CIMA P1 Step 06 (0922)

Step06
Question 1 of 60

Jetson Ltd (Jetson) produces three products:

George Elroy Jane

Sales price $60 $75 $85
Material cost $15 $30 $22
Labour cost @ $6 per hour $33 $27 $48
Demand 10,000 units 8,000 units 9,000 units

Labour is restricted to 120,000 hours. In order to meet demand, Jetson is considering using a
subcontractor to produce the products that cannot be produced in-house due to the restriction on
labour hours. The subcontractor has prepared the following quote:

George = $55

Elroy = $66

Jane = $82

Calculate the number of units of George that will be manufactured in-house.

0
2,181
7,819
10,000

1 out of 1

The correct answer is: 2,181 units.

Labour is a limiting factor. Therefore, to determine the order of production the saving per limiting
factor of manufacturing in-house for each product must be calculated:

George Elroy Jane

$ $ $
Subcontractor 55 66 82
Variable costs 48 57 70
Saving 7 9 12
Labour hours 5.5 4.5 8.0
Saving/hour 1.27 2.00 1.50

Elroy has the greatest saving of manufacturing in-house per labour hour so should be prioritised to
be manufactured in-house, followed by Jane, then George.

8,000 units of Elroy = 36,000 hrs (84,000 hours remaining)

9,000 units of Jane = 72,000 hrs (12,000 hours remaining)

12,000 hrs / 5.5 hrs per George = 2,181 units of George can be produced in-house.
Step06
Question 2 of 60

K Co makes many products, one of which is Product Z. K Co 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:

Budget category Budgeted cost $ Cost driver details

Set-up costs 22,000 88 set-ups each month
Quality testing costs* 34,000 40 tests each month

* A quality test is performed after every 75 units produced.

The following data for Product Z is provided:

Batch size 30 units

Set-ups 2 set-ups per batch

The budgeted production volume for Product Z for October is 150 units.

Calculate the budgeted overhead cost per unit of Product Z for October using an activity-based
costing approach.

$1

0 out of 1

The correct answer is: $28

Budgeted overhead unit cost of Product Z for October using an activity-based approach:

Working 1:

Set-up costs $22,000 × 88 set-ups per month = $250 per set-up

Quality testing $34,000 × 40 tests per month = $850 per test

Overheads per unit $4,200/150 units = $28

Product Z requires 5 batches (150/30) and therefore 10 set-ups (2 per batch) costing 10 × $250 =
$2,500.

Product Z requires 2 quality tests as one is required after 75 units (150/75 = 2) costing 2 × $850
= $1700

Total overheads = $4,200/150 units = $28 per unit

Step06
Question 3 of 60

The performance of three divisions is detailed below:

Division A Division B Division C Total

$£000 $£000 $£000 $£000
Sales 300 840 700 1,840
Variable costs (240) (420) (560) (1,220)
Contribution 60 420 140 620
Fixed overheads (525)
Net profit 95

Fifty per cent of the fixed overhead are specific to an individual division. Each division incurs the
same level of specific overhead.

Which divisions should continue to operate if the company objective is to maximise profits?

All of the divisions

Division A and Division B only
Division B only
Division B and Division C only

0 out of 1

The correct answer is: Division B and Division C only

The contribution of each division towards profits can be recalculated taking into account fixed
costs which relate to each division:

Division A Division B Division C Total

$£000 $£000 $£000 $£000
Sales 300 840 700 1,840
Variable costs (240) (420) (560) (1,220)
Specific fixed overheads (87.5) (87.5) (87.5) (262.5)
Contribution (27.5) 332.5 52.5 357.5
General fixed overheads (262.5)
Net profit 95

Divisions B & C make a positive contribution (towards general overheads and profits) and so
should continue, whereas Division A is making a negative contribution and so profits should
increase once it is shut down.
Step06
Question 4 of 60

In the context of Big Data, what is an algorithm?

An IT expert who analyses data to solve a problem

A source of Big Data which can be used to solve a problem
A set of rules which is used to solve a problem
A piece of hardware which is used to solve a problem

0 out of 1

The correct answer is: A set of rules which is used to solve a problem.

An algorithm is a piece of computer code or software which is written by a data analyst. Its role is
to follow a set of rules in an attempt to solve a problem. In the context of Big Data, this involves
the analysis of large volumes of data in an attempt to find patterns and correlations that were
previously unknown.

Step06
Question 5 of 60

A company uses an overhead absorption rate of $3.50 per machine hour, based on 32,000
budgeted machine hours for the period. During the same period the actual total overhead
expenditure amounted to $108,875 and 30,000 standard machine hours were recorded on actual
production.

By how much was the total overhead under- or over-absorbed for the period?

Under-absorbed by $3,875
Under-absorbed by $7,000
Over-absorbed by $3,875
Over-absorbed by $7,000

1 out of 1

The correct answer is: Under-absorbed by $3,875

$
Absorbed overhead (30,000 hours × $3.50) 105,000
Actual overhead 108,875
Under-absorbed overhead 3,875
Step06
Question 6 of 60

A decision tree is a way of representing decision choices in the form of a diagram. It is usual for
decision trees to include probabilities of different outcomes. The following statements have been
made about decision trees.

(a) Each possible outcome from a decision tree is given an expected value.

(b) Each possible outcome is shown as a branch on a decision tree.

Which of the above statements is/are true?

(a) only
(b) only
Neither (a) nor (b)
Both (a) and (b)

0 out of 1

The correct answer is: (b) only

The decision options are given expected values, not the various different possible outcomes from
each decision option. Each possible outcome is given a value, but not an expected value (EV).
Step06
Question 7 of 60

The assembly production department has budgeted machine hours of 6,500 and budgeted
overhead costs of $42,900. Overheads are absorbed using machine hours as the overhead
absorption rate.

The actual machine hours were 6,350 and the actual overheads were $40,620.

The overheads for the period were:

Under-absorbed by $1,290
Over-absorbed by $1,290
Under-absorbed by $980
Over-absorbed by $980

0 out of 1

The correct answer is: Over-absorbed by $1,290

Step 1: Calculate the OAR = $42,900/6,500 hours = $6.6 per machine hour
Step 2: Calculate the fixed overhead absorbed = $6.6 × 6,350 machine hours = $41,910
Step 3: Compare to actual fixed overhead incurred ($40,620)
Over-absorption × because amount absorbed > incurred $1,290
Step06
Question 8 of 60

One of the products manufactured by a company is Product J, which sells for $110 per unit and has
a material cost of $20 per unit and a direct labour cost of $17 per unit. The total direct labour
budget for the year is 50,000 hours of labour time at a cost of $20 per hour. Factory overheads are
$1,500,000 per year.

The company is considering the introduction of a system of throughput accounting.

What is the throughput return for Product J?

