P1 by CIMA Valid Free Exam Practice Test

Question 1

The following 5 statements apply the principles of either, both or neither absorption costing and marginal costing.
Place the option labels against the relevant statements.

Correct Answer:

Question 2

A company currently uses a rate of $32 per machine hour to absorb its total production overheads of
$960,000.
Using this system the production overhead cost per unit of product X is $160.
An activity based costing exercise has revealed that only $345,000 of the production overhead is driven by machine hours. The remainder is driven by the number of machine set ups, at a rate of $9.60 per set up.
Product X requires 3 set ups per unit.
Calculate the total production overhead cost per unit of product X using an activity based costing system.
Give your answer to two decimal places.

Correct Answer:

$86.30

Question 3

Explain the advantages of management participation in budget setting and the potential problems that may arise in the use of the resulting budget as a control mechanism.
Select all the correct answers.

A. A purposes of budgeting is to act as a control mechanism, with actual results being compared against budget. B. Participation in budget setting can cause problems; in particular, managers may attempt to negotiate budgets that they feel are easy to achieve which gives rise to "budget padding" or budgetary slack. C. Participation in budget setting can reduce the information asymmetry gap that can arise when targets are imposed by senior management. Imposed targets are likely to make managers feel demotivated and alienated and result in poor performance. D. The participation of managers in the budget setting process has several advantages. Managers are more likely to be motivated to achieve the target if they have participated in setting process has several advantages. managers are more likely to be motivated to achieve the target if they have participated in setting the target. E. Managers will not 'empire build' because they don't believe that the size of their budget reflects their importance within the organization. F. Another purpose of a budget is to set targets to motivate managers and optimize their performance.

Correct Answer: A,B,C,D,F

Question 4

A tennis club is considering running an open day to encourage new members and thus increase membership fees. The cost of the open day will be $1,000. Attendance is dependent on the weather.
There is a 60% chance of good weather and a 40% chance of poor weather on the open day.
The expected new membership fees are:

What is the expected value of running the open day?
Give your answer as a whole number.

Correct Answer:

$1840

Question 5

A manufacturing company has fixed production overhead costs, direct material costs and direct labour costs. The number of units of closing finished goods inventory is lower than the opening inventory.
Which of the following statements is true?

A. The profit using marginal costing will be higher than if throughput costing is used. B. The profit using absorption costing will be higher than if marginal costing is used. C. The profit using marginal costing will be higher than if absorption costing is used. D. The profit using absorption costing will be higher than if throughput costing is used.

Correct Answer: C

Question 6

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning.
The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.
How will a manufacturing resource planning system improve the planning of purchases and production for the company?
Select ALL the correct answers.

A. A manufacturing resource planning approach to the management of all the company's manufacturing resources including inventory, labour and machine capacity. B. The technique will not enable managers to track orders through the manufacturing process and will not assist the purchasing and production control departments to move the right amount of material or sub-assemblies at the right time to the right place. C. The traditional approach to determine material requirements is to monitor inventories constantly; whenever they fall to a predetermined level, a preset order is placed to replenish them. This traditional approach (involving re-order levels and economic order quantity calculations originates in the pre- computer era. D. It aims to generate an estimation of materials requirements after taking account of the number of employees quality and waste. The TQS model can be used within MRP provided that the major assumption in the TQS model of constant demand applies. E. It seeks to ensure that resources are available just before they are needed by the next stage of production or dispatch. It also seeks to ensure that resources are delivered only when required so that raw material inventory is kept to a minimum. F. The correct inventory management system relies on the assumption that there is constant demand.
An MRP system begins with the setting of a master production schedule specifying both the timing and quantity demanded of each of the finished goods items and then works backwards to determine the resource requirements at each stage of the production process.

Correct Answer: A,C,E,F

Question 7

A company has a budgeted contribution to sales (C/S) ratio of 30% and a budgeted operating profit margin of 20%. Budgeted sales were $100,000.
In month 2, actual production and sales volumes and all costs were as budgeted. The actual C/S ratio was 33% .
Which of the following statements, about the company's contribution and operating profit in month 2, is correct?

A. Actual operating profit was more than 10% higher than budgeted operating profit. B. Actual operating profit was less than 10% higher than budgeted operating profit. C. Actual contribution was less than 10% higher than budgeted contribution. D. Actual contribution was exactly 10% higher than budgeted contribution.

Correct Answer: A

Question 8

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

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

Correct Answer: A,D,F,G

Question 9

A bakery manager is deciding how many batches of birthday cakes to decorate each day.
Demand for the birthday cakes varies from 12 to 15 batches per day. Each batch decorated and sold earns a contribution of $40 but each batch unsold leads to loss of contribution of $15.
The payoff table below shows the total $ contribution from each of the possibilities:

Based on expected values, the number of batches of birthday cakes the bakery manager should decorate each day is:

Correct Answer:

14 batches

Question 10

Company XPP sells a perishable product that has to be produced each day in anticipation of the following day's sales.
Any product remaining unsold at the end of the day following production is wasted.
The payoff table below shows the daily profit or loss depending on the amounts produced and sold.

A new ordering system is being discussed with customers.
The new system would require customers to order in advance to enable production each day of the following day's sales quantity, thus eliminating waste.
What is the expected increase in average daily profit if the new system is accepted by customers?
Give your answer as a whole number.

Correct Answer:

$120 per day

Question 11

A company operates a customer complaints department.
How will the cost of the customer complaints department be classified in a system focussed on quality related costs?

A. External failure cost B. Appraisal cost C. Internal failure cost D. Prevention cost

Correct Answer: A

Question 12

For the forthcoming period, the number of units of product L produced must be no more than four times the number of units of product M produced.
The equation to represent this constraint in a linear programming exercise is:

A. 4L > M B. L > 4M C. L < 4M D. 4L < M

Correct Answer: C

Question 13

Traditional absorption costing is more suitable than activity-based costing when:

A. the company has a diverse product range. B. overheads are small in comparison to direct costs. C. production is specific to customer needs. D. overheads are not driven by production volume.

Correct Answer: B

Question 14

A manager in your organisation says, "I have spare capacity and I need a unit cost as a basis for pricing a special one-off contract. You have provided me with a relevant cost of $6.50 per unit and a full production cost of $8.00 per unit. Please explain which unit cost I should use." Which cost should be used in this decision and why?

A. The full production cost because it is important to ensure that all costs are covered by the selling price. B. The relevant cost because it is the lower unit cost. C. The relevant cost because it represents the cash flows that will be affected if the contract is accepted. D. The full production cost because it will be used in the financial accounting reporting system.

Correct Answer: C

CIMA Management Accounting - P1 Exam Practice Test