CIMA

Management Level
P2

Advanced
Management
Accounting

Exam
Practice Kit

For exams from January 2021

VL2020

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 Contents

Question and Answer index iv

Using your BPP Exam Practice Kit v
Examination structure vi
How to pass ix

Questions and answers

Questions 3
Answers 69

Practice mock
Questions 115
Answers 137

Mathematical tables 154

VL2020

Table of contents iii

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 Question and answer index
Page number

Objective test questions Question Answer

1 Analysing and managing costs 3 69

2 Quality management 8 72

3 Value management 12 75

4 Data for decision making 16 77

5 Project appraisal 20 79

6 Further aspects of project appraisal 25 84

7 Pricing strategies 32 88

8 Decision making in responsibility centres 38 93

9 Performance measurement 42 96

10 Transfer pricing 48 99

11 Risk and uncertainty 54 103

12 Analysis and management of risk 63 108

Mock 115 137

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iv Advanced Management Accounting

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 Using your BPP Exam Practice Kit
One of the key criteria for achieving exam success is question practice. There is generally a direct
correlation between candidates who study all topics and practise exam questions and those who are
successful in their real exams. This Kit gives you ample opportunity for such practice throughout your
preparations for your OT exam.
All questions in your exam are compulsory and all the component learning outcomes will be examined so
you must study the whole syllabus. Selective studying will limit the number of questions you can
answer and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few topics to the
exclusion of the rest.
Practising as many exam-style questions as possible will be the key to passing this exam. You must do
questions under timed conditions.

Breadth of question coverage

Questions will cover the whole of the syllabus so you must study all the topics in the syllabus.
The weightings in the table below indicate the approximate proportion of study time you should spend
on each topic, and is related to the number of questions per syllabus area in the exam.

P2 Advanced Management Accounting Syllabus topics Weighting

A Managing the costs of creating value 20%
B Capital investment decision-making 35%
C Managing and controlling the performance of organisational units 30%
D Risk and control 15%

(CIMA exam blueprint, 2019)

VL2020
Introduction v
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 Examination structure
The Objective Test exam

Pass mark 70%

Format Computer-based assessment

Duration 90 minutes

Number of questions 60

Marking No partial marking – each question marked correct or incorrect

All questions carry the same weighting (ie same marks)

Weighting As per syllabus areas

All representative task statements from the examination
blueprint will be covered

Question Types Multiple choice

Multiple response
Drag and drop
Gap fill
Hot spot

Booking availability On demand

Results Immediate

What the examiner means

The table below has been prepared by CIMA to further help you interpret the syllabus and learning
outcomes and the meaning of questions.
You will see that there are five skills levels you may be expected to demonstrate, ranging from
Remembering and Understanding to Evaluation. CIMA Certificate subjects only use levels 1 to 3, but in
CIMA's Professional qualification the entire hierarchy will be used.

Skills level Verbs used Definition

Level 5 Evaluation Advise Counsel, inform or notify

The examination or Assess Evaluate or estimate the
assessment of problems, nature, ability or quality of
and use of judgment to
draw conclusions Evaluate Appraise or assess the value
of

Recommend Propose a course of action

Review Assess and evaluate in order,
to change if necessary

Select Choose an option or course

of action after consideration
of the alternatives

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vi Advanced Management Accounting
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 Skills level Verbs used Definition

Level 4 Analysis Align Arrange in an orderly way

The examination and Analyse Examine in detail the
study of the structure of
interrelationships of
separate areas in order to Communicate Share or exchange
identify causes and find information
evidence to support
inferences Compare and contrast Show the similarities and/or
differences between

Develop Grow and expand a concept

Discuss Examine in detail by
argument

Examine Inspect thoroughly

Monitor Observe and check the
progress of
Prioritise Place in order of priority or
sequence for action

Produce Create or bring into existence

Level 3 Application Apply Put to practical use

The use or demonstration Calculate Ascertain or reckon
of knowledge, concepts or mathematically
techniques
Conduct Organise and carry out
Demonstrate Prove with certainty or exhibit
by practical means
Determine Ascertain or establish exactly
by research or calculation

Perform Carry out, accomplish, or

fulfil

Prepare Make or get ready for use

Reconcile Make or prove
consistent/compatible
Record Keep a permanent account of
facts, events or transactions

Use Apply a technique or concept

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Introduction vii
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 Skills level Verbs used Definition

Level Remembering and Define Give the exact meaning of

1/2 understanding
Describe Communicate the key
The perception and features of
comprehension of the
significance of an area Distinguish Highlight the differences
utilising knowledge gained between
Explain Make clear or
intelligible/state the meaning
or purpose of

Identify Recognise, establish or select

after consideration
Illustrate Use an example to describe or
explain something

List Make a list of

Recognise Identify/recall
State Express, fully or clearly, the
details/facts of

Outline Give a summary of

Understand Comprehend ideas, concepts
and techniques

(CIMA exam blueprint, 2019)

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viii Advanced Management Accounting
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 How to pass
Good exam technique
The best approach to the computer-based assessment (CBA)
You're not likely to have a great deal of spare time during the CBA itself, so you must make sure you
don't waste a single minute.
You should:
1. Click 'Next' for any that have long scenarios or are very complex and return to these later
2. When you reach the 60th question, use the Review Screen to return to any questions you skipped
past or any you flagged for review
Here's how the tools in the exam will help you to do this in a controlled and efficient way.
The 'Next' button
What does it do? This will move you on to the next question whether or not you have completed the one
you are on.
When should I use it? Use this to move through the exam on your first pass through if you encounter a
question that you suspect is going to take you a long time to answer. The Review Screen (see below) will
help you to return to these questions later in the exam.
The 'Flag for Review' button
What does it do? This button will turn the icon yellow and when you reach the end of the exam
questions you will be told that you have flagged specific questions for review. If the exam time runs out
before you have reviewed any flagged questions, they will be submitted as they are.
When should I use it? Use this when you've answered a question but you're not completely comfortable
with your answer. If there is time left at the end, you can quickly come back via the Review Screen (see
below), but if time runs out at least it will submit your current answer. Do not use the Flag for Review
button too often or you will end up with too long a list to review at the end. Important note – studies
have shown that you are usually best to stick with your first instincts!
The Review Screen
What does it do? This screen appears after you click 'Next' on the 60th question. It shows you any
incomplete questions and any you have flagged for review. It allows you to jump back to specific
questions or work through all your incomplete questions or work through all your flagged for review
questions.
When should I use it? As soon as you've completed your first run through the exam and reached the
60th question. The very first thing to do is to work through all your incomplete questions as they will all
be marked as incorrect if you don't submit an answer for these in the remaining time. Importantly, this
will also help to pick up any questions you thought you'd completed but didn't answer properly (eg you
only picked two answer options in a multi-response question that required three answers to be selected).
After you've submitted answers for all your incomplete questions you should use the Review Screen to
work through all the questions you flagged for review.

The different Objective Test question types

Passing your CBA is all about demonstrating your understanding of the technical syllabus content. You
will find this easier to do if you are comfortable with the different types of Objective Test questions that
you will encounter in the CBA, especially if you have a practised approach to each one.
You will find yourself continuously practising these styles of questions throughout your Objective Test
programme. This way you will check and reinforce your technical knowledge at the same time as
becoming more and more comfortable with your approach to each style of question.

VL2020
Introduction ix
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 Multiple choice
Standard multiple choice items provide four options. One option is correct and the other three are
incorrect. Incorrect options will be plausible, so you should expect to have to use detailed, syllabus-
specific knowledge to identify the correct answer rather than relying on common sense.
Multiple response
A multiple response item is the same as a multiple choice question, except more than one response is
required. You will normally (but not always) be told how many options you need to select.
Drag and drop
Drag and drop questions require you to drag a 'token' onto a pre-defined area. These tokens can be
images or text. This type of question is effective at testing the order of events, labelling a diagram or
linking events to outcomes.
Gap fill
Gap fill (or 'fill in the blank') questions require you to type a short numerical response. You should
carefully follow the instructions in the question in terms of how to type your answer – eg the correct
number of decimal places.
Hot spot
These questions require you to identify an area or location on an image by clicking on it. This is
commonly used to identify a specific point on a graph or diagram.

A final word on time management

Time does funny things in an exam!
Scientific studies have shown that humans have great difficulty in judging how much time has passed if
they are concentrating fully on a challenging task (which your CBA should be!).
You can try this for yourself. Have a go at, say, five questions for your paper, and notice what time you
start at. As soon as you finish the last question try to estimate how long it took you and then compare to
your watch. The majority of us tend to underestimate how quickly time passes and this can cost you
dearly in a full exam if you don't take steps to keep track of time.
So, the key thing here is to set yourself sensible milestones, and then get into the habit of regularly
checking how you are doing against them:
 You need to develop an internal warning system – 'I've now spent more than three minutes on this
one calculation – this is too long and I need to move on!' (less for a narrative question!)
 Keep your milestones in mind (eg approximately 30 questions done after 45 mins). If you are a
distance from where you should be then adjust your pace accordingly. This usually means
speeding up but can mean slowing down a bit if needs be, as you may be rushing when you don't
need to and increasing the risk of making silly mistakes.
A full exam will be a mix of questions you find harder and those you find easier, and in the real CBA the
order is randomised, so you could get a string of difficult questions right at the beginning of your exam.
Do not be put off by this – they should be balanced later by a series of questions you find easier.

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x Advanced Management Accounting
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 Objective test
questions

VL2020

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VL2020

2 Advanced Management Accounting

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 1 Analysing and managing costs
1.1 RDE plc uses an activity-based costing system to attribute overhead costs to its three
products. The following budgeted data relates to the year to 31 December 20X8:

Product X Y Z
Production units (000) 15 25 20
Batch size (000 units) 2.5 5 4

Machine set-up costs are caused by the number of batches of each product and have
been estimated to be $600,000 for the year.
Calculate the machine set-up costs that would be attributed to each unit of product Y.

1.2 Which of the following are included within activity-based management (ABM)?
(a) Cost reduction.
(b) Product design decisions.
(c) Operational control (variance analysis).
(d) Performance evaluation.
 (a) only
 (a), (b) and (c) only
 (b), (c) and (d) only
 (a), (b), (c) and (d)

1.3 For which of the following reasons is activity-based costing regarded as an

improvement on traditional absorption costing?
(a) Recognises the factors which drive costs
(b) Addresses all overheads
(c) Improves the quality of the costing process
 (a) and (c) only
 (a), (b) and (c)
 (b) and (c) only
 (a) only

1.4 Which of the following is NOT a feature of activity-based costing?

(a) It recognises that a single factor such as machine hours cannot be the driver of all
overhead costs.
(b) It seeks to recognise the causes of the costs of activities through the use of cost
drivers.
(c) It allocates the costs associated with cost drivers into cost pools.
(d) It uses a basis such as labour hours to incorporate batch-related overheads into
product costs.

VL2020

Questions 3
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  None of them.
 All of them.
 (d) only
 (b) only

1.5 Which of the following would you NOT consider to be a strength of activity-based
costing?
(a) Particularly appropriate for an advanced manufacturing technology environment
(b) Identifies the driver of the overhead cost
(c) Recognises that low volume products make higher profits than suggested by
absorption costing
(d) Recognises the complexity of the production process
 All of them.
 (c) only
 (b), (c) and (d)
 (d) only

1.6 In activity-based costing, what is a cost driver?

 A mechanism for accumulating the costs of an activity
 An overhead cost that is incurred as a direct consequence of an activity
 A factor which causes the costs of an activity
 A cost relating to more than one product or service

1.7 Which of the following statements about activity-based costing is / are correct?
(a) Short-term variable overhead costs should be traced to products using volume-
related cost drivers, such as machine hours or direct labour hours.
(b) Overheads that are classified as being at the 'unit level' are driven by the complexity
and diversity of production work.
(c) Transactions undertaken by support department personnel are the appropriate cost
drivers for long-term variable overhead costs.
(d) Overheads should be charged to products on the basis of their usage of an activity.
A product's usage of an activity is measured by the number of the activity's cost
driver it generates.
 All of them.
 (a) only
 (b) only
 (a), (c) and (d)

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4 Advanced Management Accounting

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 1.8 Your company supplies a particular product to customers X and Y. The product has a list
price of $40 with a mark-up of 100%.
As Y buys in bulk it receives a discount of 10% for every order of 100 units or more. However,
X obtains a discount of 15% whatever the size of the order as it collects the items, thereby
saving your company any distribution costs.
The administration cost per order is $40 and distribution costs are $800 per order.
X places 10 orders in the year totalling 400 units, and Y places 5 orders for 100 units each.
Choose which is your most profitable customer.
 X
 Y

1.9 Company X manufactures many different types of chocolate bars using the same
machinery.
In terms of the activity-based hierachy, what type of cost is equipment maintenance?
 Unit level
 Organisational/facility level
 Product/process level
 Unit level

1.10 JKL Co uses activity-based costing to allocate overheads to products.

Set-up costs: $40,000

Inspection cost: $37,500
Inventory handling costs: $13,500

Activity Product A Product B Product C

Production runs 35 40 25
Number of inspections 15 25 35
Number of inventory requisitions 10 15 20

1,000 units of each product will be produced.

