis of the most recent income statement of the business
283 | P a g e
M2.5
Which of the following costs is relevant in decision-making?
A
B
C
D
Ccommitted costs
Accounting costs
Cash costs
Historical costs
M2.6
The total time taken to produce the first sixteen batches was 200 hours. Calculate the
cumulative learning rate if the first batch took 45 hours.
M2.7
Month
1
2
3
4
Total batches produced to date

1
2
4
8
Actual learning rate

75%
85%
90%
From months 3 to 4, state possible reasons why the actual learning rate has changed?
Gradual reduction in how much more that can be learned
Superior materials being introduced
Production is no longer in its early stages
Motivation and enthusiasm of the existing staff has increased
M2.8
What does the b represent in the learning curve formula y=ax
Index of learning
It is the percentage fall required in average time if output doubles
Log r / log 2
It is the percentage amount of average time needed if output doubles
It is the time needed for the first item
284 | P a g e
M2.9
If it took 35 hrs to make the first 4 sandwiches in a shop and the learning rate is 95%,
how long did the first sandwich take? State your answer to 1 decimal place.
M2.10
What does the a represent in the learning curve formula y=ax
The learning rate
Average number oif units
Log r / log 2
M2.11
Which ONE of the following consists of dividing a market into distinct groups of buyers
on the basis of their needs, characteristics or behaviour?
A
B
C
D
Market research
Market segmentation
Market targeting
Market positioning
M2.12
Expensive perfume manufacturers have often used extensive advertising, high profile
celebrity endorsement and slogans such as because you are worth it. This enables a high
price to be charged and give the perception to a customer that it is a superior product.
Which ONE of the following pricing strategies would this type of example support?
A
B
C
D
Market skimming
Premium pricing
Psychological pricing
285 | P a g e
M2.13
Retailers often deliberately sell certain products at a low price and commonly at a loss,
but through this promotional awareness it attracts more customers who in turn may buy
other items during their visit to a website or store. Such a marketing strategy is
commonly referred to as a?
A
B
C
D
Loss leader strategy

Multi channel strategy
Price discrimination strategy
Variable pricing strategy
M2.14
Z incurs costs in total of 30:
Variable prodcution costs 12, variable selling costs 6, fixed production costs 9, fixed
selling and admin costs 3.
The demand function is P = 3,000 0.5Q
Where P = price, Q = qustity demanded
Calculate the profit maximising selling price and quatity for Z
M2.15
A new implant mobile phone is being launched by Pear plc which can be inserted under
the sklin of your wrist and therefore you can never be lost!
Its variable costs is 14 per unit and after conducting market research it turns out that if
they were to charge 25 then demand would be 1,000 units. Every 1 increase in the
selling price would reduce demand by 100 units and every 1 decrease in the selling
pricee would increase demand by 100 units.
Calculate the optimum selling price.
286 | P a g e
M2.16
Which if these relate to Beyond Budgeting? Select all if any.
Variance analysis
Fixed budgets
Zero based budgeting
Feedback control
Incremetnal budgeting
Flexed budgets
Benchmarking
M2.17
Which of the following if any are examples of feedback control?
Variance analysis
Cash flow forecasting
Target costing
Budget setting process
M2.18
In the context of budgeting and control, the term 'goal congruence' refers to:
A
B
C
D
The setting of a budget which does not include budgetary slack

The alignment of the budget with the company's strategic objectives
The setting of a budget that challenges managers
The alignment of the company's objectives with the personal objectives of the
manager
M2.19
Which of the following is not normally associated with ABC?
A
B
C
D

Minimising the use of cost drivers
287 | P a g e
M2.20
Which of the following is not a broad cost classification category typically used in
activity based costing?
A
B
C
D
Unit level
Batch level
Product sustaining level
Operational level
M2.21
In an activity based costing system, direct labour used would typically be classified as a:
A
B
C
D
Product sustaining cost

