Special Revision Session – Paper 06

Mix MCQs & Project Appraisal

CL3 – Advanced Management Accounting

1. A division is considering investing in capital equipment costing $2·7m. The

useful economic life of the equipment is expected to be 50 years, with no resale
value at the end of the period. The forecast return on the initial investment is
15% per annum before depreciation. The division’s cost of capital is 7%.
What is the expected annual residual income of the initial investment?
A $0
B ($270,000)
C $162,000
D $216,000
2. The Fruit Company (F Co) currently grows fruit which customers pick
themselves from the fields before paying. F Co is concerned that a large number
of customers are eating some of the fruit whilst picking it and are therefore not
paying for all of it. As a result, it has to decide whether to hire staff to pick and
package the fruit instead. The following values and costs have been identified:

(i) The total sales value of the fruit currently picked and paid for by customers
(ii) The cost of growing the fruit
(iii) The cost of hiring staff to pick and package the fruit
(iv) The total sales value of the fruit if it is picked and packaged by staff
instead
Which of the above are relevant to the decision?
A All of the above
B (ii), (iii) and (iv) only
C (i), (ii) and (iv) only
D (i), (iii) and (iv) only
3. Which of the following statements describes target costing?
A It calculates the expected cost of a product and then adds a margin to it to
arrive at the target selling price
B It allocates overhead costs to products by collecting the costs into pools and
sharing them out according to each
product’s usage of the cost driving activity
 C It identifies the market price of a product and then subtracts a desired profit
margin to arrive at the target cost
D It identifies different markets for a product and then sells that same product
at different prices in each market

4. The Mobile Sandwich Co prepares sandwiches which it delivers and sells to

employees at local businesses each day. Demand varies between 325 and 400
sandwiches each day. As the day progresses, the price of the sandwiches is
reduced and, at the end of the day, any sandwiches not sold are thrown away.
The company has prepared a regret table to show the amount of profit which
would be foregone each day at each supply level, given the varying daily levels
of demand.

Applying the decision criterion of minimax regret, how many sandwiches

should the company decide to supply each day?

A 325
B 350
C 375
D 400
5. The following statements have been made about transaction processing
systems and executive information systems:
(i) A transaction processing system collects and records the transactions of an
organisation
(ii) An executive information system is a way of integrating the data from all
operations within the organisation into a single system
Which of the above statements is/are true?

A (i) only B (ii) only C Both (i) and (ii) D Neither (i) nor (ii)
6. X Co uses a throughput accounting system. Details of product A, per unit, are as
follows:
Selling price $320
Material costs $80
Conversion costs $60
Time on bottleneck resource 6 minutes
What is the return per hour for product A?
A $40
B $2,400
C $30
D $1,800

7. A company manufactures three products using different amounts of the same

grade of labour, which is in short supply.
The following budgeted data relates to the products:

What order should the products be manufactured in to ensure that profit

is maximised?
P1 P2 P3
A 2nd 1st 3rd
B 2nd 3rd 1st
C 1st 3rd 2nd
D 1st 2nd 3rd
 8. Caf Co budgeted to sell 10,000 units of a new product in the period at a
budgeted selling price of $5 per unit. Actual sales volumes in the period were
as budgeted but the actual sales price achieved was only $4 per unit. This was
because a competitor launched a similar product at the same time. Caf Co had
been unaware that this was going to happen when it prepared its budget and,
had it known this, it would have revised its expected selling price to $3·80 per
unit, which was the price of the competitor’s product.
What is the sales price planning variance?
A $12,000 A
B $12,000 F
C $2,000 F
D $2,000 A

9. Dust Co has two divisions, A and B. Each division is currently considering the
following separate projects:

If residual income is used as the basis for the investment decision, which Division(s)
would choose to invest in the project?
A Division A only
B Division B only
C Both Division A and Division B
D Neither Division A nor Division B

10. Which of the following describes a ‘basic standard’ within the context of
budgeting?
A A standard which is kept unchanged over a period of time
B A standard which is based on current price levels
C A standard set at an ideal level, which makes no allowance for normal losses,
waste and machine downtime
D A standard which assumes an efficient level of operation, but which includes
allowances for factors such as normal loss, waste and machine downtime
11. A company has the following production planned for the next four weeks. The
figures reflect the full capacity level of operations. Planned output is equal to
the maximum demand per product.