Calculate the total overhead per unit of Product A. Answers should be to two decimal
places.

VL2020

Questions 5
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 1.11 HDE Co uses activity-based costing to allocate production set-up costs to Products X,Y
and Z.
Set-up cost: $95,000.
Activity Product X Product Y Product Z
Production runs 50 30 20
Number of inspection 35 45 65
Number of customer orders delivered 20 30 50
Number of purchase orders delivered 30 40 60

Calculate the amount of set-up costs that should be allocated to Product X.

1.12 NBL Co has produced the following analysis of the profits or (losses) it makes from its
10 customers (A-J).
A B C D E F G H I J
$0.4m $0.3m ($0.5m) $0.5m $0.5m $0.2m $0.6m $0.2m ($0.2m) $0.0m

Using 80:20 pareto analysis, calculate the percentage of customers that account for 80%
of NBL Co's profits (insert your answer to 1 decimal place).

1.13 Company Z is a manufacturer that makes the following products.

Product A Product B Product C
$ per unit $ per unit $ per unit
Gross profit 0.08 0.65 0.60

This analysis ignores warehousing costs, additional information relating to the warehouse is
as follows:
Total warehousing costs per week = $720,000, $160,000 of which represents extra costs
due to refrigeration.
Each week 20,000 cubic metres of product pass through the warehouse, of which 5,000
cubic metres are refrigerated (only product B is refrigerated).
Product A Product B Product C
Time spent in warehouse 1 week 2 weeks 4 weeks
Space occupied in warehouse 0.0005 0.0025 0.0020
(per unit) cubic metres cubic metres cubic metres

Using direct product profitability analysis, calculate the increase in cost per unit for
product B due to warehousing costs (insert your answer to 1 decimal place).

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 1.14 A supermarket is considering the profitability of two different brands and types of
washing detergent. SoapySuds is a compact tablet form of detergent; WhiteyWhite is
conventional soap powder.
The following information relates to each product:
SoapySuds WhiteyWhite
Contribution per unit $0.60 $0.60

Shelf space occupied per product unit 0.010m3 0.025m3

Average time in warehouse 8 weeks 6 weeks
Average time in store 4 weeks 8 weeks
Monthly unit sales per supermarket branch 1,200 1,800

Goods are transferred from the warehouse to the supermarket branches in trucks with a
capacity of 100m3. The average journey costs $80.
Warehousing costs total $480,000 per week and the warehouse manager estimates that
60% of its capacity of 800,000m3 is utilised.
Each supermarket branch has storage costs of $100,000 per week and has 200,000m3 of
shelf space.
General administration costs are $175,000 per week.
Calculate the profit per item of WhiteyWhite using the direct product profitability
method (to two decimal places).

1.15 A company uses an activity-based costing system to attribute overhead costs to its three
products. The following budgeted data has been obtained for next year.

Product A B C
Production (units) 36,000 32,000 30,000
Batch size 4,000 8,000 1,000

Pre-production inspection costs are determined by the number of batches of each product
and have been estimated to be $430,000 for the year.
What is the inspection cost per unit for Product C?
Give your answer to the nearest whole $

VL2020

Questions 7
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 2 Quality management
2.1 A company produces three products using three different machines. No other products
are made on these particular machines. The following data is available for December
20X3:

A B C
Contribution per unit $36 $28 $18
Machine hours required per unit:
Machine 1 5 2 1.5
Machine 2 5 5.5 1.5
Machine 3 2.5 1 0.5
Estimated sales demand (units) 50 50 60

Maximum machine capacity in December will be 400 hours per machine.

Calculate the machine utilisation rates for each machine for December 20X3 and identify
which is the bottleneck machine(s):
 Machine 1
 Machine 2
 Machine 3
 Machines 1 & 2

2.2 One of the products manufactured by a company is Product J, which sells for $40 per
unit and has a material cost of $10 per unit and a direct labour cost of $7 per unit. The
total direct labour budget for the year is 50,000 hours of labour time at a cost of $12 per
hour. Factory overheads are $2,920,000 per year.
The company is considering the introduction of a system of throughput accounting.
What is the throughput return for Product J?
 11
 23
 30
 40

2.3 Which THREE of the following statements are true in the context of a just in time (JIT)
inventory system?
 It is dependent upon a close and mutually beneficial working relationship with
suppliers.
 It can result in much reduced inventory holding costs.
 It inevitably increases the need for safety inventories.
 It requires suppliers to operate sound quality control procedures.
 It works best if supplies are obtained from a number of different suppliers.

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 2.4 In a Total Quality Management (TQM) environment, which of the following would be
classified as an external failure cost?
(a) Cost of repairing products returned from customers
(b) Cost of customer service section
(c) Product liability costs
(d) Cost of providing replacement items due to marketing errors
 None of the above.
 All of the above.
 (a) only
 (c) only

2.5 Which of the following are problems with JIT?

(a) JIT makes the organisation far more vulnerable to disruptions in the supply chain.
(b) Wide geographical spread makes JIT difficult.
(c) It is not always easy to predict patterns of demand.
(d) There is a risk that inventory might become obsolete.
 All of them.
 None of them.
 (a), (b) and (c)
 (a) and (c)

2.6 JH Ltd produces three products, the L1, the L2 and the L3. The L1 has a Throughput
Accounting (TA) ratio of 1.4, the L2 a ratio of 1.8, the L3 a ratio of 1.0.
Which of the following statements is/are true?
 L1 should be produced before L2
 L3 should be produced before L1
 L2 should be produced before L1
 It is impossible to state a preference between the products

2.7 Which of the following is an aspect of JIT?

(a) The use of small frequent deliveries against bulk contracts
(b) The grouping of machines or workers by product or component instead of by type of
work performed
(c) A reduction in machine set-up time
(d) Production driven by demand
 None of them.
 All of them.
 (a) only
 (c) and (d)

VL2020

Questions 9
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 2.8 The theory of constraints is an approach to production management, which aims to
maximise sales revenue less:
 Material costs as throughput
 Material and variable overhead costs
 Variable overhead costs
 All production costs

2.9 Which TWO of the following statements do not relate to kaizen costing?
 Employees are often viewed as the cause of problems.
 It assumes continuous improvement.
 It is used for cost control.
 Targets are set and applied monthly.
 It is used for cost reduction.
 Management should investigate and respond when targets are not met.

2.10 Use the words below to complete the following paragraphs.

 target
 incremental
 large
 life cycle
 improve
 kaizen
 fail
A food producer produces one type of low-cost food and production techniques have
remained largely unchanged for a number of years. It has been struggling with falling
sales. The company could improve its position by adopting  costing.

This is applied during the manufacturing stage of the  and focuses on

achieving  improvements. This type of costing is based on the

assumption that the manufacturing process is always able to .

2.11 A company has been analysing its costs of quality and has identified that its costs have
been as follows:

Prevention costs $120,000

Appraisal costs $85,000
Internal failure costs $56,000
External failure costs $97,000

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 How much are the company's costs of non-conformance?
 $120,000
 $153,000
 $205,000
 $238,000

2.12 Which of the following are features of JIT?

(a) Inventories are minimised
(b) Frequent changes of suppliers
(c) Employee involvement in preventative maintenance
 (a) and (c)
 (b)
 (a), (b) and (c)
 (a) and (c)

2.13 Fish Co makes a variety of different products, but its ability to fulfil customer demand is
restricted by the availability of manufacturing hours on Machine K. There are 4,000
hours available per month. Product Gold requires 30 minutes of machine time. The
conversion costs per year are estimated to be $144,000 per annum.
The cost card for Product Gold is as follows:
$
Selling price 50
Less: material A (26)
Labour (2 hours @ $5) (10)
Contribution per unit 15

The throughput accounting ratio for Product Gold is:

2.14 Two divisions within Jupiter plc have, at the prompting of Head Office, launched TQM
initiatives.
Division A has received complaints from customers who received defective products which
had to be replaced. Division A has therefore increased resource levels and training for the
Quality Control department to minimise the risk of defective products reaching customers.
Division B commissioned a project to improve quality. The project manager encouraged
staff to come up with initiatives to improve quality. At the end of the project, the project
manager's recommendations were presented to the board and many of the recommended
initiatives were adopted.

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Questions 11
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 Are the following statements true or false?
True False
Division A's actions are an illustration of the
application of TQM.
 
Division B's actions are an illustration of the
application of TQM.
 

2.15 Easton plc is a manufacturer which produces widgets in its factory. As part of its
adoption of TQM, the Finance Manager at Easton plc is designing a cost of quality
report.
Allocate the costs below to the correct cost heading.

Appraising completed products for quality pre-sale 

Refunding customers who received defective products 
Establishing a Quality Circle of production-line staff 
Inspecting raw materials as they arrive at the factory 

Pull down list:

Appraisal cost
External failure cost
Internal failure cost
Prevention cost

3 Value management
3.1 The following statements have been made about Cam Co's target costing system.
(a) Target costing ensures that new product development costs are recovered in the
target price for the webcam.
(b) A cost gap is the difference between the target price and the target cost of the
webcam.
Which of the above statements is/are true?
 (a) only
 (b) only
 Neither (a) nor (b)
 Both (a) and (b)

3.2 Which of these are aspects of value when applying value analysis?
 Cost value
 Exchange value
 Use value
 Esteem value
 Incremental value
 Target value

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 3.3 Which one of the following statements is correct?
 Reverse engineering is the application of value analysis to new products.
 Functional analysis is applied during the maturity stage of a product's life cycle.
 Quality management identifies customer requirements and ensures that these drive
product design and process planning.
 Value analysis aims to improve quality even if it increases costs.

3.4 Given the following information, what is the target cost gap for Product P?
Product P target selling price per unit = $20
Target margin on sales = 20%
Current cost = $26

3.5 How is target cost calculated?

 Desired selling price - actual profit margin
 Market price - desired profit margin
 Desired selling price - desired profit margin
 Market price - standard profit margin

3.6 The selling price of product B is set at $65 for each item, and sales for the coming year
are expected to be 4,000 units.
If the company requires a return of 12% in the coming year on its investment of $900,000
in product B, the target cost for each unit in the coming year is?
 $27
 $65
 $92
 $38

3.7 Which TWO of the following are support activities in the value chain?
 Marketing and sales
 Procurement
 Human resource management
 Service
 Operations

3.8 Which of these statements is correct?

(a) Target costing aims to reduce costs at the manufacturing stage of a product's life
cycle.
(b) Target costing reflects the critical importance of the development stage of a
product's life cycle.
(c) Kaizen costing is applied during the development stage of a product's life cycle.

VL2020

Questions 13
These materials are provided by BPP
 (d) Standard costing emphasises the need for variance analysis for control.
 (a), (b) and (c)
 (a), (b), (c) and (d)
 (a) and (c)
 (b) and (d)

3.9 Which of the following statements about target costing is INCORRECT?

 The first step is to define the product specification.
 Required profit is estimated based on profit margins or return on investment.
 The cost gap is calculated as the selling price minus the target cost.
 Functional analysis is used to close the cost gap before production starts.

3.10 Given the following information, what is the target cost gap for product X?

Product X target selling price per unit $10

Target profit 25% on cost
Current cost $8.40 per unit
 $0.40
 $0.60
 $0.90
 $1.60

3.11 A manufacturer of electronic products has designed a new product. The organisation's
marketing department believes that 200,000 units of the product could be sold at a price
of $25 each. Development and manufacturing costs of the product total $16,000,000.
The organisation requires a minimum of 12% return on any investment.
What is an appropriate target cost for the new product?
 $15.40
 $25
 $80
 $9.60

3.12 Which of the following are claimed outcomes of value analysis?

(a) Elimination of costs
(b) Reduction of costs
(c) An increase in sales volumes
(d) An increase in selling prices
 (c) and (d) only
 (a), (b) and (c) only
 (a), (b), (c) and (d)
 (a) and (b) only

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14 Advanced Management Accounting

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 3.13 Which of the following statements is false?
 Life cycle costing is the profiling of costs over a product's production life.
 There are four typical stages in the life cycle of a product. These are 'introduction',
'growth', 'maturity' and 'decline'.
 During the 'introduction' stage of the life cycle of a product, the product is likely to
be a net user of cash and profits are not expected.
 During the 'maturity' stage of the life cycle of a product, the product will be a cash
generator and any growth is likely to come from new uses.

3.14 During which stage of the product life cycle will marketing strategies need to
concentrate on differentiating a product from competing products, building brand
loyalty and offering incentives to entice competitors' customers to switch?
 Introduction
 Growth
 Maturity
 Decline

3.15 Quef Co, which manufactures and sells frozen meals, uses target costing as a key
element of its cost management process.
The company's product development team has recently developed a new chicken meal.
Based on its market research, the marketing department has recommended that the
chicken meal should be sold for $5.20 per unit, with expected demand of 480,000 units per
year. The cost of developing the meal has been $1,056,000.
Quef Co's senior management team will only authorise commercial production of any new
meals if the expected return on investment is at least 25% in the first year of production.
The cost of producing and packaging the chicken meal is currently forecast to be $4.90 per
unit.
What is the target cost gap per unit for the chicken meal?
 $0.25
 $0.30
 $1.00
 $1.90

3.16 Which THREE of the following statements about the use of extended value chain
analysis are correct?
 It is a useful framework for benchmarking against other companies.
 It involves the use of cost drivers to manage costs in each activity.
 It facilitates cost reduction by segregating activities into independent areas.
 It models the importance of environmental PEST factors on value creation.
 It provides a structure for understanding the relationship between cost and value.

VL2020

Questions 15
These materials are provided by BPP
 3.17 ABC Co is a large trading company.
Steve is the administration manager and is also responsible for legal and compliance
functions.
Angela is responsible for after sales service and has responsibility for ensuring that
customers who have purchased goods from ABC Co are fully satisfied.
Brian deals with suppliers and negotiates on the price and quality of inventory. He is also
responsible for identifying the most appropriate suppliers of plant and machinery for the
factory.
Sam is the information technology manager and is responsible for all information systems
within the company.
According to Porter's value chain, which manager is involved in a primary activity as
opposed to a support activity?
 Steve
 Angela
 Brian
 Sam

4 Data for decision making

4.1 Determine which one of the following costs would NOT be classified as a relevant cash
flow.
 Additional fixed costs arising as a result of a project being undertaken.
 The purchase price of an asset to be used on a project, which has no alternative use
or resale value.
 Materials used on a project which are already in inventory and will need to be
replaced if used.
 Tax allowable depreciation relating to a project.

4.2 Determine which one of the following costs would be classified as a relevant cash flow.
 Labour costs for staff paid an hourly rate but who have sufficient spare time to work
on the project.
 Depreciation charged on an asset which is being used exclusively on the project.
 Interest payable on a long-term loan used by the organisation to fund its
investments.
 Money invested in working capital which is released in full before the end of the
project.

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 4.3 If a project is undertaken, a machine costing $1m will need to be purchased. At the end of
the five-year project, the machine can be sold for $0.1m. Tax will be charged on any
profits made by the project.
Identify which of the following items should be included in a relevant cash flow analysis:
(a) Purchase price
(b) Sales proceeds
(c) Interest paid on the money borrowed to finance the purchase
(d) Tax allowable depreciation
 (a) and (b) only
 (b), (c) and (d) only
 (a), (b), and (d) only
 (a), (b) and (c) only

4.4 When reviewing qualitative aspects of a potential investment, which factors should
NOT be considered?
 The impact of the project on market share
 The impact on internal stakeholders
 The impact on external stakeholders
 The extent to which the project is consistent with the organisation's strategy

4.5 The board of directors at ABC Ltd is considering a proposal to invest in new capital
machinery.
In what order should the investment appraisal steps proceed?
(1) Creation phase
(2) Feasibility study
(3) Implementation
(4) Qualitative analysis
(5) Quantitative analysis
 1, 4, 5, 2, 3
 1, 2, 4, 5, 3
 2, 4, 5, 3
 2, 1, 3, 4, 5

4.6 The Finance Director of Orinoco Web Services (OWS) is responsible for appraising any
investment proposals. Several operational managers have submitted proposals relating
to their own departments and OWS has a policy of reviewing proposals on the following
basis:
 Feasibility study
 Stakeholder analysis
 Quantitative analysis
 Implementation

VL2020

Questions 17
These materials are provided by BPP
 Which additional stages need to be added to the OWS policy?
(a) Environmental review to identify opportunities and threats
(b) A post-completion review
(c) A customer impact assessment
(d) Financial analysis
 (a) and (c) only
 (a) and (b) only
 (b) and (c) only
 (a), (b), (c) and (d)

4.7 Which TWO costs are normally associated with the collection of secondary data?
 Time and money spent identifying information needs
 Time and money spent designing data collection process
 Time and money spent collecting new data
 Time and money spent analysing existing information

4.8 Why do many organisations use dashboards to present information to senior

managers?
 Dashboards ensure that all divisions present their performance in the same standard
layout.
 Dashboards present high volumes of detailed information at a glance.
 Dashboards summarise key pieces of information in a clear format.
 Dashboards are quick and easy to design.

4.9 Omega plc has been selling second-hand cars for over thirty years from its out-of-town
showroom. Over recent years, the number of customers has fallen dramatically and the
company is now facing urgent liquidity issues.
Which TWO of the following factors would discourage the board of directors from
commissioning analysis of the local second-hand car market based on primary data?
 The research is likely to take too long to acquire.
 The information is unlikely to be sufficiently tailored to Omega plc's situation.
 Omega's already has sufficient data about customer buying habits.
 The cost of the research.

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18 Advanced Management Accounting

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 4.10 Brendan is preparing the management accounts for Theta plc. He is under pressure to
deliver his report to the board of directors by the end of the day and he has therefore
had to exclude sales revenue from those divisions who had not submitted their returns.
Which ONE quality of information has Brendan prioritised and which ONE has he had to
compromise?

Quality of information prioritised: 

Quality of information compromised: 

Pull down list:

accuracy
completeness
cost-beneficial
user-targeting
relevance
authority
timeliness
ease of use

4.11 Kieran has been asked to gather operational data from spending officials from ten
independent cost centres and convert it into meaningful information that enables them to
run their departments more effectively. When he receives all the necessary data, Kieran
plans to consolidate all ten submissions into a single report that will be carefully
reconciled back to the source data.
However, he is conscious that spending officials will have limited time available so he has
designed some eye-catching graphics to communicate the key messages clearly and
succinctly.
Which quality of good information will Kieran's report not meet?
 Accurate
 Complete
 User-targeted
 Relevant

4.12 Toby Fairweather, Finance Director of Tuff Gin Ltd, has recently attended a promotional
event run by a Business Intelligence (BI) systems provider. Tuff Gin currently relies on
spreadsheets designed by the finance office supervisor to analyse its internal data.
Although the supervisor is not a spreadsheet expert, he is very proud of his reports and
defends them robustly when managers criticise them for their simplicity and lack of
insightful analysis. Nevertheless, Toby is keen to use BI systems within Tuff Gin and is
preparing a proposal for the board.
Which of the following is an advantage of using BI systems?
 BI systems will make the role of finance office supervisor redundant.
 BI systems will provide more meaningful information to managers.
 BI systems will be cheaper to run than the existing data analysis system.
 BI systems are likely to be received enthusiastically by the finance office supervisor.

VL2020

Questions 19
These materials are provided by BPP
 4.13 Banbridge Ltd is about to carry out net present value analysis on a project. If the project
is undertaken, a machine will be used that cost $300,000 when it was purchased two
years ago and has a current written down value of $250,000. If the project is not
undertaken, the machine could either be sold for $150,000 or used for another purpose.
If it is used for another purpose, the company will be spared the cost of acquiring a new
machine for $220,000. However, some improvements to the existing machine, costing
$20,000, will be necessary.
What is the relevant cost of the machine when calculating the net present value of the
project?

4.14 Which factor would undermine the usefulness of a Business Information System?
 An excessively high volume of source data
 A wide variety of unverified data from internal and external sources
 A combination of both structured and unstructured data
 A highly unpredictable and volatile commercial environment

5 Project appraisal
5.1 A project has a cash outflow of $4,000 at time 0 and cash inflows of $500 from time 3
onwards.
If the cost of capital is 10% per annum, calculate the net present value of the project (to
the nearest $).

5.2 Indicate whether, in a comparison of the NPV and IRR techniques, the following
statements are true or false.

Both methods give the same accept or reject decision, 

regardless of the pattern of the cash flows.

IRR is technically superior to NPV and easier to 

calculate.

The NPV approach is superior if discount rates are 

expected to vary over the life of the project.

NPV and accounting ROCE can be confused. 

Pull down list:

True
False

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 5.3 A project has an NPV of $49m at a discount rate of 10% and an NPV of $18m at a discount
rate of 15%.
Calculate the internal rate on the project to the nearest 0.1%.

5.4 A company has a nominal (money) cost of capital of 18% per annum.
If inflation is 6% each year, calculate the company's real cost of capital to the nearest
0.01%.

5.5 The payback period is the number of years that it takes a business to recover its
original investment from net returns calculated on what basis?
 Before depreciation and before taxation
 Before depreciation but after taxation
 After deprecation but before taxation
 After deprecation and after taxation

5.6 To what does the internal rate of return equate the present value of expected future net
cash receipts?
 Initial cost of the investment outlay
 Depreciated value of the investment
 Terminal (compound) value of future cash receipts
 Zero

5.7 A company is considering whether to invest in a project that would involve the purchase
of equipment costing $300,000. The project would have a six-year life, at the end of
which the equipment would have an expected residual value of $60,000. Depreciation
would be charged using the straight-line method, over the six-year period. The company
has spent $30,000 on a report by a team of consultants, who have prepared the
following estimates of the annual profit for each year of the project.

Year 1 2 3 4 5 6
Profit (in $'000) 60 75 100 60 40 20

What is the payback period for the project, to the nearest month?
 2 years 7 months
 2 years 10 months
 4 years 2 months
 4 years 11 months

VL2020

Questions 21
These materials are provided by BPP
 5.8 A contract is to be commenced immediately. In one year's time it will require material EH.
The material costs $7,800 now but will cost $8,800 in one year's time. The cost of storing
EH for one year is $110 payable in one year's time.
If the contractor's cost of capital is 10% per annum, what is the present value of using the
material if the contractor wishes to maximise the NPV from the contract?
 $7,900
 $7,999
 $7,800
 $7,910

5.9 Which TWO of the following approaches would be valid in evaluating of the NPV of a
project which is subject to a single rate of inflation?
 Accept the project if the IRR of the real cash flows is greater than nominal cost of
capital.
 Reject the project if the NPV of the real cash flows is negative when discounted at the
nominal cost of capital.
 Reject the project if the IRR of the inflated cash flows is less than the nominal cost of
capital.
 Accept the project if the NPV of the nominal cash flows is positive when discounted at
the real cost of capital.

5.10 A company has a real cost of capital of 6% per annum and inflation is currently 4% per
annum.
The company's annual money cost of capital is closest to:
 10.24%
 10.00%
 2.00%
 1.92%

5.11 K Ltd are considering an investment of $1,300,000. The company requires a minimum
real rate of return of 10% under the present and anticipated conditions. Inflation is
expected to be 3% per annum over the life of the investment and all costs and revenues
are expected to increase in line with inflation.
Which of the following is the most appropriate approach to take to a DCF appraisal?
 Increase costs and revenues at 3% per annum and discount at 10%
 Make no adjustment to the cash flows for inflation and discount at 10%
 Increase the cash flows by 3% per annum and discount at 13%
 Make no adjustment to the cash flows for inflation and discount at 13%

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22 Advanced Management Accounting

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 5.12 What are the advantages of ROCE compared to the payback method of investment
appraisal?
(a) It is easier for non-financial managers to understand.
(b) It does not account for the time value of money.
(c) It is more relevant in a capital rationing situation.
(d) It looks at the whole life of a project.
 (a) and (d) only
 (a), (b) and (c) only
 (a) only
 (d) only

5.13 Tree Cole Tarts plc is appraising an investment of $700,000 in plant, which will last four
years and have no residual value. Fixed operating costs (excluding depreciation) will be
$200,000 in the first year, increasing by 5% per annum because of inflation. The
contribution in the first year is forecast at $620,000, increasing by 7% per annum due to
inflation. The company's money cost of capital is 14%.
Calculate the net present value of the investment, to the nearest $'000.

5.14 M plc is evaluating an possible investment project, the cash flows are as follows: 10%
discount rate to determine its net present values.

Investment $'000
Initial Investment 450
Incremental cash flows: Year 1 130
Year 2 130
Year 3 130
Year 4 130
Year 5* 150

*includes $20,000 residual value.

The project has an NPV of $55,000 when discounted at a cost of capital of 10%.
Calculate the discounted payback period of the investment (to one decimal place).

years

VL2020

Questions 23
These materials are provided by BPP
 5.15 A company is considering an investment of $400,000 in new machinery. The machinery
is expected to yield incremental profits over the next five years as follows:

Year Profit
($)
1 175,000
2 225,000
3 340,000
4 165,000
5 125,000

Thereafter, no incremental profits are expected and the machinery will be sold. It is
company policy to depreciate machinery on a straight line basis over the life of the asset.
The machinery is expected to have a value of $50,000 at the end of year 5.
Calculate the payback period of the investment in this machinery to the nearest 0.1
years.

years

5.16 An investment costing $100,560 is forecast to generate equal cash inflows each year, to
last for five years, and to produce a positive NPV of $22,440 at a company's cost of
capital of 7%.
What is the approximate internal rate of return of the investment?
 4.0% so the project should be rejected
 10.0% so the project should be accepted
 15.0% so the project should be accepted
 22.3% so the project should be accepted

5.17 Peter plans to buy a holiday villa in five years' time for cash. He estimates the cost will be
$1.5m. He plans to set aside the same amount of funds at the beginning of each of the
next five years, starting immediately and earning a rate of 10% interest per annum
compound.
To the nearest $100, how much does he need to set aside each year?

5.18 Mesma Co pays corporation tax at a rate of 30%. Tax allowable depreciation (TAD) is
available on a 25% reducing balance basis.
In 20X0 Mesma Co purchases plant and equipment of $100,000 and claims TAD in that
year.
How much tax will Mesma Co save in 20X1 by taking the writing down allowance?

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24 Advanced Management Accounting

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 5.19 A lease agreement has a net present value of $26,496 at a rate of 8%. The lease involves
an immediate down payment of $10,000 followed by 4 equal annual payments.
What is the amount of the annual payment, to the nearest $?

5.20 Classify the following into qualitative and quantitative non-financial performance
measures

Defective products per batch 

Levels of repeat business 

Employee morale 

Customer satisfaction 

Brand loyalty 

Volume of customer complaints 

Employee turnover 

Corporate reputation 

Pull down list:

Quantitative
Qualitative

6 Further aspects of project appraisal

6.1 A company is considering four capital projects in which to invest. All of the projects are
divisible, which means that if the company invests in a fraction of a project, it will earn
that fraction of the expected returns. Information about the projects is as follows:

Project W Project X Project Y Project Z

Cash flows $ $ $ $
Year 0 (10,000) (8,000) (18,000) (17,000)
Year 1 3,000 7,000 0 0
Year 2 6,000 5,000 18,000 27,000
Year 3 8,000 3,000 15,000 -
Year 4 8,000 2,000 1,000 -
PV of annual cash profits 17,340 13,200 24,500 25,860

VL2020

Questions 25
These materials are provided by BPP
 If there is capital rationing in Year 0, and none of the project start times can be delayed
beyond year 0, how would the four projects be ranked in order of priority, starting with
the most desirable project first?
 W, X, Y then Z
 W, X, Z then Y
 X, W, Z then Y
 Z, Y, W then X

6.2 Four investment projects are under consideration. Details are as follows.

Project Year 0 PV of future Profitability

outlay cash flows index
$'000 $'000 $'000
A 200 300 0.50
B 600 800 0.33
C 1,000 1,300 0.30
D 1,600 1,800 0.125

Projects A and B are mutually exclusive. Projects C and D are mutually exclusive.
If the projects are divisible, but investment funds are restricted to $1,000,000, which
projects should be undertaken?
 Project A and 80% of Project C
 Project A and 50% of Project D
 Project B and 40% of Project C
 Project B and 25% of Project D

6.3 When deciding between mutually exclusive investment projects with unequal lives, the
decision should be based on a comparison of:
 The net present value of future cash flows of each cycle divided by the project life
 The terminal value of future cash flows of each cycle
 Total present value of cash flows of each cycle
 The net present value of future cash flows of each cycle expressed as an annuity

6.4 When choosing between mutually exclusive projects with unequal lives on the basis of
lowest annualised equivalent cost, we usually ignore which THREE of the following?
 Annual running costs
 Future changes in cost of capital
 Future changes in technology
 That the product is unlikely to be produced forever
 Replacement costs

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26 Advanced Management Accounting

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 6.5 What is the annual equivalent cost of spending a present value of $24,870 every three
years if the discount rate is 10%?
(use discount factors to three decimal places)
The annual equivalent cost is:

6.6 A company is considering its asset replacement policy for a machine that it uses in its
operations. The machine costs $15,000 and has a maximum expected useful life of four
years. The expected annual running costs and the expected residual value of the
machine are as follows.

Running End of Residual

costs ($) value ($)
Year 1 2,000 Year 1 7,000
Year 2 6,000 Year 2 4,000
Year 3 8,000 Year 3 1,000
Year 4 9,000 Year 4 0

The decision facing the company is whether to replace the machine annually, or every two,
three or four years. The cost of capital is 15%.
Year Discount factor PV of $1 Discount factor
at 15% per annum at 15%
1 0.87
2 0.76 Years 1–2 1.63
3 0.66 Years 1–3 2.29
4 0.57 Years 1–4 2.86

What is the equivalent annual cost of replacing the machine every three years, to the
nearest $1,000?
To the nearest $1,000, the equivalent annual cost of replacement every three years is:

6.7 Capital rationing is best described as a situation where:

 A company has insufficient cash to undertake all the projects available to it.
 A company has chosen to pay some of its cash to pay a dividend rather than
undertaking all the projects that have a positive NPV at its cost of capital.
 A company has insufficient projects available with a positive NPV to use up all its
cash.
 A company has insufficient cash to undertake all the projects that have a positive
NPV at its cost of capital.

VL2020

Questions 27
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 6.8 A machine costing $150,000 has a useful life of eight years, after which time its
estimated resale value will be $25,000. Annual running costs will be $5,000 for the first
three years of use and $8,000 for each of the next five years. All running costs are
payable on the last day of the year to which they relate.
Using a discount rate of 20%, what would be the annual equivalent cost of using the
machine if it were bought and replaced every eight years in perpetuity (to the nearest
$100)?
 $46,600
 $43,900
 $43,300
 $21,100

6.9 A company expects to have spare production capacity during the coming three years
and its directors are considering whether to undertake a contract for a fixed price of
$1,000,000. Work on the new contract would have to start immediately and would take
three years to complete. The management accountant has calculated that the NPV of the
contract's cash flows is negative.
Which of the following statements is correct?
(a) A negative NPV means that an investment proposal should always be rejected.
(b) The reliability of the data provided needs to be considered.
(c) The project can be considered in isolation without considering other projects.
(d) The effect on employees, customers' reaction and the flexibility of the business all
need to be considered.
 (a), (b), (c)
 (a), (b), (c), (d)
 (a), (c)
 (b), (d)

6.10 Use the words below to complete the following paragraphs.

 large
 insufficient
 positive
 external
 internal
 inappropriate

Capital rationing arises when there is  capital to invest in all available

projects which have  NPVs. Hard rationing is where

 limits exist on funds available. Soft rationing is where

constraints are imposed.

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28 Advanced Management Accounting

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 6.11 An investment project that requires an initial investment of $500,000 has a residual value
of $130,000 at the end of five years. The project's cash flows have been discounted at
the company's cost of capital of 12% and the resulting net present value is $140,500.
The profitability index of the project is closest to:
 0.02
 0.54
 0.28
 0.26

6.12 JKL plc has $1 million available for investment. It has identified three possible
investments, J, K and L, which each have a life of three years.
The three-year period coincides with JKL plc's investment plans.
JKL plc uses a 15% cost of capital when appraising investments of this type.
Details of these investments are set out below:
J K L
$'000 $'000 $'000
Initial investment 400 500 300
Net positive cash flows
Year 1 40 70 50
Year 2 80 90 50
Year 3 510 630 380
Net present value 31 43 31

Assuming that each of the investments is divisible, they are not mutually exclusive and
cannot be invested in more than once, state the optimum investment plan for JKL plc.
Project Priority for funding Outlay
(1-3) $'000s
J 
K 
L 

Pull down list:

1
2
3

VL2020

Questions 29
These materials are provided by BPP
 6.13 A company has appraised three capital investment projects, and has produced the
following analysis.

Project Capital PV of net NPV of Profitability

outlay cash flows project index
$'000 $'000 $'000
Alpha 480 1,050 570 1.19
Beta 600 1,200 600 1.00
Gamma 800 1,650 850 1.06

Given that capital available is restricted to $1,120,000, what is the maximum total NPV
achievable, assuming that all three projects are divisible?
 $850,000
 $1,170,000
 $1,250,000
 $1,420,000

6.14 Four investment projects are under consideration. Details are as follows.

Project Year 0 PV of Profitability

outlay future cash index
flows
$'000 $'000 $'000
A 200 300 0.50
B 600 800 0.33
C 1,000 1,300 0.30
D 1,600 1,800 0.125

Projects A and B are mutually exclusive. Projects C and D are mutually exclusive.
If the projects are divisible and investment funds are not in restricted supply, which
projects should be undertaken?
 Projects A and C
 Projects A and D
 Projects B and C
 Projects B and D

6.15 An investor is indifferent between replacing a machine every two years, and replacing it
every four years.
The present value of the first two years' replacement cycle is $17,360, and the present
value of the first four years' replacement cycle is $31,700.
What discount rate is the investor using?
 5%
 10%
 15%
 20%

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30 Advanced Management Accounting

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 6.16 Complete the setence using the following words below.
 wait
 abandon
 follow on
An electronics company makes radios and is considering launching a new portable version
which will give the company a competitive advantage for three years. They would need to
buy new capital equipment for $400,000 which would have a scrap value of $60,000 in
three years' time. Launching the radio would give the company opportunity to launch
further models at a later date. This is an option to . The opportunity to

sell the capital equipment provides an option to .

6.17 Which ONE of the following statements concerning the modified internal rate of return
(MIRR) is correct?
 MIRR is based on the cost of capital set by the central bank.
 MIRR does not discount future cash flows.
 MIRR is calculated on the basis of investing the inflows at the cost of capital.
 MIRR is only concerned with capital inflows.

6.18 The following information is available concerning a proposed investment by Emand Co.
The company's cost of capital is 10%.

Year Cash flow

$
0 (24,500)
1 15,000
2 11,694
3 3,000
4 1,000

Calculate the modified internal rate of return (MIRR), to the nearest %.

6.19 Which of the following statements is incorrect with regard to appraising capital
investment proposals?
 An organisation may review its operational objectives in the light of an attractive
proposal.
 A project that undermines an organisation's mission should still be undertaken as
long as it is profitable.
 Even if the funds are available, an organisation may be prevented from undertaking
a profitable proposal.
 Hard capital rationing is the term used to describe a lack of sufficient funds to
undertake the proposal.

VL2020

Questions 31
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 6.20 A company has recently developed a new lawnmower with an estimated market life of
five years. Production and sale of the new lawnmower will require investment in new
production equipment costing $750,000. It is expected that this equipment could be sold
back to the original vendor for $50,000 at the end of five years.
Purchase of the equipment would be financed by a five-year fixed rate bank loan at an
interest rate of 6%.
A manager already employed by the company would be moved from his current position to
manage production of the new lawnmower. His position would be filled by a new recruit on
a fixed annual salary of $35,000.
Which of these statements is INCORRECT?
 If the lawnmower is a failure then management can terminate the project early and
sell the equipment, giving them an abandonment option.
 The salary of the replacement manager is a relevant cash flow in the decision.
 The interest costs on the bank loan are a relevant cash flow in the decision.
 Launching a new lawnmower gives an opportunity to launch more new versions and
provides a follow-on option.

7 Pricing strategies
7.1 Which one of the following statements is true?
 Marginal cost plus pricing is also known as full cost plus pricing.
 Minimum pricing is based on relevant costs.
 Full cost plus pricing is used for profit maximisation.
 Demand is a main factor in the full cost plus approach to pricing.

7.2 A wholesaler sells 15 product lines to retailers. It has 100,000 cubic metres of storage in
its warehouse, including 1,000 cubic metres of cold storage. General overheads are
$400,000 and additional cold storage costs are $60,000. One of the products, the Ice,
requires cold storage; each unit of the Ice occupies 0.05 cubic metres.
All products are charged for general use of the warehouse.
The wholesaler pays $2 per unit for the Ice, and prices its products to generate a profit
margin of 20%.
Calculate the selling price of a unit of the Ice (to one decimal place).

7.3 In an attempt to win over key customers in the motor industry and to increase its market
share, PN Motor Components plc has decided to charge a price lower than its normal
price for component WB47 when selling to the key customers who are being targeted.
Details of component WB47's standard costs are as follows.

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32 Advanced Management Accounting

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 Standard cost data
Component WB47
Batch size 200 units
Machine Machine Machine
group 1 group 7 group 29 Assembly
$ $ $ $
Materials (per unit) 26.00 17.00 – 3.00
Labour (per unit) 2.00 1.60 0.75 1.20
Variable overheads (per unit) 0.65 0.72 0.80 0.36
Fixed overheads (per unit) 3.00 2.50 1.50 0.84
31.65 21.82 3.05 5.40
Setting-up costs per batch of
200 units $10 $6 $4 –

Compute the lowest selling price at which one batch of 200 units could be offered
(to the nearest $).

7.4 Use the words below to complete the following paragraphs.

 expensive
 decrease
 unique
 late
 skimming
 increase
 early
 penetration
A company manufactures and sells a number of products all of which have a life cycle of
six months or less. It has recently developed an innovative product and has decided to
launch it with a high price initially as the product is . This is a market

 pricing strategy which will allow the company to gain high profits

 in the product's life cycle. In the growth stage, selling prices are likely

to .

VL2020

Questions 33
These materials are provided by BPP
 7.5 Which of the following statements best explains the difference between market
skimming and penetration pricing?
 Penetration pricing is a strategy that is often used in the decline phase of a product's
life cycle whereas market skimming is a strategy that is mainly used in the
introduction phase of the product life cycle.
 Market skimming is a strategy that is often used in the decline phase of a product's
life cycle whereas penetration pricing is a strategy that is mainly used in the
introduction phase of the product life cycle.
 Penetration pricing is a policy of charging high prices when the product is first
launched in order to obtain sufficient penetration in the market whereas market
skimming is a policy of charging low prices when a product is first launched and
attracting customers through heavy advertising and sales promotion.
 A strategy of penetration pricing could be effective in discouraging potential new
entrants to the market, whereas the strategy of market skimming is to gain high unit
profits early in the product's life cycle.

7.6 An entertainment company is launching a new games console to the market next year
and is currently considering its pricing strategy for this new product.
The product will be unlike any other product that is currently available and will introduce
3-D effects when playing games online. The prototype required a substantial amount of
time to develop and as a result the company is keen to recover its considerable research
and development costs as soon as possible.
However, this unique position in the market place is expected to remain for only six months
before one of the company's competitors develops a similar games console. The
competitors would avoid the significant research and development costs by reverse
engineering this company's own product.
To minimise the effect of this, this company must be prepared to reduce the price of the
product significantly just before its competitors enter the market.
Which pricing strategy would be most suitable during the launch phase of the games
console?
 Penetration pricing
 Market skimming
 Dual pricing
 'Own label' pricing

7.7 Which of these statements are correct?

(a) Price is the only factor affecting demand.
(b) Premium pricing is used to imply that the product is different in some way.
(c) Loss leadership is often used for new and different products with a short product life
cycle.
 (a), (b)
 (a), (b), (c)
 (b)
 (a), (c)

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34 Advanced Management Accounting

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 7.8 A company has recently developed an innovative product. Since the product is unique, it
was decided that it would be launched with a market skimming pricing policy. However,
the company expects that other companies will try to enter the market very soon.
Which of the following statements is likely to be incorrect?
 In the growth stage, the selling price is likely to fall as competition increases.
 In the growth stage costs per unit are likely to be increasing.
 At the maturity stage, the selling price will probably have stabilised.
 The company needs to make as much profit as possible in the early part of the life
cycle.

7.9 When is a market penetration pricing policy appropriate?

 If a product is new and different
 If demand is highly elastic
 If demand is inelastic
 If there is no possibility of economies of scale

7.10 In which one of the following circumstances would the choice of a market-skimming
pricing policy be unsuitable for a product during the initial stage of its life cycle?
 The product is protected by a patent.
 Expected demand and the price sensitivity of customers for the new product are
unknown.
 The product is expected to have a long life cycle.
 To maximise short-term profitability.

7.11 Alpha plc experiences annual demand of 200,000 units when it sets a selling price of
$240 per unit for one of its products. In order to shift surplus stock, it plans to reduce the
selling price to $210 per unit and expects demand to increase to 280,000 units.
What is the price elasticity of demand?
 0.3
 0.5
 2.0
 3.2

7.12 Albatross plc is a book publisher. The cost card for one of its books is as follows:
$
Direct materials 4
Direct labour 3
Royalty paid to author 1
Fixed overheads absorbed 2
Total cost 10
Albatross's policy is to add a mark-up of 40% to the marginal cost of producing the book.

VL2020

Questions 35
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 Calculate the selling price of a book.
 $9.80
 $11.20
 $13.33
 $14.00

7.13 Apricot plc, a leading electronics designer and manufacturer, has launched a new mobile
phone. This phone contains technology which is at least five years ahead of Apricot's
competitors. For this reason, Apricot has set a selling price which is significantly higher
than any other mobile phone either Apricot or its competitors have previously sold, and
which it intends to maintain.
Which pricing policy is Apricot following?
 Own label pricing
 Premium pricing
 Price discrimination
 Price skimming

7.14 Bridge Farm Ltd estimates that the total cost of producing a litre of milk, including the
absorption of fixed overheads, is $0.95. It currently sells its milk at a 25% margin but has
discovered that another farm is selling its milk at $1.10/litre and wants to match the price.
What margin will Bridge Farm earn if it matches its competitor's price?
 13.6%
 15.8%
 25.0%
 33.3%

7.15 CL Ltd has commissioned a consultant to research its market. The consultant has
advised that CL's products have a price elasticity of demand (PED) of -3.2.
Which of the following statements about CL's products is correct?
 A small percentage increase in price results in a larger percentage increase in
demand.
 A small percentage increase in price results in a smaller percentage decrease in
demand.
 A small percentage increase in price results in a larger percentage decrease in
demand.
 A small percentage increase in price results in a smaller percentage increase in
demand.

7.16 Market research by Company A has revealed that the maximum demand for product R is
50,000 units each year, and that demand will reduce by 50 units for every $1 that the
selling price is increased. Based on this information, Company A has calculated that the
profit-maximising level of sales for product R for the coming year is 35,000 units. At a
price of $1,000, no units would be sold.

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36 Advanced Management Accounting

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 Calculate the price at which these units will be sold.

7.17 A company has determined that if a price of $250 is charged for Product G, demand will
be 12,000 units. It has also been established that demand will rise or fall by 5 units for
every $1 fall/rise in the selling price. The marginal cost of product G is $80.
Marginal revenue = a - 2bQ when the selling price (P) = a - bQ.
Calculate the profit-maximising selling price for product G.

7.18 The demand curve for a product is expressed by the formula P = 24 – 0.004Q, where P is
the selling price and Q is the quantity demanded per week at that price. At the current
sales price of $10 per unit, demand per week is 3,500 units.
By how much could the company raise the selling price per unit in order to increase
total sales revenue per week, before total sales revenue per week from the product
begins to go into decline?
 By $2 per unit
 By $4 per unit
 By $10 per unit
 By $12 per unit

7.19 Product LOO currently sells for $95 per unit. Annual demand at that price is 107,000
units. If the price falls to $85, the annual demand increases by 2,500 units.
What is the formula for the demand curve?
 P = 523 - Q/250
 P = 523 + Q/250
 P = 523 - Q/2,500
 P = 137.8 - Q/250

7.20 H is launching a new product. It expects to incur variable costs of $14 per unit. Market
research has been done to determine the optimum selling price with the following results.
If the price charged was to be $25 per unit then the demand would be 1,000 units each
period. For every $1 increase in the selling price, demand would reduce by 100 units each
period.
Calculate the optimum selling price for the new product (in cents to two decimal
places).

VL2020

Questions 37
These materials are provided by BPP
 7.21 The following information is available for Product Y.

Units Price Total Marginal Total Marginal

revenue revenue cost cost
$ $ $ $ $
0 0 0 0 600 –
1 504 504 504 720 120
2 471 942 438 804 84
3 439 1,317 375 864 60
4 407 1,628 311 924 60
5 377 1,885 257 1,005 81
6 346 2,076 191 1,134 129
7 317 2,219 143 1,274 140
8 288 2,304 85 1,440 166
9 259 2,331 27 1,674 234
10 232 2,320 (11) 1,980 306
What is the optimal price for Product Y, if they have to choose from the list of prices in
the table above?

8 Decision making in responsibility centres

8.1 The following information is available regarding the fixed budget of HU Co.
Production units sold 5,000
$'000
Sales 35
Variable costs 20
Contribution 15
Fixed costs 10
Calculate the profit figure if the number of production units sold is flexed to 8,000.
Ignore any movements in inventory.

$ ,000

8.2 A manager of a production department in a manufacturing company is made responsible

for certain costs of his department.
Which of the following costs should the manager NOT be held accountable for?
 A proportion of rent and rates for the building the production department shares
with other departments
 Direct labour costs
 Direct material costs
 Repair costs incurred on machinery in the production department arising from
misuse by production department employees

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38 Advanced Management Accounting

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 8.3 Hay budgeted to sell 400 units and produced the following budget.

$
Sales 142,000
Variable labour costs (63,200)
Variable material costs (25,200)
Contribution 53,600
Fixed costs (37,800)
Profit 15,800
Actual sales were 460 units which sold for a total of $150,000. Actual expenditure on
material was $48,000, actual labour cost was $54,000 and fixed costs totalled $20,000.
What contribution (in $) will a budget that has been flexed to reflect actual output
show?

8.4 The following statements have been made about planning and operational variances.
(a) They can undermine the importance placed on the original target set at the
beginning of the budgeting period.
(b) It is usually easy to identify in retrospect what prices and quantities were, but not
nearly so easy to identify what they should have been.
Which of the above statements is/are true?
 (a) only
 (b) only
 Neither (a) nor (b)
 Both (a) and (b)

8.5 Big data is sometimes defined in terms of the three Vs. Which of the following is not
one of the three Vs?
 Veracity
 Variety
 Velocity
 Volatility

8.6 The directors of Bee El Ltd have expressed frustration with the lengthy management
reports they are sent each month. They have asked the Finance Director to prepare
something more visually appealing and user friendly.
Which factor does the Finance Director NOT need to consider when re-designing the
reports?
 Format of layout
 Colour of layout
 Size of layout
 Flexibility of layout

VL2020

Questions 39
These materials are provided by BPP
 8.7 In which of the following fields would data analytics NOT be appropriate?
 Measuring machine efficiency
 Preparing the annual financial accounts
 Estimating future sales for existing products
 Estimating sales for a new product that has not yet been launched

8.8 Complete the following statements:

Cost centre managers have a responsibility to  

Revenue centre managers have a responsibility to 

Pull down list:

Financial inputs
Financial outputs
Minimize
Maximise

8.9 Avocado plc has divisionalised its decision making on a geographic basis. The head office
management accountant has prepared the following figures for December 20X8:

$m
Revenue 285.0
Variable materials (105.0) Purchased through a central supplier contract
Variable labour (45.0) Recruited locally but payroll administered by
head office
Variable overheads (25.0) Labour-related overheads
Fixed production
costs (60.0) Long-term lease on factory
Fixed non-prod'n
costs (22.0) Allocation of head office costs
Profit 28.0
When measuring divisional performance, what profit figure should be reported?

$m

8.10 Which of the following fixed costs would not be described as controllable for the
purpose of reporting managerial performance?
 A long-term lease for the factory production facility
 The cost of a marketing campaign commissioned by the local manager
 A temporary lease taken out to secure additional warehouse storage space
 The fixed cost of calibrating factory machinery each time a different product is
produced

8.11 The branch managers in a chain of retail stores are responsible for recruiting part-time
staff, and for marketing and promotional activities in the store.

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40 Advanced Management Accounting

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 The rents and rates payable for all stores are negotiated centrally by head office. Inventory
is also procured centrally, and the procurement team negotiates the price paid for all the
items sold by the stores, and decides on the quantities of inventory to be ordered.
The company's policy is that managers' performance should be judged only on those
aspects of performance which they can control.
Which costs should be included when assessing the branch managers' performance?
Choose one or more as appropriate:
 Part-time staff costs
 Cost of sales
 Rent and rates
 Marketing and promotions

8.12 The IT Co (IT) is a company that provides hardware and software support to domestic
users in their homes. It was set up 15 years ago by Brian Brown and the sight of IT staff
on mopeds coming to 'rescue' customers gave them a cult status. As a result, Brian
expanded into a number of cities, although he found that his own approach didn't
always work because each city had very different customer bases and needs.
Although he was initially determined to retain total control over the business, Brian is
finding it increasingly difficult to manage all aspects of operations. He has sought advice
from a management consultant who has identified highly skilled staff across the company
and advised Brian to set up each city as its own semi-autonomous division, each with its
own manager appointed from within the existing teams.
Which of the following would be advantages of creating a divisional structure?
Select all that apply.
 Cost savings
 Faster decision making
 More informed decisions
 Increased control
 Increased motivation

8.13 Aisha manages the customer service department of a multinational car manufacturer.
Her department is treated as a cost centre for the purposes of management accounting.
Which one of the following costs should Aisha NOT be held accountable for?
 Salaries of customer service staff
 Maintenance of IT equipment used by Aisha's team
 A bonus paid to Aisha and her team in line with a company-wide policy
 HR costs relating to recruitment and selection of customer service staff

8.14 Etheridge plc is a specialist brewery. Its new management accountant is seeking to
categorise the following responsibility centres:
The sales department promotes Etheridge's products to pubs, bars and alcohol retailers.
At the line manager's discretion, staff often travel considerable distances to visit customers
face-to-face.

VL2020

Questions 41
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 The finance department provides financial and management accounting services to
Etheridge plc. A complex transfer pricing system is in place to recognise the value of what
is provided.
The research and development department is responsible for recommending new
products. Their performance criteria relate solely to the quality and taste of the product.
In order to encourage healthy lifestyles, Etheridge plc provides a gym for all staff to use
free of charge.
Identify the correct type of responsibility centre for each department.

Sales department 

Finance department 

Research & development department 

Gym 

Pull down list:

Cost centre
Investment centre
Profit centre
Revenue centre

8.15 Omega plc has prepared the following flexed budget showing two levels of activity:

1,000 units 1,500 units

Materials $5,000 $7,500
Direct labour $7,000 $10,500
Production overheads $8,000 $9,500
Non-production overheads $10,000 $10,000
If activity levels are at 1,250 units, what budget should be recorded?
Give your answer to the nearest $.

9 Performance measurement
9.1 Which of the following types of benchmarking involves reviewing the processes of a
business to identify those which indicate a problem and offer a potential for
improvement?
 Competitve
 Metric
 Diagnostic
 Process

9.2 Division B of BM Ltd is considering a project which will increase annual net profit after tax
by $15,000, but will require average stock levels to increase by $100,000. The current
target return on investment is 10% and the imputed interest cost of capital is 9%.

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42 Advanced Management Accounting

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 In these circumstances would the return on investment (ROI) and/or residual income
(RI) criteria motivate the managers of division B to act in the interests of the group as
a whole?
 ROI - yes, RI - yes
 ROI - yes, RI - no
 ROI - no, RI - yes
 ROI - no, RI - no

9.3 A division with $21m capital employed currently earns a return on investment of 16% per
annum which is double its cost of capital. It has the opportunity to invest $4m in a new
project where the return will be $0.8m per annum over the four years of the project. After
the fourth year there will be no further returns.
What would be the division's residual income for the first year if the project is
accepted (ignore depreciation)?

$ m

9.4 Division L has reported a net profit after tax of $8.6m for the year ended 30 April 20X6.
Included in the costs used to calculate this profit are the following items:
 Development costs of $6.3m for a new product that was launched in May 20X5, and
is expected to have a life of three years
 Advertising expenses of $1.6m that relate to the re-launch of a product in June 20X6
The opening year value of the net assets invested in Division L at 1 May 20X5 is $30m.
The cost of capital for Division L is 13% per year.
Calculate the Economic Value Added (to the nearest million) for Division L for the year
ended 30 April 20X6.

$ m

9.5 Which one of the following is not one of the four perspectives of Kaplan and
Norton's balanced scorecard?
 Financial perspective
 Customer perspective
 Internal business perspective
 Environmental perspective

9.6 A division of a service company is aware that its recent poor performance has been
attributable to a low standard of efficiency amongst the workforce, compared to rival
firms. The company is adopting a balanced scorecard approach to setting performance
targets. As part of its objective of closing the skills gap between itself and rival
companies, the division's management has set a target of providing at least 40 hours of
training each year for all its employees.
This is a performance target that reflects:

VL2020

Questions 43
These materials are provided by BPP
  A finance perspective
 An internal process perspective
 A learning and growth perspective
 A customer perspective

9.7 In the context of a balanced scorecard approach to the provision of management

information, which of the following measures would be appropriate for monitoring
the customer perspective?
(a) Percentage of on-time deliveries
(b) Customer complaints per month
(c) Average set-up time
 (a) and (b) only.
 (a) and (c) only.
 (b) and (c) only.
 (a), (b) and (c)

9.8 Please complete the following sentence using one of the options below.
Asset turnover is a measure of:
 How often on average business assets are replaced
 How well the assets of a business are used to generate sales
 How well the assets of a business are used to generate profits
 The proportion of revenue that is re-invested in assets

9.9 Which of the following is a non-financial performance measure?

 Share price
 Delivery time
 Cash flow
 Revenue

9.10 A company reports sales of $550,000 and a PBIT of $27,500. Its ROCE is 15%.
What is the asset turnover for the company?

9.11 Which type of benchmarking would be most likely to use reverse engineering?
 Internal
 Functional
 Competitive
 Strategic

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44 Advanced Management Accounting

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 9.12 The annual operating statement for a company is shown below:
$'000
Sales revenue 800
Less variable costs 390
Contribution 410
Less fixed costs 90
Less depreciation 20
Net income 300
Assets $6.75m
The cost of capital is 13% per annum.
The residual income (RI) for the company is closest to:
 -$467,000
 -$487,000
 -$557,000
 -$577,500

9.13 The annual operating statement for a company is shown below:

$'000
Sales revenue 800
Less variable costs 390
Contribution 410
Less fixed costs 90
Less depreciation 20
Net income 300
Assets $6.75m
The return on investment (ROI) for the company is closest to:
 4.44%
 4.74%
 5.77%
 6.07%

9.14 Summary financial statements are given below for one division of a large divisionalised
company.

Summary Divisional Financial Statements for the year to 31 December

Balance sheet Income statement

$ $
Non-current assets 1,500 Revenue 4,000
Current assets 600 Operating costs (3,600)
Total assets 2,100 Operating profit 400
Interest paid (70)
Divisional equity 1,000 Profit before tax 330
Long-term borrowings 700
Current liabilities 400
Total equity and liabilities 2,100

VL2020

Questions 45
These materials are provided by BPP
 The cost of capital for the division is estimated at 12% each year.
Annual rate of interest on the long-term loans is 10%.
All decisions concerning the division's capital structure are taken by central management.
The divisional return on investment (ROI) for the year ended 31 December is:

9.15 Summary financial statements are given below for one division of a large divisionalised
company.

Summary Divisional Financial Statements for the year to 31 December

Statement of financial position Statement of profit or loss

$ $
Non-current assets 1,500 Revenue 4,000
Current assets 600 Operating costs (3,600)
Total assets 2100 Operating profit 400
Interest paid (70)
Divisional equity 1,000 Profit before tax 330
Long-term borrowings 700
Current liabilities 400
Total equity and liabilities 2,100

The cost of capital for the division is estimated at 12% each year.
Annual rate of interest on the long-term loans is 10%.
All decisions concerning the division's capital structure are taken by central management.
The divisional residual income (RI) for the year ended 31 December is:
 $160,000
 $196,000
 $230,000
 $330,000

9.16 Division A of G Ltd reported net profit of $1,700,000 in 20X5 and the gross capital
employed at the end of the year was $5,000,000. For evaluation purposes, all divisional
assets are valued at original cost. The division is considering a project which will increase
annual net profit by $75,000, but will require average inventory levels to increase by
$150,000 and non-current assets to increase by $350,000. G Ltd imposes a 18% capital
charge on its divisions.
In these circumstances, will the return on investment (ROI) and/or residual income (RI)
criteria motivate the managers of Division A to accept the project?
 ROI – yes, RI – yes
 ROI – yes, RI – no
 Impossible to tell from the information provided.
 ROI – no, RI – yes
 ROI – no, RI – no

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46 Advanced Management Accounting

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 9.17 Division Y has reported annual operating profits of $40.2 million. This was after charging
$6 million for the full cost of launching a new product that is expected to last three years.
Division Y has a risk-adjusted cost of capital of 11%. The historical cost of the assets in
Division Y, as shown on its statement of finanical position, is $100 million, and the
replacement cost has been estimated at $172 million.
Ignore the effects of taxation.
The EVA for Division Y is:
 $23.28 million
 $24.84 million
 $29.20 million
 $30.44 million

9.18 The following data have been extracted from a company's year-end accounts:

$
Turnover 7,055,016
Gross profit 4,938,511
Operating profit 3,629,156
Non-current assets 4,582,000
Cash at bank 4,619,582
Short term borrowings 949,339
Trade receivables 442,443
Trade payables 464,692

Calculate the return on capital employed to the nearest whole %.

9.19 The time taken for a company to develop new products would be included in which
perspective of the balanced scorecard?
 Financial
 Customer
 Internal
 Innovation and learning

VL2020

Questions 47
These materials are provided by BPP
 9.20 A company's operating profit for the last year was $168.0 million. Tax paid in the year
was $8.0 million.
The company spend $7.4 million on marketing and promotions, and $4.3 million on product
development. The development expenditure has not been capitalised.
The operating profit figure includes a depreciation charge of $5.0 million. Economic
depreciation for the year was estimate to be $6.8 million.
In the context of Economic Value Added (EVA), what was the company's net operating
profit after tax (NOPAT) for the last year?
(Give your answer to one decimal place).