Batch level cost
Unit level cost
Facility level cost
M2.22
Which of the following is least likely to be classified as a batch level activity in an
activity based costing system?
A
B
C
D
Dispatching
Receiving and inspection
Income tax
Quality assurance
M2.23
In an activity based costing system materials receiving would typically be classified as a:
A
B
C
D
Unit level activity

288 | P a g e
M2.24
Tyson is developing a new range of vacuum cleaners that use turbine power technology.
The research costs for this technology are said to come from:
A
B
C
D
Unit level activity

M2.25
Which of the statements if any are true regarding product sustaining activities?
They must be done for each batch of product that is made
They must be done for each unit of product that is made
They are needed to support an entire product line
M2.26
Which of the following is least likely to be classified as a facility level activity in an
activity based costing system?
A
B
C
D
Machine processing cost

Property taxes
Plant maintenance
Plant management salaries
M2.27
Most supply chains involve which ONE of the following?
A
B
C
D
A number of different companies

An organisations infrastructure
After sales service
A strategic apex
M2.28
Which ONE of the following is NOT a category featured in Porter's Value Chain?
A
B
C
D
Procurement
Operations
Marketing and sales
Gross profit
289 | P a g e
M2.29
Which ONE of the following strategies is less likely to achieve greater integration within
an organisations supply chain?
A
B
C
D
Divestment of activities
Strategic alliances
Joint ventures
M2.30
Quality failure costs incurred before the good or service has been transferred to the
customer would normally be described as?
A
B
C
D
Prevention costs
Appraisal costs
Internal failure costs
M2.31
Which of the following technologies facilitates a virtual supply chain?
i.
ii.
iii.
A
B
C
D
Electronic data interchange

Extranets
E-commerce
i only
i and ii only
iii only
All of the above
M2.32
Supply chain partnerships grow out of
A
B
C
D
An expansion of trade
Adopting a marketing philosophy
290 | P a g e
M2.33
In purchasing, the Reck and Long positioning tool is by nature
A
B
C
D
Strategic
Independent
Supportive
Passive
M2.34
A necessary product/service requirement to meet the Japanese interpretation of quality
is to
A
B
C
D
Comply with all safety standards

Cost no more than necessary
Meet a design brief
Meet customer expectations
M2.35
An approach of producing goods or purchasing stock only when required is referred to as
A
B
C
D
Just-in-time
Ad hoc
Level capacity strategy
Plan-do-check-act (PDCA) quality
M2.36
Which ONE of the following would be defined as the philosophy that recommends the
redesign of processes to fulfill defined external customer needs?
A
B
C
D
TQM
JIT
BPR
5S
M2.37
Which of the following is normally accepted as a requirement of JIT to be successful?
A
B
C
D
Bulk buying from suppliers

High levels of demand from customers
Training and involvement of staff
Mass automation
291 | P a g e
M2.38
Which of the following is not associated with TQM?
A
B
C
D
Get it right first time philosophy

Zero defects
Redesign of existing processes
Continuous improvement is the aim
M2.39
Which of these is NOT an external failure cost of quality?
A
B
C
D
Administration of customer complaints

Administration of customer service
Inspection of processes
Repairs and replacements
M2.40
Which of these is a prevention cost of quality?
A
B
C
D
Failure analysis e.g. reasons why and faults

Training and development of quality culture
Losses/scrap of materials and finished goods
Lost goodwill/reputation
M2.41
A bundle of machines that can be programmed to switch from one production run to
another is an example of?
A
B
C
D
Flexible manufacturing system

M2.42
An information systems which provides a list of parts and materials required for the type
and number of products entered, allowing for better stock management is an example of?
A
B
C
D