$8

0 out of 1

The correct answer is: 90

Throughput contribution per unit of J = $110 - $20 = $90

Materials are the only variable cost in a throughput accounting system.

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Question 9 of 60

Which THREE of the following statements regarding relevant costs are true?

An opportunity cost is defined as the relevant cost of taking a business opportunity.

The net relevant cash flow for a potential product will not necessarily be the same as the
projected profit from the same product.
Business decisions should be taken on the basis of whether they improve profit or reduce
costs.
Making decisions using relevant costing principles will mean that the company is always
profitable.
Relevant costing principles provide a better basis than profit calculations for making short-
term decisions because many costs are fixed in the short run.
Incremental fixed costs should be included in a schedule of relevant costs.

0 out of 1

The correct answers are:

The net relevant cash flow for a potential product will not necessarily be the same as the
projected profit from the same product.
Relevant costing principles provide a better basis than profit calculations for making short-
term decisions because many costs are fixed in the short run.
Incremental fixed costs should be included in a schedule of relevant costs.

The different assumptions will mean that a product could show a positive net relevant cash flow
whilst as the same time making a loss under traditional costing principles. A relevant cash flow
calculation is based on future incremental cash flows, whilst a profit calculation would include
accruals concepts and accounting estimates.

Relevant costs would include incremental fixed costs as these arise as a result of the decision
being considered, but not apportioned fixed overheads, which would be deemed to occur
regardless of whether the project goes ahead.
Step06
Question 10 of 60

Ship Co manufactures a single product and has drawn up the following flexed budget for the year.

Level of activity
65% 75% 85%
$ $ $
Direct materials 25,870 29,850 33,830
Direct labour 45,500 52,500 59,500
Production overhead 36,250 39,750 41,250
Other overhead 50,000 50,000 50,000
Total cost 157,620 172,100 184,580

What would be the total cost in a budget that is flexed at the 70% level of activity?

$114,360
$165,898
$165,860
$164,360

0 out of 1

The correct answer is: $164,360

The workings have been split into the four expense categories; however, in the exam it would be
quicker to do one high-low calculation based on the total cost at the highest and lowest level of
activity.

Direct materials × variable at $398 per %

Direct labour × variable at $700 per %

Other overhead × fixed at $50,000

Production overhead × semi-variable therefore using the high-low method:

% $
High 85 41,250
Low 65 36,250
Difference 20 5,000
Step06
Question 11 of 60

A company manufactures four products using Material L, which is in short supply.

The following budget data relates to the products:

Product A Product B Product C Product D

$/per unit $/per unit $/per unit $/per unit
Selling price 210 198 230 205
Material K cost
$4 per kg 32 40 40 28
Material L cost
$2 per kg 18 16 22 20
Labour costs 34 24 25 58
Contribution per
unit 126 118 143 99

Rank the following products for manufacture to maximise profit for the products

Production A
1st ▼ Production B 4th ▼ Production C 2nd ▼ Production D ▼

0 out of 1

The correct answer is:

Product Rank
B 1st
A 2nd
C 3rd
D 4th
Product A Product B Product C Product D
$/per unit $/per unit $/per unit $/per unit
Contribution per
unit 126 118 143 99
Kgs of L 9 8 11 10
Contribution per
unit of L 14 14.75 13 9.9
Rank 2 1 3 4
Step06
Question 12 of 60

A company makes two products, R and S. Each product earns a contribution of $6 per unit. Direct
labour and machine hours are both effective limiting factors on production and sales.

Relevant information is as follows:

Product R Product S Total available per

per unit per unit period
Direct labour hours 0.4 0.8 36,000 hours
Machine hours 0.2 0.1 12,000 hours

The maximum contribution achievable is $420,000, by making and selling 50,000 units of R and
20,000 units of S.

What is the shadow price of a direct labour hour?

$3.75
$5.00
$7.50
$15.00

0 out of 1

The correct answer is: $5.00

If one more labour hour is available, contribution will be maximised where:

(1) 0.4R + 0.8S = 36,001

(2) 0.2R + 0.1S = 12,000
Multiply (2) by 2
(3) 0.4R + 0.2S = 24,000
Subtract (3) from (1): 0.6S = 12,001
S = 20,001.667
Substitute into (2). 0.2R + (20,001.667 X 0.1) = 12,000
R = 49,999.166
Total contribution = (20,001.667 X $6) + (49,999.166 X $6) = $420,004.998
Contribution without additional hour = $420,000
This is an increase in contribution of $5, therefore the shadow price is $5.
Step06
Question 13 of 60

A budget that is continuously updated by adding a further accounting period (a month or a

quarter) when the earlier accounting period has expired is known as a:

Zero-base budget
Rolling budget
Periodic budget
Flexible budget

0 out of 1

The correct answer is: Rolling budget

Sometimes this is known as a continuous budget as the budget period is continually being
extended.
Step06
Question 14 of 60

Which of the following statements are true?

(a) A flexed budget allows businesses to evaluate a manager’s performance more fairly.

(b) A fixed budget is useful for defining the broad objectives of the organisation.

(c) Relying on fixed budgets alone would usually give rise to large variances.

(a) and (c)

(a) and (b)
(b) and (c)
(a), (b) and (c)

0 out of 1

The correct answer is: (a), (b) and (c)

Statement (a) is true because certain factors are often outside of the manager's control. The level
of sales will be out of a production manager's control and a flexed budget will account for this.

Statement (b) is true because the purpose of a fixed budget is at the planning stage when it seeks
to define the broad objectives of the organisation.

Statement (c) is true because forecast volumes are very unlikely to be equal to actual volumes
and so the variances will contain large volume differences.
Step06
Question 15 of 60

Which of the following factors should be considered when developing visualisation within a report?

Preparing a message that any stakeholder group will understand

Ensuring that the format, colour and size always follow a standard template
Communicating as much information as possible in the space available
Using format, colour and size to improve perception

0 out of 1

The correct answer is: Using format, colour and size to improve perception

The visualisation should not be generic, but should be tailored to the specific stakeholder group
(intent). Format, colour and size should be used to tailor the visualisation × designers should not
be constrained by a single, standard template (perception). The message should be clear and
uncluttered (simplicity) rather than crammed full of as much information as possible.
Step06
Question 16 of 60

Simon plans to sell 16,000 items of stationery in May 20X9. His budget is to sell pens, rulers and
pencils in the ratio 5:1:2.

The actual and standard contribution per item, along with their sales prices, is provided below:

$ Actual contribution Standard contribution Sales price

Pen 0.50 0.40 1.50
Ruler 1 1.50 4
Pencil 0.25 0.2 0.5

In May 20X9 he sold 9,000 pens, 3,500 rulers and 5,500 pencils.

The Sales mix variance for May 20X9 was:

$ ▼

0 out of 2

The correct answer is: $1,175 Favourable

The sales mix variance is comparing total sales in the actual mix to that level of sales in the
budgeted mix.

x standard
Actual sales Actual Favourable
contribution
Product at standard quantity in Difference Variance (F)/
per unit $
mix (W1) actual mix Adverse (A)
(W2)
Pens 11,250 9,000 2,250 (A) $0.4 $900 (A)
Rulers 2,250 3,500 1,250 (F) $1.5 $1,875 (F)
Pencils 4,500 5,500 1,000 (F) $0.2 $200 (F)
Total 18,000 18,000 $1,175 (F)

(w1) Actual sales in the standard mix:

Pens 18,000 x (5/(5 + 1 + 2)) = 11,250

Ruler 18,000 x (1/(5 + 1 + 2)) = 2,250
Pencils 18,000 x (2/(5 + 1 + 2)) = 4,500
Step06
Question 17 of 60

A company wishes to go ahead with one of two mutually exclusive projects, but the profit/ (loss)
outcome from each project will depend on the strength of the sales demand, as follows:

Strong Moderate Weak

demand demand demand
$ $ $
Project 1 80,000 50,000 (5,000)
Project 2 60,000 25,000 10,000
Probability of demand 0.2 0.4 0.4

The company could purchase market research information, at a cost of $4,500. This would predict
demand conditions with perfect accuracy.

What is the net value of perfect information to the company, after allowing for market research
costs?

$ 89

0 out of 1

The correct answer is $1,500

EV of Project 1 = (0.2 × 80,000) + (0.4 × 50,000) × (0.4 × 5,000) = $34,000

EV of Project 2 = (0.2 × 60,000) + (0.4 × 25,000) + (0.4 × 10,000) = $26,000

Project 1 would be chosen on the basis of EV without perfect information. With perfect information
the right decision would be made at each level of demand × ie Project 1 if demand was forecast to
be strong or moderate and Project 2 if weak demand was forecast.

EV with perfect information = (0.2 × 80,000) + (0.4 × 50,000) + (0.4 × 10,000) = $40,000
EV without perfect information = $34,000
Therefore value of perfect information (VOPI) = $6,000
Less cost of information ($4,500)
Value of perfect information to the company $1,500
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Question 18 of 60

Your company regularly uses Material X and currently has in inventory 500 kgs for which it paid
$1,500 two weeks ago. If this were to be sold as raw material, it could be sold today for $2.00 per
kg. You are aware that the material can be bought on the open market for $3.25 per kg, but it
must be purchased in quantites of 1,000 kgs.

What is the relevant cost of 600kg needed to be used in a job for a customer?

$1,325
$1,825
$1,950
$3,250

1 out of 1

The correct answer is: $1,950

The material is in regular use so the relevant cost is 500 kg in inventory at the replacement cost of
$3.25. The other 100 will need to be purchased at a cost of $3.25.

The total is therefore 600 × 3.25 = $1,950.

If you selected $1,325 you valued the inventory at their resale value. The items are in regular use
so they would not be resold.

$1,825 values the items at their original purchase price but this is a sunk cost.

$3,250 is the cost of the full 1,000 kg that must be purchased. However, as the material is
regularly used it can be kept in inventory till needed.
Step06
Question 19 of 60

A company is launching a new product. In order to manufacture this new product, two types of
labour are required. The new product required five hours of skilled labour and five hours of semi-
skilled.

A skilled employee is available and is currently paid $10 per hour. A replacement would, however,
have to be obtained at a rate of $9 per hour for the work that would otherwise be done by the
skilled employee. The current rate for semi-skilled workers is $5 per hour and an additional
employee would be appointed for this work.

What is the relevant cost of labour to be used in making one unit of the new product?

$45
$50
$70
$75

1 out of 1

The correct answer is: $70

The rate of $10 per hour is not relevant because it would be paid anyway. The relevant hourly rate
is the incremental cost of $9 per hour.

Skilled labour 5 hours × $9 = 45

Semi-skilled 5 hours × $5 = 25
Total = $70

If you chose $45 you missed out the semi-skilled labour.

If you chose $50 you costed all of the hours at the $10 per hour which is the rate for the skilled
employee, but not the relevant one in this scenario.

If you chose $75 you then added the 5 hours at $5 to this $50. In other words all hours were
costed using normal hourly rates.
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Question 20 of 60

RT plc sells three products.

Product R has a contribution to sales ratio of 30%.

Product S has a contribution to sales ratio of 20%.

Product T has a contribution to sales ratio of 25%.

Monthly fixed costs are $100,000.

If the products are sold in the ratio:

R:2S:5T:3

What is the monthly breakeven sales revenue?

Give your answer to the nearest whole thousand.

$ 534

0 out of 1

The correct answer is: $426,000

(2 × 30%)+(5 × 20%)+(3 × 25%)

Weighted average C/S ratio = = 23.5%
(2 + 5 + 3)

At breakeven point, contribution = fixed costs = $100,000

? Breakeven revenue = $100,000/0.235 = $425,532

Therefore the answer is $426,000.

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Question 21 of 60

Production output by a manufacturing company is restricted by a shortage of supplies of Material

X and skilled labour Y. Material X costs $10 per kg.

It has been determined using linear programming that at the profit-maximising level of output, all
available quantities of Material X would be fully utilised and the shadow price (dual price) of
Material X would be $6 per kg. Skilled labour Y has a shadow price of $0, but existing staff would
be willing to work overtime for an additional $2 per hour.

Another supplier has now offered to supply additional quantities of Material X, but at a price of $14
per kg.

Would the company increase profits by:

1. Purchasing Material X at the higher price?

2. Employing skilled labour Y to work overtime?

Buy extra Material X Pay labour Y to work overtime

A No Yes
B No No
C Yes Yes
D Yes No
A
B
C
D

0 out of 1

The correct answer is: D

Buy extra Material X Pay labour Y to work overtime

D Yes No

The shadow price of Material X is $6, so buying additional quantities at a price $4 above its normal
variable cost would add $2 to profit for each kg of material bought and used. (However, this
applies only as long as the shadow price of Material X remains at $6 per kg.) The shadow price of
skilled labour Y is $0, which means that available amounts of time are not fully utilised. There is no
requirement to work overtime.
Step06
Question 22 of 60

The following data relate to Product J and its raw material content for May:

Budget
Output 20,000 units of J
Standard labour hours 3 hours at $12.00 per labour hour
Actual
Output 18,000 units of J
Labour hours worked and paid 50,000 hours at $14.00 per labour hour

It has now been agreed that following a pay rise awarded at the end of April the standard labour
rate should be $13.50 per labour hour. The standard time to produce a unit has not changed.

The labour rate planning variance for May was:

Adverse ▼

1 out of 1

The correct answer is: $81,000 Adverse

$
Actual labour hours should cost ($12 × 18,000 × 3 hours) 648,000
Actual labour hours @ revised standard cost ($13.50 × 18,000 × 3 hours) 729,000
Variance 81,000 Adverse
Step06
Question 23 of 60

The following statements have been made about linear programming analysis:

(a) The sales price of units produced and sold may be a constraint in a linear programming
problem.

(b) If a constraint is 0.04x + 0.03y < 2,400,="" the="" boundary="" line="" for="" the=""
constraint="" can="" be="" drawn="" on="" a="" graph="" by="" joining="" up="" the=""
points="" x="80,000" and="" y="60,000" with="" a="" straight="">

Which of the above statements is/are true?

(a) only
(b) only
Neither (a) nor (b)
Both (a) and (b)

1 out of 1

The correct answer is: Neither (a) nor (b)

Neither (a) nor (b) are correct. Sales price (for maximising revenue) or sales price minus variable
cost (for maximising contribution) affects the objective function rather than constraints. If a
constraint is 0.04x + 0.03y < 2,400, the boundary line for the constraint can be drawn on a graph
by joining up the points:

x = 2,400/0.04 = 60,000 and y = 2,400/0.03 = 80,000 with a straight line.

Step06
Question 24 of 60

A company uses linear programming to decide on the production and sales budget that will
maximise total contribution and profit for a financial period. The optimal solution involves using all
available direct labour hours, for which the shadow price is $4.50 per hour, and machine hours, for
which the shadow price is $3 per machine hour. Direct labour is paid $8 per hour.

If the objective of the company is to maximise total contribution and profit in each period, how
much should the company be willing to pay per hour to obtain additional direct labour hours of
production capacity?

Up to but not including $4.50

Up to but not including $9.50
Up to but not including $12.50
Up to but not including $15.50

0 out of 1

The correct answer is: Up to but not including $12.50

The shadow price of a limiting resource is the amount above the normal variable cost that will be
added to the objective function (total contribution) if one extra unit of the resource is made
available. This means that the company would increase contribution by paying up to $(8 + 4.50) =
$12.50 per hour for additional labour time. However, it would not pay exactly $12.50, as this
would leave it no better and no worse off than if it did not have the extra labour hour.
Step06
Question 25 of 60

M is preparing its budgets for next year and has collected the following data concerning its vehicle
running costs:

Cost Kilometres
$£000 000
100 400
96 380
148 640

If cost price levels and cost structures are expected to be unchanged, the budget cost allowances
for 490,000 kilometres is nearest to:

$98,000
$113,000
$118,000
$122,000

1 out of 1

The correct answer is: $118,000

Using the high-low method we can determine fixed and variable costs

Cost Kilometres
$ 000
High 148,000 640
Low (96,000) 380
Difference 52,000 260

Variable cost = = $0.20 per kilometre

Cost
$
Total cost of 640,000 kilometres 148,000
Variable cost of 640,000 kilometres (' $0.2 per km) 128,000
Fixed cost 20,000
Budgeted cost allowance $
Variable 490,000 × $0.20 98,000
Fixed 20,000
118,000
Step06
Question 26 of 60

Y has set the current budget for operating costs for its delivery vehicles using the formula
described below. Analysis has shown that the relationship between miles driven and total monthly
vehicle operating costs is described in the following formula:

y = $800 + $0.0002x2

Where
y is the total monthly operating cost of the vehicles, and
x is the number of miles driven each month

The budget for vehicle operating costs needs to be adjusted for expected inflation in vehicle
operating costs of 3%, which is not included in the relationship shown above.

The delivery mileage for September was 4,100 miles, and the total vehicle operating costs for
September were $5,000.

The total vehicle operating cost variance for September was closest to:

$713 Adverse
$737 Adverse
$777 Adverse
$838 Adverse

1 out of 1

The correct answer is: $713 Adverse

Substituting the delivery mileage in the formula

Y = $800 + $0.0002 × 4,1002

Y = $800 + $3,362 = $4,162

Adjusting for expected inflation of 3%

Y = $4,162 × 1.03 = $4,287

Operating costs should have been $4,287 and they are $5,000. Therefore, the total vehicle
operating cost variance is closest to $713 Adverse ($5,000 × $4,287).
Step06
Question 27 of 60

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

to be specifically justified ▼ , as though the activities to which the budget relates
were being undertaken for the first time ▼ '

1 out of 1

The correct answer is:

'Zero-based budgeting: A method of budgeting which requires each cost element to be specifically
justified, as though the activities to which the budget relates were being undertaken for the first
time.'

The principle behind zero-based budgeting is that the budget for each cost centre should be
prepared from 'scratch' or zero (not to be set at zero). Every item of cost must be justified to be
included in the budget for the forthcoming period.
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Question 28 of 60

The following details have been extracted from the receivables collection records of L Co.

%
Invoices paid in the month after sale 70
Invoices paid in the second month after sale 20
Invoices paid in the third month after sale 8
Bad debts 2

Invoices are issued on the last day of each month.

Customers who pay a month after sale are entitled to a 3% discount.

Credit sales values for June to September 20X9 are budgeted as follows:

June July August September

$52,500 $60,000 $90,000 $67,500

The amount budgeted to be received in September 20X9 from credit sales is:

$ 98

0 out of 1

The correct answer is: $77,310

August sales 70% × $90,000 × 97% 61,110

July sales 20% × $60,000 12,000
June sales 8% × $52,500 4,200
77,310
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Question 29 of 60

The activity levels and production costs for the last six months of 20X1 are as follows:

Activity level Cost

$
July 63,000 608,000
August 70,000 642,000
September 76,000 699,000
October 73,000 677,000
November 71,000 652,000
December 68,000 623,000

The cost at 74,000 units is:

$ 55

0 out of 1

The correct answer is: $685,000

Using the high-low method:

Highest output = 76, 000 and lowest = 63,000. As output changes by 13,000 (76,000 × 63,000)
cost changes by $699,000 - $608,000 = $91,000. So variable costs = $91,000 / 13,000 = $7 per
unit.

If the total cost of 63,000 units is $608,000 and the variable element of this $441,000 ($7 ×
63,000) then fixed costs are $608,000 - $441,000 = $167,000.

Therefore for 74,000 units = 167,000 + (7 × 74,000) = 685,000.

Step06
Question 30 of 60

Trafalgar Limited budgets to produce 10,000 units of product D12, each requiring 45 minutes of
labour. Labour is charged at $20 per hour, and variable overheads at $15 per labour hour. During
September 20X3, 11,000 units were produced; 8,000 hours of labour were paid at a total cost of
$168,000. Variable overheads in September amounted to $132,000.

What is the correct labour efficiency variance for September 20X3?