$ million

10 Transfer pricing
10.1 The following statements have been made about a transfer pricing system where Division
A transfers output to Divison B.
(a) Internal transfers should usually be preferred when there is an external market for
the transferred item, because there will be more control over quality and delivery.
(b) The transfer price will determine how profits will be shared between the two divisions.
Which of the above statements is/are true?
 (a) only
 (b) only
 Neither (a) nor (b)
 Both (a) and (b)

10.2 WX has two divisions, Y and Z. The following budgeted information is available.
Division Y manufactures motors and budgets to transfer 60,000 motors to Division Z and to
sell 40,000 motors to external customers.
Division Z assembles food mixers and uses one motor for each food mixer produced.
The standard cost information per motor for Division Y is as follows:

$
Direct materials 70
Direct labour 20
Variable production overhead 10
Fixed production overhead 40
Fixed selling and administration overhead 10
Total standard cost 150
In order to set the external selling price the company uses a 33.33% mark up on total
standard cost.
Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at marginal
cost (say answer in '000s):

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48 Advanced Management Accounting

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 Calculate the budgeted profit/(loss) for Division Y if the transfer price is set at the total
production cost (say answer in '000s):

10.3 Which TWO of the following are reasons why cost-based approaches to transfer
pricing are often used in practice?
 Because there is often no external market for the product that is being transferred
 Because the external market is imperfect
 Because the transferring division wants to maximise its profits
 Because the buying division wants to maximise its profits

10.4 ABC Group has several divisions. Division A manufactures one type of product, a Unit,
which it sells both to external customers and also to Division B, another member of the
ABC Group. The Group's policy is to allow divisions the freedom to set transfer prices and
choose their own suppliers.
ABC uses residual income (RI) to assess divisional performance with targets being set each
year. The group's cost of capital is 10% a year. For Division A the budgeted information for
next year is as follows:
Maximum capacity 200,000 units
External sales 160,000 units
External selling price $33 per unit
Variable cost $20 per unit
Fixed costs $1,200,000
Capital employed $3,600,000
Target RI $200,000
Division B provisionally requests a quote for 60,000 Units from Division A for the coming
year.
What is the transfer price per Unit that Division A should quote B in order to meet its
residual income target?

$ per unit.

10.5 ABC Group has several divisions. Division A manufactures one type of product, a Unit,
which it sells both to external customers and also to Division B, another member of the
ABC Group. The Group's policy is to allow divisions the freedom to set transfer prices and
choose their own suppliers.
ABC uses residual income (RI) to assess divisional performance with targets being set each
year. The group's cost of capital is 10% a year.

VL2020

Questions 49
These materials are provided by BPP
 For Division A the budgeted information for next year is as follows:
Maximum capacity 200,000 units
External sales 160,000 units
External selling price $33 per unit
Variable cost $20 per unit
Fixed costs $1,200,000
Capital employed $3,600,000
Target RI $200,000
Division B provisionally requests a quote for 60,000 Units from Division A for the coming
year.
What transfer price(s) would Division A have to quote Division B if the Group's policy is to
quote transfer prices based on opportunity costs?
 $33 only
 $33 and $20
 $20 only
 None of these

10.6 ABC Group has several divisions. Division A manufactures one type of product, a Unit,
which it sells both to external customers and also to Division B, another member of the
ABC Group. The Group's policy is to allow divisions the freedom to set transfer prices and
choose their own suppliers.
ABC uses residual income (RI) to assess divisional performance with targets being set each
year. The group's cost of capital is 12% a year. For Division A the budgeted information for
next year is as follows:
Maximum capacity 200,000 units
External sales 160,000 units
External selling price $33 per unit
Variable cost $20 per unit
Fixed costs $1,200,000
Capital employed $3,600,000
Target RI $200,000
Division A needs to meet its Target RI and sets its transfer price at $20.20 accordingly.
Division B, based in a different country to A, needs 60,000 Units which it could purchase
from Division A, but it could also buy them from W Co at $20 per Unit. Division A is taxed at
50%, whilst Division B is taxed at 30%.
By how much more would the group's profits increase if B bought from W rather than A?

10.7 Which of the following is not one of the desired effects of an 'ideal' transfer price?
 It enables the transferring division to earn a return for its efforts.
 It enables profit centre performance to be measured commercially.
 It enables profit centres to make entirely autonomous decisions.
 It results in action that is consistent with the aims of the organisation as a whole.

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50 Advanced Management Accounting

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 10.8 In which two of the following situations should market price or market-based price be
used as a basis for transfer pricing?
 When variable costs and market prices are constant
 When there is an imperfect external market
 When variable costs and market prices are not constant
 When a perfect external market exists

10.9 The following sentence can be validly completed by selecting which two options from
below?
When there is no external market for an item being transferred between divisions the
transfer price should be:
 Less than or equal to the selling price minus variable costs in the receiving division
 Greater than or equal to the selling price minus variable costs in the receiving
division
 Less than or equal to the variable cost in the supplying division
 Greater than or equal to the variable cost in the supplying division

10.10 Consider two profit centres, M and S. M transfers all its output to S as there is no external
market for it. The variable cost of output from M is $4 a unit, and fixed costs are $1,000
per month.
Additional processing costs in S are $5 a unit for variable costs, plus fixed costs of $950 per
month. Budgeted production is 500 units a month, and the output of S sells for $14 a unit.
Which of the following transfer prices will motivate the managers of both M and S to
increase output?
 $6.00
 $4.00
 $9.50
 $14.00

10.11 Which two of the following are disadvantages of using market value as a transfer price?
 The market price used may be a temporary one.
 Using it may act as a disincentive to use up spare capacity.
 Using it may act as a disincentive to control fixed costs.
 It may result in inter-departmental disputes resulting in head office intervention.

10.12 Which of the following is not a feature of a two-part tariff system?

 Once a period there is a transfer of a fixed fee as a lump sum payment to the
supplying division.
 Transfer prices are set at variable cost.
 The selling division's fixed costs should be covered.
 The message sent to the supplying division is that fixed costs must be controlled.

VL2020

Questions 51
These materials are provided by BPP
 10.13 Jim Jarr plc is a manufacturing company with several divisions. Division X produces a
single product which it sells to Division Y and also to outsiders.

Sales to Div Y External sales

by Div X by Div X
$ $
Sales revenue: at $35 per unit 350,000

at $30 per unit 150,000

Variable costs at $18 per unit (90,000) (180,000)

Contribution 60,000 170,000

Fixed costs (50,000) (120,000)

Profit 10,000 50,000

A supplier offers to supply 4,000 units at $25 each to Division Y.

What will Division X's contribution be if Division X does not match the lower price offered
by the external supplier and cannot increase its external sales, so that Division Y chooses
to purchase from the external supplier?

10.14 A company has three profit centres, X, Y and Z. The output of Division X is transferred to
Division Y, and the output of Division Y is transferred to Division Z. The end product of
Division Z is sold to external customers at a price of $100 per unit. The transfer prices of
output transferred between profit centres are based on a profit margin of 20%.
Cost data is as follows, excluding transfer costs.
X Y Z
$ per unit $ per unit $ per unit
Added materials 8 6 6
Direct labour 6 4 8
Production overhead 10 10 12

What is the profit per unit sold for profit centre Z?

(in dollars and cents)

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52 Advanced Management Accounting

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 10.15 X and Y are two divisions of Oldhat Ltd. Division X manufactures one product, the XX,
with a unit production cost of $12 which includes $2 of absorbed fixed overhead. The
prevailing market price for the XX is $16. Product XX is sold outside the company in a
perfectly competitive market and also to Division Y. If sold outside the company, variable
selling costs of $2 per unit are incurred.
If the total demand for the XX is more than sufficient for Division X to manufacture to
capacity, what would be the minimum price Division X would accept to transfer the XX to
Division Y?
 $10
 $12
 $14
 $16

10.16 Within the PQ Group plc, Division P transfers component X to Division Q at a transfer
price of $52 per unit. The unit cost of X within Division P is $45 (variable cost of $34 plus
absorbed fixed overhead of $11). Division Q has located an external supply of component
X for $49 per unit.
If Division Q uses the external supplier, what will be the effect on profits?
 P's profit will decrease, overall group profit will decrease
 P's profit will increase, overall group profit will decrease
 P's profit will decrease, overall group profit will increase
 P's profit will increase, overall group will increase
 It is not possible to tell without further information

10.17 If transfer prices are set at variable cost, the supplying division does not cover its fixed
costs.
Which of the following does not resolve this problem?
 Each division can be given a share of the overall contribution earned by the
organisation.
 Central management can impose a range within which the transfer price should fall.
 A two-part charging system can be adopted.
 A system of dual pricing can be adopted.
 The level of fixed costs can be reduced.

10.18 X and Y are two divisions of Oldhat Co.

Division X manufactures one product, the Flek, with a unit production cost of $12 which
includes $2 of absorbed fixed overhead. The prevailing market price for the Flek is $16.
The Flek is sold outside the company in a perfectly competitive market and also to Division
Y. lf sold outside the company, variable selling costs of $2 per unit are incurred.
lf the total demand for the Flek is more than sufficient for Division X to manufacture to
capacity, what would be the minimum price Division X would accept to transfer the
Flek to Division Y?

VL2020

Questions 53
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  $10
 $14
 $16
 $12

10.19 Which of the following are true?

(a) Transfer prices based on standard costs provide an incentive for the receiving
division to control costs.
(b) If the transfer price for an intermediate product is greater than the external market
price for that product, the internal transfer should not happen.
(c) One of the disadvantages of negotiated transfer prices is that divisional
performance can be determined by the negotiating skills of divisional managers.
 (a) and (b) only
 (a) and (c) only
 (b) and (c) only
 (a), (b) and (c)

11 Risk and uncertainty

11.1 Daily sales of product X by Y Ltd are likely to be 400 units, 500 units or 600 units. The
probability of sales of 500 units is 0.5, while the probability of sales of 600 units is 0.1.
Calculate the expected value of the daily sales volume.

11.2 Claire Ltd is considering a project with the following revenue stream:

Year Investment Variable Sales Net cash

costs flows
$000 $000 $000 $000
0 (10,000)
1 (4,000) 9,000 5,000
2 (4,000) 9,000 5,000
3 (4,000) 9,000 5,000

The company's cost of capital is 5%.

By what percentage will sales have to fall for the project to produce a zero net present
value?
 14.8%
 26.6%
 33.2%
 36.2%

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54 Advanced Management Accounting

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 11.3 Helen Ltd has budgeted the following results for the year:

Sales Probability
units
20,000 0.2
30,000 0.5
40,000 0.3

Sales price per unit is $20. Variable costs per unit are budgeted as follows.
Costs Probability
$
12 0.1
14 0.6
16 0.3

Fixed costs will be $175,000.

What is the probability that Helen will make a loss?
(to two decimal places)

11.4 Lynn Ltd has budgeted the following results for the year:

Sales Probability
units
20,000 0.3
30,000 0.4
40,000 0.3

Sales price per unit is $20.

Variable costs per unit are budgeted as follows.
Costs Probability
$
12 0.2
14 0.5
16 0.3

Fixed costs will be $175,000.

What is the expected loss that Lynn will make?

VL2020

Questions 55
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 11.5 A project requires an initial outlay of $400,000.
The present value of its future cash flows is estimated as follows:

$000s
Sales revenue 6,000
Variable costs 4,000
Incremental fixed costs 750
Tax at 20% 250

What is the sensitivity of the project decision to a change in sales volume?

 10.0%
 62.5%
 37.5%
 30.0%

11.6 A company has estimated the selling prices and variable costs of one of its products as
follows:

Selling price per unit

$ Probability
40 0.30
50 0.45
60 0.25

Variable cost per unit

$ Probability
20 0.55
30 0.25
40 0.20

Given that the company will be able to supply exactly 1,000 units of its product each
week irrespective of the selling price, and variable costs per unit are independent of each
other, calculate the probability that the weekly contribution will exceed $20,000.

11.7 X Ltd can choose from three 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

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56 Advanced Management Accounting

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 Based on the expected value of the net cash inflows, which project should be undertaken?
 L
 M
 N

11.8 A five-year project has a net present value of $160,000 when it is discounted at 12%. The
project includes an annual cash outflow of $50,000 for each of the five years. No tax is
payable on projects of this type.
The percentage increase in the value of this annual cash outflow that would make the
project no longer financially viable is closest to:
 64%
 89%
 113%
 156%

11.9 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 conditions conditions
$m $m $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?