292 | P a g e
M2.43
Which of these is NOT true about Kaizen costing?
A
B
C
D
Similar to TQM
Focussing on small incremental improvements
Focuses on reducing fixed costs of future periods below that of prior periods
Underpins empowerment of employees
M2.44
Which of these is NOT an aspect of value in value analysis?
A
B
C
D
Utility value
Esteem value
Cost value
Sale value
M2.45
The IRR:
A
B
C
D
Discounts cashflows
Is when the NPV of a project is negative
Selects projects based return of profit
Is when the NPV of a project is positive
M2.46
Which one of the following would be included in the analysis of relevant costs when
completing a net present value of a project?
A
B
C
D
Sunk cost
Future cash-flow
Apportioned fixed cost
Committed cost
293 | P a g e
The following information is to be used for M2.47 and M2.48:

The following data exists for Company B, who manufacture units of a product that has a
selling price of 250 and a variable cost per unit of 110. Specific fixed cost for a project
they are investigating will be 80,000 a year and a net present value for a new machine
has been calculated using the above information.
T0
T1 to T5
Machine outlay
Annual cash-flow profit
Cash-flow
600,000
280,000
8% D.F
1.0
3.993
000s
(600)
1,118
+518
M2.47
What would be the percentage change in selling price (to the nearest 1%), using the
above data that would give a net present value of zero?
A
B
C
D
18%
19%
20%
21%
M2.48
How many units sold per annum would achieve break-even (to the nearest 100 units)?
A
B
C
D
1,000 units
1,200 units
1,400 units
1,600 units
294 | P a g e
M2.49
The following data exists for a company:
Machine paid for now is 200,000 and provides cash-flows each year for the next 4 years
of 40,000. Corporation tax is 30% and is paid in equal instalments in the seventh and
tenth months of the year in which the profit is earned and the first and fourth months of
the following year. The companys cost of capital is 8%. Writing down allowance of 25%
on a reducing balance basis can be claimed each year. You are to assume the companys
investment in the machine occurs on the first day of the tax year.
The present value of cash flow occurring in the second year (to the nearest 1) would be?
A
B
C
D
35,224
35,675
36,769
38,124
M2.50
If a company has a money cost of capital of 17% and the inflation rate is 2.5% what s the
real cost of capital rate?
A
B
C
D
14%
13%
12%
11%
M2.51
A project has an NPV of 2,500 and discount rate of 3%, also an NPV of (1,500) at a
discount rate of 13%. What is the IRR?
A
B
C
D
9.25%
3%
13%
7.45%
295 | P a g e
M2.52
When abandoning a project which of the following factors is not normally a factor that is
considered?
A
B
C
D
Future inflows and cashflows of existing project

Future inflows and outflows of alternative project
Scrap value of existing project
Total costs and revenues to date of existing project
M2.53
Which of these is not an advantage of a functional structure company?
A
B
C
D
Reduction in costs
Higher quality service
Improved customer satisfaction
Duplciation of functions in a division
M2.54
The divisional managers decision is different to the decision that head office would have
made and would only benefit the division and not the company as a whole. This is known
as?
A
B
C
D
Goal congruence
Sub optimal decision
Profit minimisation
Cost maximisation
M2.55
Rusty Ltd has net assets of 2,450,000; net profit of 750,000 and sales of 1,850,000.
What is the return on investment for the current period?
A
B
C
D
25.2%
75.5%
44.9%
30.6%
296 | P a g e
M2.56
Kaalia Ltd has a cost of capital of 15%. If the assets value for one of its divisions is
600,000 and the divisional income was 100,000, what was the residual income for the
division?
A
B
C
D
100,000
90,000
10,000
190,000
M2.57
If an intermediate market exists, then the optimal transfer price is usually the:
A
B
C
D
None of these options

