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CIMA P1 - Management Accounting Question Tutorial Sample Questions:

1. 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.
Select ALL the benefits for the company that could occur following the introduction of an activity based budgeting system.

A) ABB systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred.
B) Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization.
C) The approach under an activity based system is to make arbitrary cuts in order to meet overall financial targets.
D) Under an activity based budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated.
Under a traditional budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.
E) Under an activity based budgeting system, resource allocation is linked to the strategic plan is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget.
F) Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.

2. A company's budget for the next period shows that it would breakeven at sales revenue of $800,000 and fixed costs of $320,000.
The sales revenue needed to achieve a profit of $200,000 in the next period would be:

A) $1,780,000
B) $1,400,000
C) $1,950,000
D) $1,300,000
E) $1,390,000

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) 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.
C) 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.
D) 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.
E) Another purpose of a budget is to set targets to motivate managers and optimize their performance.
F) Managers will not 'empire build' because they don't believe that the size of their budget reflects their importance within the organization.

4. PL currently earns an annual contribution of $2,880,000 from the sale of 90,000 units of product B. Fixed costs are $800,000 per annum.
The management of PL is considering reducing the selling price per unit to $48. The estimated levels of demand at the revised selling price and the probabilities of them occurring are as follows:

Calculate the probability that the profit will increase from its current level if the selling price is reduced to $48.

A) The probability therefore that the contribution will exceed $2,880,000 is 40%.
B) The probability therefore that the contribution will exceed $2,880,000 is 90%.
C) The probability therefore that the contribution will exceed $2,880,000 is 50%.
D) The probability therefore that the contribution will exceed $2,880,000 is 70%.

5. Explain THREE benefits that organizations gain from using budgetary planning and control systems.
Select ALL the true statements.

A) The budget is a useful device of influencing an operator's thoughts and motivating operators to perform in line with the organization's marketing budget.
B) The budget provides an external benchmark against which performance against which performance can be evaluated.
C) Budgeting forces an organization's management to look ahead and set performance targets.
D) It provides a standard which managers may be motivated to achieve. It can also encourage inefficiency
and conflict between managers particularly if the budget is imposed from above, whereby it may act as a threat rather than as a challenge.
E) The budget ensures actions of different parts of the organization are coordinated are reconciled otherwise managers take actions for the benefit of their own part of organization that may not benefit the organization as a whole.
F) Another benefit of budgeting is to set targets to motivate managers and optimize their performance.
G) The budget acts as a variable mechanism, with actual results being compared with budget.

Solutions: