Each question is worth 2 marks:

1. X co uses rolling budgeting, updating its budgets on a quarterly basis. After carrying out the last
quarter’s update to the cash budget, it projected a forecast cash deficit of $ 400,000 at the end of the
year. Consequently, the planned purchase of new capital equipment has been postponed.
Which of the following types of control is the sales manager’s action an example of?

a) Feedforward control
b) Negative feedback control
c) Positive feedback control
d) Double loop feedback control

2. A company makes a single product which it sells for $2 per unit. Fixed costs are $13,000 per month.
The contribution/sales ratio is 40%. Sales revenue is $62,500.What is the margin of safety (in units)?
a) 15,000
b) 16,250
c) 30,000
d) 31,250

3. The following statements have been made about different types of standards costing systems.
1) Basic standards provide the best basis for budgeting because they represent an achievable
level of productivity.
2) Ideal standards are short-term targets and useful for day-to-day control purposes.

Which of the above statements are true?

a) 1 only
b) 2 only
c) Neither 1 or 2
d) Both 1 and 2

4. A budget that is continuously updated by adding a further accounting period (a month or quarter)
when the earlier accounting period has expired is known as:
a) Zero base budget
b) Rolling budget
c) Periodic budget
d) Flexible budget

5. Division X and Division Y are profit centres in the same company. Division X makes a single component
product. It has a fixed contract to supply an external customer with 5,000 units each month at a price
 of $35 per unit. All other sales are to Division Y at $30 per unit. Budgeted monthly profits for Division
X are as follows:

Sales: External 350,000.00

Sales to Division Y 150,000.00
500,000.00
Variable costs (270,000.00)
Fixed Costs (170,000.00)
Profit 60,000.00

An external supplier offers to sell 4,000 units of the component to Division Y at a price of $25 per unit,
for one month only. Division X would not be able to sell additional components externally.
If Division Y chooses to buy the components from the external supplier, how will profits for the month
be affected?

a) Division X profit will be $0. The company’s profit will be $20,000 lower
b) Division X profit will be $0. The company’s profit will be $28,000 lower
c) Division X profit will be $12,000. The company’s profit will be $20,000 lower
d) Division X profit will be $12,000. The company’s profit will be $28,000 lower

6. The following are types of management accounting techniques :

I. Flow cost accounting
II. Input/output analysis
III. Life cycle costing
IV. Activity based costing

Which of the above techniques could be used by a company to account for its environment costs?
a) i only
b) i and ii only
c) i, ii, and iii only
d) All of the above

7. A business makes two components which it uses to produce one of its products. Details are:
Component A Component B.
Per unit information $ $
Buy in price 14 17

Material
Labour
Variable overheads
General fixed over heads
Total absorption cost
2 5
4 6
6 7
4 3
16 21
The business wishes to maximize contribution and is considering whether to continue making the
components internally or buy in from outside.

Which components should the company buy in from outside in order to maximize is contribution?
a) A only
b) B only
c) Both A and B
d) Neither A nor B

8. The following circumstances mat arise in relation to the launch of a new product:

i. Demand is relatively inelastic

ii. There are significant economies of scale
iii. The firm wishes to discourage new entrants to the market
iv. The product life cycle is particularly short

Which of the circumstances favour a penetration pricing policy?

a) (ii) and (iii) only
b) (ii) and (iv)
c) (i), (ii) and (iii)
d) (ii), (iii) and (iv) only

9. Tree co is considering employing a sales manager. Market research has shown that a good sales
manager can increase profit by 30%, an average one by 20% and a poor one by 10%. Experience has
shown that the company has attracted a good sales manager 35% of the time, an average one 45% of
the time and a poor one 20% of the time. The company’s normal profits are $180,000 per annum and
the sales manager’s salary would be $40,000 per annum.

Based on the expected value criterion, which of the following represents the correct advice which Tree co
should be given?
a) Do not employ a sales manager as profits would be expected to fall by $1,300
b) Employ a sales manager as profits will increase by $38,700
c) Employ a sales manager as profits are expected to increase by $100
d) Do not employ a sales manager as profits are expected to fall by $39,900

10. Which one of the following may be used to study possible future outcomes when there are many
different variables in the situation and the relationships between variables are not predictable?
a) Sensitivity analysis
b) Stress testing
c) Pay-off table
d) Simulation model

11. The following costs arise in relation to production of a new product

i. Research and development costs
ii. Design costs
iii. Testing costs
iv. Advertising costs
 v. Production costs

In calculating the lifetime costs of the product, which of the above items would be excluded?
a) (i), (ii) and (iii) only
b) (ii) and (iii) only
c) (iv) and (v) only
d) None of the above

12. The following statements have been made about zero based budgeting
(1) Employees will focus on eliminating wasteful expenditure
(2) Short-term benefits could be emphasized over long-term benefits.
Which of the above statements is/are true?
a) 1 only
b) 2 only
c) Neither 1 nor 2
d) Both 1 and 2