Market price
Opportunity cost of not selling to the outside market
Variable costs associated with producing the product
M2.58
The owner can pay for a specialist car marketing company that claims that 70% of the
time it can accurately predict whether or not the competition will be better or worse. The
maximum amount that would be paid to the firm of consultants, compared with not
purchasing it and not attending the exhibition would be?
A
B
C
D
89,600
59,800
29,200
19,800
M2.59
K Plc is about to launch a new training centre in London the cost of doing so will be
20,000. There is a 60% chance it will be successful and a 40% chance it will be
unsuccessful. If it is successful it is estimated that there is a 50% chance it will be very
successful and generate contribution of 60,000 and a 50% chance that it will be
moderately successful and generate contribution of 30,000. What is the expected value
of the new centre launch?
A
B
C
D
27,000
15,000
7,000
42,000
297 | P a g e
M2.60
A risk seeking decision maker will:
A
B
C
D
Accept risk
Ignore risk
Avoid risk
Seek risk
298 | P a g e
Mock Exam 2 - Answers

M2.1 Answer
The cost of inventory when looking at selling it or retaining it
The cost of a speciasl gas installation for an asset when looking at its purchase
The salary of a manager who will be transferred to the West Nottingham branch
after the closure of the East Nottingham branch
M2.2 Answer
A past cost that is the same compared to other alternatives
A past cost that is different from alternatives
A future cost that is the same compared to other alternatives
A future cost that is different from alternatives
A cost that is based on past experience
M2.3 Answer
The original cost of materials already in the store which will be used on the
project
Depreciation of existing fixed assets
Specific development costs incurred
General expenditure already incurred
Cost of specific materials which will be purchased
M2.4 Answer is B
M2.5 Answer is C
M2.6 Answer is 84%
a = 45 hrs, y = 200 hrs / 16 batches = 12.5 hrs on average for 16 batches
Batches
1
2
4
8
16

45
45 x r
45 x r x r
45 x r x r x r
45 x r x r x r x r
299 | P a g e
Therefore for 8 batches:

45 r (^4) = 22.78
r (^4) = 22.78 / 45
r (^4) = 0.506
r = 0.506 (^1/4)
r = 0.843
Therefore learning rate is 84%
M2.7 Answer
Gradual reduction in how much more that can be learned
Superior materials being introduced
Production is no longer in its early stages
Motivation and enthusiasm of the existing staff has increased
M2.8 Answer
Index of learning
It is the percentage fall required in average time if output doubles
Log r / log 2
Using the formula y=ax
r = 0.95 therfore the value of b = log 0.95 / log 2 = -0.0740
y = 35 / 4 = 8.75
8.75 = a (4) (to the power of -0.0740)
8.75 = a (0.90250)
a = 9.7 hrs
300 | P a g e
M2.10 Answer
The learning rate
Average number oif units
Log r / log 2
M2.11 Answer B
Market segmentation
M2.12 Answer is B
Premium pricing
M2.13 Answer is A
Loss leader strategy
M2.14 Answer is 1,509 and 2,982 units
MR = 3,000 Q
MC = 12 + 6 = 18
Therfore:
3,000 Q = 18
-Q = -2,982
Q = 2,982
Quatity demanded of Z is 2,982 units at the profit max position
Selling price:
P = 3,000 0.5Q
P = 3,000 0.5 (2,982)
P = 3,000 1,491
P = 1,509
Selling price of Z at the profit max position is 1,509
301 | P a g e
M2.15 Answer is 24.50