$5,000 (A)
$5,000 (F)
$5,250 (F)
$10,000 (A)

0 out of 1

The correct answer is: $5,000 (F)

The correct labour efficiency variance is calculated by comparing budgeted hours with actual
hours spent for actual production.

Hours
11,000 units should use @ 0.75 hours 8,250
11,000 units did use 8,000
Difference 250
Valued @ standard cost per hour $20 $5,000 (F)
Step06
Question 31 of 60

The fixed overhead volume variance is defined as:

The difference between the budgeted value of the fixed overheads and the standard fixed
overheads absorbed by actual production
The difference between the standard fixed overhead cost specified for the production
achieved, and the actual fixed overhead cost incurred
The difference between budgeted and actual fixed overhead expenditure
The difference between the standard fixed overhead cost specified in the original budget and
the same volume of fixed overheads, but at the actual prices incurred

0 out of 1

The correct answer is: The difference between the budgeted value of the fixed overheads and the
standard fixed overheads absorbed by actual production

Fixed overhead volume variance is a measure of the over- or under-absorption of fixed overhead
cost caused by actual production volume differing from that budgeted. It is calculated as the
difference between actual and budgeted production (volume) multiplied by the standard
absorption rate per unit.

The difference between budgeted and actual fixed overhead expenditure is incorrect because it
refers to fixed overhead expenditure variance which is calculated as the difference between the
budgeted fixed overhead expenditure and the actual fixed overhead expenditure. The difference
between the standard fixed overhead cost specified for the production achieved, and the actual
fixed overhead cost incurred is incorrect because it refers to the fixed overhead total variance
which is the difference between fixed overhead incurred and fixed overhead absorbed.
Step06
Question 32 of 60

AD Ltd manufactures and sells a single product, E, and uses a standard absorption costing system.
Standard cost and selling price details for Product E are as follows.

$ per unit
Variable cost 8
Fixed cost 2
10
Standard profit 5
Standard selling price 15

The sales volume variance reported for last period was $9,000 adverse.

AD Ltd is considering using standard marginal costing as the basis for variance reporting in future.

What would be the correct sales volume variance to be shown in a marginal costing operating
statement for last period?

$ ▼

1 out of 2

The correct answer is: $12,600 Adverse

Sales volume variance under absorption costing is the difference between budgeted and actual
units × standard profit per unit.

Variance = $9,000 (A)

Std profit = $5
? difference in units = 1,800
To calculate sales volume variance under marginal 1,800 × $7 (standard
=
costing contribution)
= $12,600 Adverse
Step06
Question 33 of 60

In order to indicate to managers the trend and materiality of variances, B plc expresses them as
percentages as in the following examples.

July Aug Sep Oct Nov

% % % % %
Material usage variance as a percentage of standard total production
3(F) 2(A) 6(A) 10(A) 12(A)
cost
Material price variance as a percentage of standard cost of material
1(A) 2(A) 7(F) 8(F) 9(F)
used

(A) denotes an adverse variance; (F) denotes a favourable variance

The following statements relate to recent operational events:

(a) In September the buyer located a new supplier who charged a lower price than the previous
supplier. The material was found to be of low quality, however, leading to a high level of waste.

(b) The general trend is that all direct material variances are becoming more significant and are
likely to be worthy of management attention.

(c) A change in the bonus payment scheme has improved the productivity of labour, who are now
processing material more effectively.

Which of the statements is/are consistent with the results shown?

Statements (a) and (b) only

Statements (a) and (c) only
Statements (b) and (c) only
Statement (b) only

0 out of 1

The correct answer is: Statements (a) and (b) only

Statement (a) is consistent with the variances because a fairly large favourable price variance
arose at the same time as an adverse usage variance, which could have been caused by the
higher wastage.

Statement (b) is consistent with the variances because the trend is towards higher percentage
variances. Even if these variances are still within any control limits set by management, the
persistent trend is probably worthy of investigation.

Statement (c) is not consistent with the variances because more effective use of material should
produce a favourable usage variance.
Step06
Question 34 of 60

The accountant at HAL Ltd is examining her operating statement for January 20X0.

The statement includes a sales quantity variance of $400 (Favourable)

Actual sales were 1,000 quarks and 500 Higgs-Bosons, which was in proportion to the budgeted
mix. The standard profit on a Quark is $2 per item and on a Higgs-Boson is $3 per item.

The budgeted sales of Quarks for the month of January 20X0 (to the nearest whole unit) was:

55 units

0 out of 1

The correct answer is: 884 units

The sales quantity variance compares actual quantity in the standard mix with standard quantity
in the standard mix (ie budgeted sales).

If budgeted sales are 'X', then sales of Quark = (1000/1500 = ) 2/3 X; and

Sales of Higgs-Boson = (500/1500 = ) 1/3 X.

Actual sales x Standard

Budgeted in the profit per
sales standard mix Difference unit (w2) Variance
(units) (units) (units) $ $
Quark (2/3) X 1000 1000 × [(2/3 X] 2 2000 × (4/3 x)
Higgs-Boson (1/3) X 500 500 × [(1/3 X)] 3 1,500 × X
Total X 1,500 400

2,000 × (4/3)X + 1,500 × X = 400

93,500 × (7/3)X = 400

(7/3) X = 3,100

X = 3,100 × (3/7) = 1328.57

If total budgeted sales = 1328.57 items, then budgeted sales of Quarks = 1328.57 × (2/3) =
883.71, or 884 to the nearest whole number.
Step06
Question 35 of 60

Extracts from the flexible budgets of a manufacturing company are as follows.

Production and sales quantity 5,000 units 7,000 units

Budget cost allowance $£000 $£000
Material costs 50 70
Labour costs 65 77
Production overheads 80 84
Administration costs 35 35
Selling and distribution costs 15 19
Total cost allowance 245 285

What would be the total expenditure incurred in a period when 6,000 units are produced and
5,500 units are sold?

$234,000
$250,500
$263,500
$264,000

0 out of 1

The correct answer is: $264,000

Production Selling
costs costs
$£000 $£000
Cost of 7,000 units 231 19
Cost of 5,000 units 195 15
Variable cost of 2,000 units 36 4
Variable cost per unit $18 $2
$£000 $£000
Total cost of 5,000 units 195 15
Variable cost of 5,000 units 90 10
Fixed costs 105 5
$£000
Variable cost of making 6,000 units (' $18) 108
Variable cost of selling 5,500 units (' $2) 11
Fixed costs (105 + 35 + 5) 145
Total budgeted cost allowance 264
Step06
Question 36 of 60

A control system that reacts to historical changes in the business environment, usually to maintain
a desired state of operations, is known as:

Feedback control
Feedforward control
A rolling budget
Top-down control

0 out of 1

The correct answer is: Feedback control

An example of feedforward control is using the information from a forecast, rather than a historical
result, to decide on appropriate control measures. Feedback is where past actual figures have
been compared to a plan and this has necessitated making corrective action going forward. A
rolling budget is a budget model that is regularly updated to take account of a changing
environment. Top-down is a form of control where the budget is imposed upon the lower levels of
the organisation from those above.