13. Which of the following is the best definition of a traceable divisional cost?
a) A variable cost incurred in a division
b) A cost incurred in a division over which the divisional manager has control
c) A cost attributable directly to a division over which the manager may or may not have control
d) Costs are charged to a division including both directly attributable costs and a share of
general overheads.
14. A company makes and sells product P. at the current selling price of $6 per unit, weekly demand is
4,000 units. It is estimated that for every $0.50 increase in price, sales demand will fall by 200 units,
and for every $0.50 reduction in price, sales demand will increase by 200 units.
What is the formula for the sales demand curve for this product where p is the sales price and Q is
quantity demanded?
a) P = 6-0.0025Q
b) P = 16-0.0025Q
c) P = 6-0.005Q
d) P = 16-0.005Q

15. The following statements have been made about activity based costing
(1) There may be more than one cost driver for an activity
(2) ABC involves some arbitrary allocation or appointment of overheads costs
Which of the above statements are true?
a) 1 only
b) 2 only
c) Neither 1 nor 2
d) Both 1 and 2
 Next page

SECTION B
ALL 15 QUESTIONS ARE COMPULSORY AND MUST BE ATTEMPTED
The following scenario relates to questions 16-20

Linacre Co
Linacre Co. operates an activity-based costing system and has forecast the following information for the next
year.

Cost pool cost cost diver number of drivers

Production set ups $105,000 set ups 300
Product testing $ 300,000 tests 1,500
Component supply and storage $ 25,000 component orders 500
Customer orders and delivery $ 112,500 customer orders 1,000

General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are
expected to be $900,000 and these overheads are absorbed on a direct labour hour basis. Total direct labour
hours for next year are expected to be 300,000 hours.
Linacre co expects orders for product ZT3 next year to be 100 orders of 60 units per order and 60 orders of 50
units per order. The company holds no inventories of Product ZT3 and will need to produce the order
requirement in production runs of 900 units. One order for components is placed prior to each production
run. Four tests are made during each production run to ensure that quality standards are maintained. The
following profit information relates to Product ZT3:

Component cost $1 per unit

Direct labour 10 minutes per unit at $7.80 per hour
Profit mark up 40% of total unit cost

Required:
16. Calculate the activity based recover rates for production set ups and product testing.
a) Production set up $350 per set up, product testing $600 per test
b) Production set up $350 per set up, product testing $200 per test
c) Production set up $210 per set up, product testing $200 per test
d) Production set up $210 per set up, product testing $1,000 per test
17. Calculate the activity based recovery rates for component supply and storage and customer orders
and delivery.
a) Component supply and storage $50 per order, customer orders and delivery $112.50 per order
b) Component supply and storage $50 per order, customer orders and delivery $225 per order
c) Component supply and storage $25 per order, customer orders and delivery $225 per order
d) Component supply and storage $25 per order, customer orders and delivery $112.50 per order

18. Calculate the general overhead per unit and the direct labour cost per unit of Product ZT3.
a) General overhead $0.50 per unit, direct labour cost $7.80 per unit
 b) General overhead $3 per unit, direct labour cost $1.30 per unit
c) General overhead $3 per unit, direct labour cost $7.80 per unit
d) General overhead $0.50 per unit, direct labour cost $1.30 per unit

19. The following statements are made about Linacre co

(1) The use of a mark up to determine the price and profit per unit of ZT3 may lead to the
incorporation of components which are not valued by the customer.
(2) A target costing approach would place an emphasis on the planning and design stage of products
in Linacre.

Which of the above statements is/are true?

a) 1 only
b) 2 only
c) Neither 1 nor 2
d) Both 1 and 2

20. The following statements have been made about Linacre co

(1) Unlike traditional absorption costing, ABC identifies variable overhead costs in the production of
ZT3, for all allocation to product costs.
(2) ABC can be used as an information source for budget planning based on activity rather than
incremental budgeting.
Which of the above statements is/are true?
a) 1 only
b) 2 only
c) Neither 1 nor 2
d) Both 1 and 2
(total=10 marks)

The following scenario relates to question 21-25.

SH (12/08, amended)
Shifters Haulage (SH) is considering changing some of its vans it uses to transport crtaes for customers.
The new vans come in three sizes; small, medium and large. SH is unsure about which types of van to buy.
The capacity is 100 crates for the small, 150 for the medium van and 200 for the large van.
Demands for the crates varies can be either 120 or 190 crates per period, with the probability of the
higher demand being 0.6.
SH has in the past been very aggressive in its decision making, pressing ahead with rapid growth
strategies. However, its managers have recently grown more cautious as the business has become more
competitive.

Profits table:
Small van Medium van Large van
Capacity 100 150 200
Low demand (120 crates) 300 468 368
High demand (190 crates) 300 500 816

REQUIRED:
21. Using the profits table, state which van SH should buy if the management is is aware.
 a) Small van
b) Medium van
c) Large van
d) Small van and medium van gives the same result

22. Using the profit table, state which van should SH buy if the management is risk taking.
a) Small van
b) Medium van
c) Large van
d) Small van and medium van gives the same result

23. Using the profit table, state which van should SH buy if the management is risk neutral.
e) Small van
f) Medium van
g) Large van
h) Small van and medium van gives the same result

24. The following statements have been made about SH

(1) If the manager in SH are optimistic about the future they will choose the van using maxim in
criteria.
(2) If the managers in SH are pessimistic and becoming more cautious, they will use expected values
to make this decision.