The direct labour force is threatening to go on strike for two weeks out of the
coming four. This means that only 2,160 hours will be available for production
rather than the usual 4,320 hours.

If the strike goes ahead, which product or products should be produced

if profits are to be maximised?
A D and A
B B and D
C D only
D B and C

12. Oxco has two divisions, A and B. Division A makes a component for air
conditioning units which it can only sell to Division B. It has no other outlet for
sales.
Current information relating to Division A is as follows:
Marginal cost per unit $100
Transfer price of the component $165
Total production and sales of the component each year 2,200 units
Specific fixed costs of Division A per year $10,000
Cold Co has offered to sell the component to Division B for $140 per unit. If
Division B accepts this offer, Division A will be shut.
 If Division B accepts Cold Co’s offer, what will be the impact on profits
per year for the group as a whole?
A Increase of $65,000
B Decrease of $78,000
C Decrease of $88,000
D Increase of $55,000

13. The following statements have been made in relation to activity-based costing:
(1) A cost driver is a factor which causes a change in the cost of an activity
(2) Traditional absorption costing tends to under-estimate overhead costs for
high volume products
Which of the above statements is/are true?
A 1 only
B 2 only
C Neither 1 nor 2
D Both 1 and 2

14. Which of the following is an advantage of non-participative budgeting as

compared to participative budgeting?
A It increases motivation
B It is less time consuming
C It increases acceptance
D The budgets produced are more attainable

15. What is the name given to a budget which has been prepared by building
on a previous period’s budgeted or
actual figures?
A Incremental budget
B Flexible budget
C Zero based budget
D Functional budget
16. A company manufactures two products, C and D, for which the following
information is available:

Using activity-based costing, what is the budgeted overhead cost per unit
of product D?
A $43·84
B $46·25
C $131·00
D $140·64

17. At the end of 20X1, an investment centre has net assets of $1m and annual
operating profits of $190,000. However, the bookkeeper forgot to account for
the following:
A machine with a net book value of $40,000 was sold at the start of the year for
$50,000 and replaced with a machine costing $250,000. Both the purchase and
sale are cash transactions. No depreciation is charged in the year of purchase
or disposal. The investment centre calculates return on investment (ROI) based
on closing net assets.

Assuming no other changes to profit or net assets, what is the return on

investment (ROI) for the year?
A 18·8%
B 19·8%
C 15·1%
D 15·9%
18. Which of the following statements regarding market penetration as a
pricing strategy is/are correct?
(1) It is useful if significant economies of scale can be achieved
(2) It is useful if demand for a product is highly elastic
A 1 only
B 2 only
C Neither 1 nor 2
D Both 1 and 2

Following information is relevant for Question No 19 & 20

Mylo runs a cafeteria situated on the ground floor of a large corporate office
block. Each of the five floors of the building are occupied and there are in total
1,240 employees.
Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly
prepared each morning and Mylo has to decide how many meals to make each
day. As the office block is located in the city centre, there are several other
places situated around the building where staff can buy their lunch, so the level
of demand for lunches in the cafeteria is uncertain.
Mylo has analysed daily sales over the previous six months and established four
possible demand levels and their associated probabilities. He has produced the
following payoff table to show the daily profits which could be earned from the
lunch sales in the cafeteria:

19. If Mylo adopts a maximin approach to decision-making, which daily

supply level will he choose?
A 450 lunches
B 620 lunches
C 775 lunches
D 960 lunches
20. If Mylo adopts a minimax regret approach to decision-making, which daily
supply level will he choose?
A 450 lunches
B 620 lunches
C 775 lunches
D 960 lunches