Step06
Question 37 of 60

In the context of data visualisation, what is framing?

The way in which information is presented

A form of cognitive bias towards information
Information that has been presented in a biased way
Decision making based only on objective factors

1 out of 1

The correct answer is: A form of cognitive bias towards information

Framing is a psychological concept that is observed when a decision maker reacts differently to
the same basic information presented or 'framed' in a certain way. Note that 'framing' refers to the
cognitive bias, not the information itself.
Step06
Question 38 of 60

Which TWO of the following statements apply to feedforward control?

It is the measurement of differences between planned outputs and actual outputs.

It is the measurement of differences between planned outputs and forecast outputs.
Cash budgeting is an example.
Variance analysis is an example.
Throughput accounting is an example.

0 out of 1

The correct answers are:

It is the measurement of differences between planned outputs and forecast outputs.

Cash budgeting is an example.

Feedforward control involves looking at projected future results or forecast results and comparing
those to budgeted or planned results, with the aim of making a correction now to get back on
course if deviations are envisaged. Cash budgeting would be an example of this, for example
delaying discretionary expenditure if this would create a cash shortage.
Step06
Question 39 of 60

The following statements relate to the use of Activity Based Costing in a service environment.

Which TWO statements are true?

ABC is easier to use in a service environment than a manufacturing environment as ABC

directly measures activity
ABC is more useful than traditional absorption costing is all overheads are driven by the
volume of labour hours involved in the provision of service
ABC should give an improved cost per unit of service compared to traditional absorption
costing if the majority of costs are facility sustaining costs
ABC is more costly to implement in a service business than traditional absorption costing
ABC improves inventory valuation in a service business
ABC should improve pricing decisions in a service business when based on cost plus.

0 out of 1

The correct answer are: 1,110 Favourable

ABC is more costly to implement in a service business than traditional absorption costing
ABC should improve pricing decisions in a service business when based on cost plus.

The other statements:

ABC is more difficult to use in a service environment due to the nature of production × services
are often different each time they are produced, and effort/resource consumption is difficult to
measure in the production process. The first statement is therefore false.

If most overheads are driven by volume, then traditional absorption costing will give a similar
answer to activity based costing as traditional absorption costing typically uses volume based
measures as the basis of absorption. The second statement is therefore incorrect.

If the majority of the costs are facility sustaining, this means they are not driven by any activity in
particular (such as factory rent), so ABC will need to use an arbitrary basis of apportionment, like
floor space, much like traditional absorption costing. The third statement is therefore incorrect.

Service businesses by their very nature do not create inventory, hence the use of ABC to improve
inventory valuation is largely irrelevant. The fifth statement is therefore incorrect.
Step06
Question 40 of 60

The following details relate to three services provided by JHN plc:

Service J Service H Service N

$ $ $
Fee charged to customers 84 122 145
Unit service costs:
Direct materials 12 23 22
Direct labour 15 20 25
Variable overhead 12 16 20
Fixed overhead 20 42 40

All three services use the same type of direct labour which is paid $30 per hour. The fixed
overheads are general fixed overheads that have been absorbed on the basis of machine hours.

If direct labour is a scarce resource, the most and least profitable uses of it are:

Most profitable Least profitable

A H J
B H N
C N J
D N H
A
B
C
D

1 out of 1

The correct answer is: A

Service J Service H Service N

Contribution per unit $45 $63 $78
1 2 5
Labour hours required per unit /2 /3 /6
Contribution per labour hour $90 $94.50 $93.60
Ranking 3 1 2
Step06
Question 41 of 60

D Co provides a motorist rescue service to its members. It has been proposed to change the
annual membership fee to $120 for the next year. The impact of this on the number of members is
uncertain but the following estimates have been made:

Number of members Probability

20,000 0.1
30,000 0.6
40,000 0.3

It is thought that the variable operating costs vary in relation to the number of members but the
cost per member is uncertain. The following estimates have been made:

Variable cost per member Probability

$70 0.3
$60 0.5
$40 0.2

D Co expects to incur annual fixed costs of $1,100,000.

The Management Accountant of D Co has produced a two-way data table.

Calculate the joint probability of having 20,000 members and a variable cost per member of $40.

0 out of 1

The correct answer is: 0.02

0.1 × 0.2 = 0.02

Step06
Question 42 of 60

JJ plc has recently introduced an activity-based costing system. It manufactures three products,
details of which are set out below:

L D S
Budgeted annual production (units) 200,000 200,000 100,000
Batch size (units) 200 100 50
Machine set-ups per batch 2 3 5
Purchase orders per batch 3 2 1
Processing time per unit (minutes) 4 5 5
Three cost pools have been identified. Their budgeted costs for the year ending 30 April 20X3 are
as follows:

Machine set-up costs $270,000

Purchasing of materials $150,000
Processing $100,000

Calculate the budgeted machine set-up cost per unit of product L.

(give your answer to two decimal places)

$5

0 out of 1

The correct answer is: $0.15

Number of batches produced:

Number of set-ups required:

L 1,000 × 2 = 2,000
D 2,000 × 3 = 6,000
S 2,000 × 5 = 10,000
= 18,000

Machine set-up cost per batch of L = 15 × 2 = $30

Step06
Question 43 of 60

DEF Co publishes three newspapers, The Post, The Gazette and The News. The following
information has been obtained from the accounting system for period 6:

The Post The Gazette The News

Number published 60,000 80,000 90,000
Direct labour hours per unit 0.2 0.3 0.1
Machine hours per unit 0.4 0.5 0.3
Set-ups 4 3 3

Overheads are related to the following activities:

Activities Cost of activities

$
Machine maintenance 24,570
Machine set-up 25,730
50,300

What is the overhead attributable to each unit of The Post using Activity based costing?

$ 55

0 out of 1

The correct answer is: 0.28

Number of Cost per cost

Activity Cost driver Cost
cost drivers driver unit
$ $
Maintenance Machine hours 91,000 24,570 0.27
Setting up Set-ups 10 25,730 2573.00

Total overhead attributable to The Post:

(60,000 × 0.4 × $0.27) + (4 × $2,573) = $16,772

Overhead attributable to each Post:

$16,772 × 60,000 = $0.28

Step06
Question 44 of 60

The following data relate to a manufacturing company. At the beginning of August there was no
inventory. During August 2,000 units of product X were produced, but only 1,750 units were sold.
The financial data for Product X in August were as follows:

$
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Variable selling costs 6,000
Fixed selling costs 19,300
Total costs for X for August 109,800

The value of inventory of X at 31 August using a marginal costing approach is:

$6,575
$7,750
$8,500
$10,562

0 out of 1

The correct answer is: $7,750

The total cost of producing 2,000 units on a marginal cost basis is:

$
Materials 40,000
Labour 12,600
Variable production overheads 9,400
62,000

The cost per unit is $31 ($62,000 × 2,000).