P = 25
Q = 1,000
b = 1/100 = 0.01
a=?
Use the price function to solve for a:
P = a - bQ
25 = a 0.01(1,000)
25 = a 10
35 = a
P = 35 0.01Q
MR = 35 2(0.01)Q
MR = 35 0.02Q
MC =14
Therfore:
35 0.02Q = 14
-0.02Q = 14 - 35
-0.02Q = -21
Q = -21 / -0.02
Q = 1,050
Optimal quatity demanded is 1,050.
Selling price:
P = 35 0.01Q
P = 35 0.01 (1,050)
P = 35 10.5
P = 24.5
Optimal selling price is 24.50.
302 | P a g e
M2.16 Answer
Variance analysis
Fixed budgets
Zero based budgeting
Feedback control
Incremetnal budgeting
Flexed budgets
Benchmarking
M2.17 Answer
Variance analysis
Cash flow forecasting
Target costing
Budget setting process
M2.18 Answer is D
M2.19 Answer is B
M2.20 Answer is D
M2.21 Answer is C
M2.22 Answer is C
M2.23 Answer is D
M2.24 Answer is C
M2.25 Answer
They must be done for each batch of product that is made
They must be done for each unit of product that is made
They are needed to support an entire product line
M2.26 Answer is A
M2.27 Answer is A
A number of different companies
303 | P a g e
M2.28 Answer is D
Gross profit
M2.29 Answer is A
Divestment of activities
M2.30 Answer is C
Internal failure costs
M2.31 Answer is D
All of the above
M2.32 Answer is B
M2.33 Answer is A
Strategic
M2.34 Answer is D
To meet customer expectations
M2.35 Answer is A
Just-in-time (JIT)
M2.36 Answer is C
Business process reengineering (BPR)
M2.37 Answer is C
M2.38 Answer is C
M2.39 Answer is C
M2.40 Answer is B
M2.41 Answer is A
304 | P a g e
M2.42 Answer is A
M2.43 Answer is C
M2.44 Answer is D
M2.45 Answer is A
M2.46 Answer is B
M2.47 Answer is C
Contribution 280,000 + 80,000 fixed overhead = 360,000
Contribution per unit = 360,000/(250 - 110) contribution per unit = 2,571 units sold
per annum.
PV of sales 250 x 2,571 units p.a. x 3.993 = 2,566,500
In order for the project to break-even the PV of sales would be compared to the NPV of
the project.
NPV 518k/PV Sales 2567k = 20.1%
M2.48 Answer is D
BE Units x (250 - 110) x 5 year annuity (8%) = PV outflow
BE Units x 140 x 3.993 = T0 (600,000) + T1 to T5 (80,000 p.a. x 3.993)
BE Units x 559 = 919,440
BE Units = 919,440/559
BE Units = 1,645 units
Alternative method
PV Contribution 360,000 x 3.993 = 1,437,480
NPV 518k/PV Contribution 1437k = 36%
Volume would have to fall by 36% for the project to break-even therefore 2,571 units x
0.64 (for a fall in 0.36 volume) = 1,645 units
305 | P a g e
M2.49 Answer is A
WDAs
T1
WDA 25%
T2
WDA 25%
200,000
(50,000) x 30%
150,000
(37,500) x 30%
T1
T2
7,500
7,500
5,625
13,125
T3
5,625
Therefore PV C/F T2 (13,125 + 40,000 (0.3 x 40,000)) x 0.857 = 35,224