Which of the above statements is/are true?

a) 1 only
b) 2 only
c) Neither 1 nor 2
d) Both 1 and 2

25. Which one of the following would reduce the level of uncertainty for SH in their decision making
process?
a) Expected value analysis
b) Market research
c) Sensitivity analysis
d) Relevant costing

(TOTAL = 10 marks)

The following scenarios relates questions 26- 30

Spinster Co
Spinster has developed a new product. The first batch of 10 units will take 300 labour hours to produce. There
will be an 80% learning curve that will continue until 540 units have been produced. Batches after this level
will each take the same amount of time as the 54 th batch. The batch size will always be 10 units.

Note: the learning index for an 80%learning curve is -0.3219

Ignore the time value of money.

26. Calculate the cumulative average time per batch for the first 54 batches.
 a) 4485.78 hours
b) 83.57 hours
c) 83.07 hours
d) 82.58 hours

27. The total time for the first 16 batches of units was 3,300 hours. What was the actual learning rate
closest to the nearest %?
a) 85%
b) 91%
c) 90%
d) 87%
28. Once a steady state was reached in production, Spinster Co set the standard costs for the new
product. Which if the following best describes and attainable standard?
a) A standard which can be attained under perfect operating conditions
b) A standard based on current working conditions
c) A long term standard which remains unchanged over the years and is used to show trends
d) A standard which can be achieved if production is carried out efficiently, machines are
properly operated and / or materials are properly used.

29. The staff at Spinster Co received incentives based on monthly variances analysis. Six months aster the
setting of the new standards for the new product, the operating manager reported back to the board
to say that despite unfavourable variances being reported each month, the staff seemed less
motivated to improve the situation in month six, than they were after the first couple of months.

Based on this information, which of the following standards do you think was applied to the new product.

a) Ideal
b) Attainable
c) Current
d) Basic

30. Spinster Co wish to improve their standard costing system by holding managers accountable for the
costs over which they have some influence. Which of the following costs are not controllable by a
production department manager?
a) Variable production overheads
b) Direct labour rate
c) Increases in overall material costs due to high level of wastage caused by poor supervision of
production workers
d) An increase in the level of idle time because of poorly maintained machines by the
production department
(total = 10 marks)

SECTION C
BOTH QUESTIONS ARE COMPULSARY AND MUST BE ATTEMPTED

31 PC Co (12/11)
You have recently been appointed a s an assistant management accountant in a large company, PC Co. when
you meet the production manager, you over hear him speaking to one of his staff, saying:

Budgeting is a waste of time. I don’t see the point of it. It tells us what we can’t afford but it doesn’t keep us
from buying it. It simply makes us invent new ways of manipulating figures. If all levels of management aren’t
involved in the setting of the budget, they might as well not bother preparing one.

Required

(a) Identify and explain SIX objectives of a budgetary control system (9marks)
(b) Discuss the concept of a participative style of budgeting in terms of the six objectives identified in
part (a). (11 marks)
(total = 20 marks)

Rotech group (6/14)

The Rotech group comprises of two companies, W co and C co.

W co is trading company with two divisions: the design division, which designs wind turbines and supplies the
designs to customers under licences and the gearbox division, which manufactures gearboxes for the car
industry.

C co manufactures components for gearboxes, it sells the components globally and also supplies W co with
components for its gearbox manufacturing division.

The financial results for the two companies for the year ended 31 st May 20x4 are as follows:

W Co C Co

Design division Gearbox division

$000 $000 $000,

External sales 14,300 25,535 8,010

Sales to Gearbox division 7,550

Cost of sales (4,900) (16,200)* (5,280)

Administration costs (3,400) (4,200) (2,600)

Distribution costs - (1,260) (670)

Operating profit 6,000 3,875 7,010

Capital employed 23,540 32,320 82,975

*includes cost of components purchased from C Co.

Required
 (a) Discuss the performance of C Co and each division of W Co, calculating and using the following three
performance measures:
i. Return on capital ( ROCE)
ii. Asset turnover
iii. Operating profit margin

NOTE: there are 4.5 marks available for calculations and 5.5 marks available for discussion. (10 marks)

(b) C Co is currently working to full capacity. The Rotech group’s policy is that group companies and
divisions must always make internal sales first before selling outside the group. Similarly, purchases
must be made from within the group wherever possible. However, the group divisions and companies
are allowed to negotiate their own transfer prices without interference from head Office.

C Co has always charged the same price to the Gearbox division as it does to its external customers. However,
after being offered a 5% lower price for similar components from an external supplier, the manager of the
Greabox division feels strongly that the transfer price is too high and should be reduced. C Co currently
satisfies 60% of the external demand for its components. Its variable costs represent 40% of revenue.

Required

Advise, using suitable calculations, the total transfer price or prices at which the components should be
supplied to the Gearbox division from C Co. (10 marks)

(Total = 20 marks)