For the remaining inventory of 250 units, the cost would be 250 × $31 = $7,750.
Step06
Question 45 of 60

The following data relate to a manufacturing company. At the beginning of August there was no
inventory. During August 2,000 units of product X were produced, but only 1,750 units were sold.
The financial data for product X August were as follows:

$
Materials 40,000
Labour 12,600
Variable production overheads 9,400
Fixed production overheads 22,500
Variable selling costs 6,000
Fixed selling costs 19,300
Total costs for X for August 109,800

The value of inventory of X at 31 August using a throughput accounting approach is:

$5,000
$6,175
$6,575
$13,725

0 out of 1

The correct answer is: $5,000

The total cost of producing 2,000 units using a throughput approach is:

$
Materials 40,000

The cost per unit is $20 ($40,000 × 2,000).

For the remaining inventory of 250 units the cost would be 250 × $20 = $5,000
Step06
Question 46 of 60

A company operates a standard absorption costing system. The following fixed production
overhead data are available for the latest period:

Budgeted output 300,000 units

Budgeted fixed production overhead $1,500,000
Actual fixed production overhead $1,950,000
Total fixed production overhead variance $150,000 Adverse

The actual level of production for the period was nearest to:

277,000 units
324,000 units
360,000 units
420,000 units

0 out of 1

The correct answer is: 360,000 units

Fixed overhead total variance:

$£000
Fixed overhead incurred 1,950
Fixed overhead absorbed (1,500/300 × actual production) X
150 (A)

So X = 1,950,000 × 150,000 = 1,800,000

? 1,500,000 × 300,000 × actual production = 1,800,000

? actual production = 360,000 units

Step06
Question 47 of 60

X 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 annual cash inflows and their associated probabilities are shown below.

Market conditions Poor Good Excellent

Probability 0.20 0.50 0.30
$£000 $£000 $£000
Project L 500 470 550
Project M 400 550 570
Project N 450 400 475
Project O 360 400 420
Project P 600 500 425

Determine, based on the expected value of the net cash inflows, which project should be
undertaken.

Project L
Project M
Project N
Project O
Project P

0 out of 1

The correct answer is: Project M

EV of L = $£000 (0.2 × $500 + 0.5 × $470 + 0.3 × $550) = $500,000

EV of M = $£000 (0.2 × $400 + 0.5 × $550 + 0.3 × $570) = $526,000
EV of N = $£000 (0.2 × $450 + 0.5 × $400 + 0.3 × $475) = $432,500
EV of O = $£000 (0.2 × $360 + 0.5 × $400 + 0.3 × $420) = $398,000
EV of P = $£000 (0.2 × $600 + 0.5 × $500 + 0.3 × $425) = $497,500

Project M should be undertaken as it has the highest EV.

Step06
Question 48 of 60

A company is considering the development and marketing of a new product. Development costs
will be $2m. There is a 75% probability that the development effort will be successful, and a 25%
probability that it will be unsuccessful. If development is successful and the product is marketed, it
is estimated that:

Expected profit Probability

Product very successful $6.0m 0.4
Product moderately successful $1.8m 0.4
Product unsuccessful ($5.0m) 0.2

Calculate the expected value of the project in millions.

(show answer to two decimal places)

66

0 out of 1

The correct answer is: 0.41

$m $m
Development costs (2.00)
Expected returns if development successful
very successful 0.4 × 6m 2.40
moderately successful 0.4 × 1.8m 0.72
unsuccessful 0.2 × (5.0m) (1.00)
2.12
' probability of development being successful ' 0.75
1.59
Expected value of project (0.41)
Step06
Question 49 of 60

Trident Co has analysed its total cost behaviour using the following equation:

Y = $300,000 + $40X

Where Y = total cost, and X = output.

Trident Co aims to achieve a target profit of $180,000.

The contribution to sales ratio is 60%.

What is the level of output (in units) needed for Trident Co to achieve its target profit?

0 out of 1

The correct answer is: 8,000

From the formula the variable cost is $40.

If the contribution to sales ratio is 60% then variable cost = 40% of sales.

So sales price = 40 / 0.40 = $100

So contribution per unit = $100 - $40 = $60

So output to achieve target profit = (fixed cost + target profit) / contribution per unit

$480,000 / $60 = 8,000 units

Step06
Question 50 of 60

Which TWO of the following statements are TRUE?

Using full cost plus pricing ensures that a product will generate profit for the business.
Full cost plus pricing is more consistent with relevant costing principles than marginal cost
plus pricing.
If a business switches from full cost plus pricing to marginal cost plus pricing and aims to keep
the same sales price for its products the mark-up will increase.
When calculating a mark-up and a margin on the same product, the margin will be lower.
If full cost plus pricing is used and the actual sales volume variance is favourable, the business
may not recover all of its fixed costs.

0 out of 1

The correct answer is:

If a business switches from full cost plus pricing to marginal cost plus pricing and aims to
keep the same sales price for its products the mark-up will increase.
When calculating a mark-up and a margin on the same product, the margin will be lower.

If switching from full cost to marginal cost plus, the business would need to calculate a larger
mark-up on the lower marginal cost to keep the sale price the same.

A mark-up is based on the lower cost price, whereas a margin is based on the sales price (which is
higher). To achieve the same profit figure the margin will therefore need to be a lower figure.

Marginal costs are future incremental costs, so marginal cost plus pricing is more in line with
relevant cost principles than full cost plus, which includes all costs, regardless of whether they are
incremental.

Any cost plus pricing does not ensure that a profit will be made for a product. Many other factors,
including sales volumes, determine whether the product will be profitable. If the price is set too
high, it may be uncompetitive and not sell sufficient quantities to make a profit. Under-recovery of
fixed costs is an issue if sales volumes are lower than planned, with a favourable sales volume
variance they will be higher than planned.
Step06
Question 51 of 60

A risk neutral investor has prepared the following table of profits to use when choosing between
three investments.

Good economic Average economic Bad economic

Investment
conditions $m conditions $m conditions $m
1 20 20 20
2 40 30 0
3 5 25 30

The probability of good economic conditions is 30%, average 50% and bad conditions is 20%.

What is the maximum the investor would be prepared to pay for a market research survey which
could correctly predict the economic conditions?

$ 23 m

0 out of 1

The correct answer is: $6m

$m
EV with perfect information (0.3 × 40) + (0.5 × 30) + (0.2 × 30) 33
EV without perfect information 27
Value of perfect information 6

Need to work out the highest possible EV without perfect information:

Investment 1 = $20m

Investment 2 = (0.3 × 40) + (0.5 × 30) = $27m

Investment 3 = (0.3 × 5) + (0.5 × 25) + (0.2 × 30) = $20m

Step06
Question 52 of 60

Why should visualisation be considered when preparing a management accounting report?

To make the figures less boring

To ensure that the message is clearly communicated and targeted
To manipulate the figures so that they support your agenda
To demonstrate the artistic skills of the accountant

0 out of 1

The correct answer is: To ensure that the message is clearly communicated and targeted

Visualisation is intended to communicate the message clearly for the target audience. Note that
accountants are obliged to show integrity and objectivity, so visualisation should not be used to
manipulate data to meet an individual's agenda.

Step06
Question 53 of 60

In which THREE of the following circumstances are participative budgets likely to be effective?

In very large organisations

During periods of economic affluence
When an organisation's different units act autonomously
In newly formed organisations
In stable organisations

0 out of 1

The correct answers are:

In very large organisations

During periods of economic affluence
When an organisation's different units act autonomously

Imposed budgets are likely to be most effective in newly formed organisations, because there is a
lack of experience. Also, in stable organisations there is less benefit in participation as conditions
are static. However, participative budgets are likely to be effective in other organisations.
Step06
Question 54 of 60

A company produces two products in a joint process. Details of the products are as follows:

Litres produced Litres sold Selling price per litre

Product A 50,000 42,000 $6
Product B 87,500 70,000 $8

Joint production costs total $300,000 and are split between the products on the basis of the
relative market value at the point of separation.

What are the joint costs allocated to Product B?(to the nearest $0.1m)

$ 44

0 out of 1

The correct answer is: $210,000

The level of sales is largely irrelevant in the allocation of the joint costs. The costs will be allocated
to all production, even if some of that production is unsold and remains in inventory.

Sales value of production

Proportion Share of joint costs
at the point of separation
Product A $300,000 30% $90,000
Product B $700,000 70% $210,000
Step06
Question 55 of 60

Manager M has a number of questions for you.

Which of the following is least likely to be helped by use of sensitivity analysis?

What will the cash flow position be if the length of trade receivable days increase?
What will happen to profit if there is increase in the sales price?
What will be the impact on the breakeven point at different levels of fixed costs?
What will be the impact on total costs at different rates of materials pricing and labour wage
rates?

0 out of 1

The correct answer is: What will be the impact on total costs at different rates of materials and
labour wage rates?

This is because sensitivity analysis can only be used to assess changes in one variable at a time.

If you chose one of the other options this would be incorrect as these are all circumstances in
which sensitivity analysis could be used:

The cash flow position will change depending on the length of the trade receivables days and
sensitivity analysis could be used to see what the impact would be.

The profit will change depending on the sales price and sensitivity analysis could be used to see
what the impact would be.

The breakeven point will change at different rates and fixed costs sensitivity analysis could be
used to see what the impact would be.
Step06
Question 56 of 60

Manager N seeks to minimise the maximum opportunity cost from making wrong decisions.

Which approach to decision making is she using?

Maximax
Minimax regret
Maximin
EV max

1 out of 1

The correct answer is: Minimax regret

The answer is minimax regret because this is a strategy in which the decision maker seeks to
minimise the maximum opportunity cost from making the wrong decision.

If you chose maximax this was incorrect because this is a strategy in which the decision maker
seeks to maximise the maximum possible return.

If you chose maximin this was incorrect because this is a strategy in which the decision maker
seeks to maxmimise the minimum possible return.

If you chose EV max this was incorrect because this is a strategy in which the decision maker
seeks to maximise the expected value.

Step06
Question 57 of 60

Company A is considering whether to undertake Project B or Project C. If project B is chosen

resources costing $2,000 will need to be added. There is a 50% chance that the project will
generate a gain of $20,000.

If project C is chosen, the operations will continue as is and no further capital investment will be
required. There is a 90% chance that continuing as normal will result in a gain of $5,000.

What is the expected value at point B and what would be the risk-neutral profit maximising
decision at point A?
EV at B - Decision

$5,000 – B
$3,000 - B
$5,000 - C
$3,000 - C

0 out of 1

The correct answer is $5000 – C

EV at B = (20,000 x 0.5) – (10,000 x 0.5) = $5000

EV at C = (5,000 x 0.9) – (5,000 x 0.1) = $4000

The decision at A should take into consideration the capital investment:

Project B: $5000 - $2000 = $3000 return

Project C: $4000

Therefore choose project C.

Step06
Question 58 of 60

A company has reviewed its logistics, determined that it incurs costs of $35 per delivery and, as it
expects to make 1,400 deliveries next month, has budgeted $49,000.

This is an example of:

Incremental budgeting
Activity-based budgeting
Beyond budgeting
Rolling budgets

0 out of 1

The correct answer is: Activity-based budgeting

This is because the budget figure has been arrived at by considering the cost per activity (in this
case delivery) and the expected number of activities.

If you selected incremental budgeting this would be incorrect as incremental budgeting uses
previous period data and adjusts it up or down, but this approach is closer to zero-based
budgeting.

If you selected beyond budgeting this would be incorrect as beyond budgeting does away with
budgets.

If you selected rolling budgets this would be incorrect as in this example it could be the company
is using either a rolling budget or is operating on a periodic basis.
Step06
Question 59 of 60

A company which imports materials and exports its final products is preparing its budget and is
concerned that due to political instability the domestic currency may depreciate.

What impact should this have on its budget?

Costs per unit of imported materials will fall; there may be an increase in volume of exports.
Costs per unit of imported materials will rise; there may be a reduction in volume of exports.
Costs per unit of imported materials will fall; there may be a reduction in volume of exports.
Costs per unit of imported materials will rise; there may be an increase in volume of exports.

1 out of 1

The correct answer is: Costs per unit of imported materials will rise; there may be an increase in
volume of exports.

This is because as the currency has depreciated the cost of products that are sold in another
currency will appear relatively higher, so this will increase the cost of imports but may also make
the company's exports more attractive to overseas buyers and increase the quantity bought.

Step06
Question 60 of 60

Which of the following is an advantage that traditional budgeting has over the beyond budgeting
approach?

Ensures planning happens

Encourages innovation
Greater increases in motivation
Allows faster response to threats and opportunities

0 out of 1

The correct answer is: Ensures planning happens

This is because beyond budgeting does not require the production of formal plans whereas
traditional budgeting does.

If you selected encourages innovation, greater increase in motivation or allows faster response to
threats and opportunities these would be incorrect because they are advantages of beyond
budgeting.