M2.50 Answer is A
(1 + r) = (1+m) / (1+i)
(1 + r) = (1 + 0.17) / (1 + 0.025)
(1 + r) = 1.17 / 1.025
1+ r = 1.14
r = 14%
M2.51 Answer is A
3% + (2500 / (2500 - - 1500) x [13% - 3%]) = 9.25%
M2.52 Answer is D
M2.53 Answer is D
M2.54 Answer is B
M2.55 Answer is D
(750,000 / 2,450,000,000) x 100% = 30.6%
M2.56 Answer is C
100,000 (600,000 x 15%) = 10,000
M2.57 Answer is B
306 | P a g e
M2.58 Answer is D
A = Attend show and pay for market research
N = Not attend show and do not pay for market research
4 x 15k = 60k
0.4
4 x 15k = 60k
N
Right
0.7
90k
90k
0.6
8 x 15k = 120k
-10k = 110k
A
0.4
90k
Wrong
0.3
4 x 15k = 60k
-10k = 50k
8 x 15k = 60k
90k
0.6
Therefore the most you will pay for the market research with imperfect information
would be 90,000 60,000 = 30,000.
Other decision trees could have represented the decision differently e.g. could have
shown better or worse first and then right or wrong for the market research company last
on the decision tree
Evaluation:
The market research company is right (0.7) and the competition is going to be better (0.4)
you therefore do not go as you will sell 4 cars anyway.
The market research is right and the competition is worse (0.6) you therefore do go and
sell 8 cars but will have to incur 10k exhibition costs.
The market research is wrong (0.3) and the competition you find is better (0.4), you
would not have gone had you been told this, but you would go because they were wrong
so you would sell 4 cars and incurred 10k exhibition costs for doing so.
The market research is wrong (0.3) and the competition is worse (0.6), you would have
gone but seeing as they predicted the competition would be better, you would have stayed
away, sold 4 cars anyway, but incurred no exhibition costs.
307 | P a g e
In the above decision you would have always sold 4 cars any way so you could have
excluded the 4 cars sold at every stage of the decision process.
The decision tree is the same as above but ignores 4 cars sold (earning 60k contribution,
every stage of each decision. This would also allow you to calculate the answer quicker.
0
0.4
N
Right
0.7
30k
0.6
50k
A
19.8
-10k
0.4
19.8
Wrong
0.3
-4k
0.6
Probability of attending the show and finding competition is worse than you
= 0.7 x 0.6 = 0.42.
Incremental contribution 8 cars 4 cars sold anyway = 60k -10k cost = 50k.
Probability of attending the show and finding the competition is better than you
= 0.3 x 0.4 = 0.12.
Incremental contribution 4 cars 4 cars sold anyway = 0k 10k cost = -10k.
(0.42 x 50k) + (0.12 x 10k) = 19.8k
308 | P a g e
M2.59 Answer is C
0
0.4
60k
-20k
7k
27k
0.5
0.6
45k
0.5
30k
M2.60 Answer is B
309 | P a g e

P2 - Exam - Practice - Kit (ACORN) - 1 PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

P2 - Exam - Practice - Kit (ACORN) - 1 PDF

Uploaded by

Copyright:

Available Formats

CIMA

Managment Level Paper P2

ADVANCED MANAGEMENT ACCOUNTING

Tutor contact details

P2 ADVANCED MANAGEMENT ACCOUNTING

Chapters relevant from

A. Cost planning and analysis for

B. Control and performance management of

C. Long-term decision making

D. Management control and risk

Objective test questions

Introduction to relevant costing

Learning curve theory

Activity based costing

Long-term decision making

Performance management and transfer pricing

Management control and risk

90 minute test (syllabus mixture of 60 questions)

Chapter 1 - Introduction to relevant costing

A sunk cost of 1,750

Variable costs of scarce resource and market price of resource

The costs incurred in choosing the next best alternative

Current replacement cost of material

It has high variable costs in comparison total costs

A product which has a high sales value at the split-off point

The fixed costs are an allocation of general fixed overheads.

All of the divisions

Selling price after

Selling price after

Calculate which products are finacnially worthwhile processing further?

The specific costs of the three individual further processes are:

Shops which have a loss should be discontinued

Buy the BMW 320

Decrease operating income by $10,000

Chapter 2 Learning curve thoery

time per unit

The following information applies to 2.10 and 2.11:

Total batches produced to date

The following information applies to 2.22 and 2.23:

The change in demand to changes in prices

Greater than zero

Large number of buyers

May extend the life of the product life-cycle

Good for inelastic demand

Time consuming and difficult

Better understanding of cost

Sets a target budget for a product

Non recovery of promotional costs

A retailor offering a sandwich and drink for a combined price

Characteristics (insert letters A to D)

High sales volume

Chapter 4 - Beyond budgeting

(i) and (iii)

A standard which assumes an efficient level of operation, but which includes

A standard which is kept unchanged over a period of time.

A standard which is based on current price levels.

Difference between the budgeted output and the actual output

Difference between budgeted capacity utilisation and full capacity

Intentional over estimation of costs and/or under estimation of revenue in a

The communication of budgetary plans to budget holders in advance of the budget

Detects information it is programmed or instructed to find

Detects information it is programmed or instructed to find