$ m

11.10 A company wishes to decide on a selling price for a new product, and wants to choose
the price that will provide the most satisfactory weekly total contribution.
Weekly sales of each product will depend on the price charge and also on customers'
response to the new product. The following pay-off table has been prepared.
Probability Price P1 Price P2 Price P3 Price P4
$ $ $ $
Price 5.00 5.50 6.00 6.50
Unit contribution 3.00 3.50 4.00 4.50
Weekly demand Units Units Units Units
Best possible 0.3 10,000 9,000 8,000 7,000
Most likely 0.5 8,000 7,500 7,000 6,000
Worst possible 0.2 6,000 5,000 4,000 3,000

VL2020

Questions 57
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 If the choice of selling price is based on a maximax decision rule, which price would be
selected?
Insert your answer to two decimal places.

11.11 The main purpose of sensitivity analysis is to:

 Predict the future outcome from an uncertain situation
 Determine the outcome from a situation in the event of the worst possible outcome
 Determine the expected value of an outcome that is uncertain
 Gain insight into which assumptions or variables in a situation are critical

11.12 A company wishes to decide on a selling price for a new product. Weekly sales of each
product will depend on the price charge and also on customers' response to the new
product. The following pay-off table has been prepared.

Profitability Price P1 Price P2 Price P3 Price P4

$ $ $ $
Price 5.00 5.50 6.00 6.50
Unit contribution 3.00 3.50 4.00 4.50
Weekly demand Units Units Units Units
Best possible 0.3 10,000 9,000 8,000 7,000
Most likely 0.5 8,000 7,500 7,000 6,000
Worst possible 0.2 6,000 5,000 4,000 3,000

If the choice of selling price is based on a maximin decision rule, which price would be
selected?
 P1
 P2
 P3
 P4

11.13 The following statements have been made about decision making under conditions of
uncertainty.
(a) The expected NPV of a project is the value expected to occur if an investment project
with several possible outcomes is undertaken once.
(b) A risk-averse decision maker avoids all risks in decision making.
(c) Expected values are used to support a risk-averse attitude to decision making.
(d) Expected values are more valuable as a guide to decision making where they refer to
outcomes which will occur many times over.

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58 Advanced Management Accounting

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 Which of the above statements is/are true?
 All of them
 (a), (c) and (d) only
 (a) and (b) only
 (d) only

11.14 GLM Co is a pharmaceutical company. In the current year GLM only has sufficient funds
to finance one of four potential new projects.
The NPV of four potential options has been assessed using expected values. These are
shown in the decision tree below, where the benefit is the net present value of each of the
four projects (these are numbered from 1 to 4).
GLM is risk-neutral.
Probability Benefit
$m

1.0 9,500
1
0.3 14,000
2
0.3 10,000

3 0.4 5,000

0.4 10,000

4 0.6 9,000

0.7 8,000

0.3 14,000

Which choice should be made so as to optimise the expected benefit?

 Choice 1
 Choice 2
 Choice 3
 Choice 4

VL2020

Questions 59
These materials are provided by BPP
 11.15 A company wishes to decide on a selling price for a new product. Weekly sales of each
product will depend on the price charge and also on customers' response to the new
product. The following pay-off table has been prepared.

Profitability Price P1 Price P2 Price P3 Price P4

$ $ $ $
Price 5.00 5.50 6.00 6.50
Unit contribution 3.00 3.50 4.00 4.50
Weekly demand Units Units Units Units
Best possible 0.2 10,000 9,000 8,000 7,000
Most likely 0.5 8,000 7,500 7,000 6,000
Worst possible 0.3 6,000 5,000 4,000 3,000

If the choice of selling price is based on the expected value decision rule, which price
would be selected?
 P1
 P2
 P3
 P4

11.16 A company wishes to decide on a selling price for a new product. Weekly sales of each
product will depend on the price charge and also on customers' response to the new
product. The following pay-off table has been prepared.

Profitability Price P1 Price P2 Price P3 Price P4

$ $ $ $
Price 5.00 5.50 6.00 6.50
Unit contribution 3.00 3.50 4.00 4.50
Weekly demand Units Units Units Units
Best possible 0.3 10,000 9,000 8,000 7,000
Most likely 0.5 8,000 7,500 7,000 6,000
Worst possible 0.2 6,000 5,000 4,000 3,000

If the choice of selling price is based on a minimax regret decision rule, which price would
be selected?
 P1
 P2
 P3
 P4

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60 Advanced Management Accounting

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 11.17 Which of the following are true in respect of using expected values in net present value
calculations?
(a) Appropriate for one-off events
(b) Hides risk
(c) Probably won't actually occur
(d) Eliminates uncertainty
 (a), (b) and (c) only
 (c) and (d) only
 (b) and (c) only
 (a), (b) and (d)

11.18 The following financial information relates to an investment project:

$'000
Present value of sales revenue 50,025

Present value of variable costs 25,475

Present value of contribution 24,550

Present value of fixed costs 18,250

Present value of operating income 6,300

Initial investment 5,000

Net present value 1,300

What is the sensitivity of the net present value of the investment project to a change in
sales price?
 7.1%
 2.6%
 5.1%
 5.3%

11.19 Which of the following statements is the main advantage of using simulations to assist
in investment appraisal?
 Statement 1 - simulation gives a clear decision rule
 Statement 2 - with simulation, more than one variable can change at a time
 Statement 3 - simulation is statistically more accurate than other methods
 Statement 4 - being diagrammatic makes simulation easier to understand

VL2020

Questions 61
These materials are provided by BPP
 11.20 A company wishes to go ahead with one of three mutually exclusive projects, but the
profit outcome from each project will depend on the strength of sales demand, as follows:

Strong Moderate Weak

demand demand demand
$ $ $
Project 1 70,000 10,000 (7,000)
Project 2 25,000 12,000 5,000
Project 3 50,000 20,000 (6,000)
Probability of demand 0.1 0.4 0.5

What is the value to the company of obtaining perfect market research information,
ignoring the cost of obtaining the information?
 $3,000
 $5,500
 $6,000
 $7,500

11.21 A company manufactures mobile phones; it has two factories.

30% of the mobile phones are made in factory X, the other 70% in factory Y.
10% of factory X's production has a major fault, 12% of factory Y's production has such a
fault.
A customer has just purchased a mobile phone that has a major fault.
What is the probability that it was made in factory Y?
(Give your answer to one decimal place)

11.22 Company A is expecting to make a profit of $4 million on a new project. The standard
deviation of the project has been estimated as $2 million.
Calculate the probability of a profit in excess of $5 million being made on this project.
(Give your answer as a % to two decimal places)

11.23 Company A is expecting to make a profit of $3 million on a new project, the standard
deviation has been estimated as $2 million.
Calculate the probability of a loss being made on this project.
(Give your answer as a % to two decimal places)

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62 Advanced Management Accounting

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 12 Analysis and management of risk
12.1 Briggs plc has analysed a particular risk faced by its Scarborough division on a risk map.
It has concluded that the matter has a low impact but there is a high probability of its
occurrence.
Which of the following risk responses would be most appropriate?
 Risk avoidance
 Risk reduction
 Risk transfer
 Risk acceptance

12.2 Two terms recur in the evaluation of any system; they are efficiency and effectiveness
and are two key reasons for the introduction of information systems into an organisation.
Identify the THREE examples of efficiency from those below.
 Automation is pursued because the company expect it to help increase market share
or satisfy customer needs.
 The speed of processing is improved.
 The cost of a computer system is lower than the manual system it replaces, mainly
because the jobs previously performed by human operators are now done by
computers.
 The accuracy of data/information and processing is improved, because a computer
is less likely to make mistakes.
 Front office systems are developed to improve the organisation's decision-making
capability.

12.3 Data and information come from sources both inside and outside an organisation.
Which THREE of the following represent data or information captured from within the
organisation?
 Information about personnel from the payroll system
 Information on new employment legislation from the company secretary
 Value of sales from the accounting records
 Information on decisions taken from the minutes of a meeting
 Market information on buying habits of potential customers from the marketing
manager

12.4 Which of the following statements is true?

 High frequency, high severity risks are always strategic risks.
 Risk transfer means the management of a portfolio of different risks.
 Insuring risks means that businesses will not need to take any measures to reduce
those risks.
 Risk hedging is taking action to offset one risk by incurring a new risk in the opposite
direction.

VL2020

Questions 63
These materials are provided by BPP
 12.5 CIMA's Code of Ethics for professional accountants is based upon:
 A framework of fundamental principles
 A framework of strict rules
 A scale of penalties for non compliance
 Sustainability principles and best practice

12.6 Grenville Ltd is renewing its buildings and contents insurance policy covering its eight UK
factories.
In terms of risk management, this is an example of:
 Risk avoidance
 Risk reduction
 Risk transfer
 Risk retention

12.7 Risk mapping is a technique for assessing the severity of a risk and the probability or
frequency of its likely occurrence.
For what type of risk would it probably be most appropriate to take out an insurance
policy from an insurance company?
 Severity high, frequency high
 Severity high, frequency low
 Severity low, frequency low
 Severity low, frequency high

12.8 Drag and drop the reactions to risk onto the risk map below:
Severity
Low High

Low
Probability

High

Pull down list:

Transfer
Accept
Reduce / control
Abandon / avoid

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 12.9 In what circumstances would an organisation accept a risk and not take further action?
 The cost of avoiding the risk is considered to be too great.
 The risk is an inevitable but low-impact consequence of a commercial decision.
 The probability of the risk materialising is low.
 The risk cannot be avoided without withdrawing from the market.

12.10 Which of the following is NOT an example of a business risk?

 The risk of a change in price of raw materials used in production
 The risk of a key member of staff resigning
 The risk of demand for a product or service falling
 The risk of failure due to a poorly developed strategy

12.11 Which of the following is NOT a relevant question in identifying whether a course of
action is ethical?
 Is it legal?
 Is it fair to the parties involved?
 Is it consistent with the organisation's strategy?
 How would you feel if other people found out about what you had done?

12.12 Justin is a management accountant who produces monthly reports for Ambridge Ltd. In
December, Justin realised he had made a mistake in the previous month's management
report. The error was a minor example of human error, but Justin prided himself on never
making mistakes and was therefore very embarrassed. Although he corrected the historic
figures in the next month's report, he did not notify the recipients that the previous report
contained inaccuracies.
Which ethical principle has Justin failed to demonstrate?
 Professional competence and due care
 Integrity
 Professional behaviour
 Objectivity

12.13 Epsilon Co is a well-established company looking to invest in a new five-year accounting

software licence. The new software will require all historic data to go through a one-off
re-formatting.
Which TWO risks does Epsilon need to consider with regard to the new licence?
 Switching costs
 Finance costs
 Locking in costs
 Strategic costs

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 12.14 The O3 arena is a live music venue with a capacity of 20,000. In spite of very strong box
office performance, the arena has a tense relationship with local residents and
businesses, who complain about large numbers of people clogging up roads near the
venue whenever an event takes place. After several years of tense negotiations, O3 has
agreed to implement a Park & Ride scheme which encourages ticketholders to park in a
large car park two miles away and catch a free shuttle bus (arranged by O3) to the
venue.
What principle has O3 applied in arranging the shuttle bus?
 An integrity-based approach to ethics
 Professional behaviour
 Social responsibility
 Commercial acumen

12.15 Earl identified nine reasons why Information Technology (IT) needs to be treated as a
strategic issue.
Which of the following is not one of those reasons?
 IT can be a source of major competitive advantage.
 IT staff need to be managed effectively.
 IT affects a wide variety of stakeholders.
 IT can result in revolutionary changes to the way an organisation operates.

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 Answers to
objective test
questions

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 1 Analysing and managing costs
1.1 The correct answer is: $7.50.
Step 1
Cost driver is number of batches, therefore calculate number of batches for each product
and in total.

X Y Z Total
Number of batches
Production units 15 25 20
Batch size 2.5 5 4
6 5 5 16

Step 2
Calculate machine set-up costs attributable to product Y using number of batches as the
allocation basis.

5
Machine set-up costs  600,000 = $187,500
16

Step 3
Calculate the machine set-up costs that would be attributable to each unit of Product Y:

Machine set-up costs = $187,500

Production units = 25,000
Machine set-up costs per unit = $7.50

1.2 The correct answer is: (a), (b), (c) and (d)
ABM includes cost reduction (by use of cost drivers), product design decisions (by use of
cost drivers), operational control (for example, a better understanding of whether variances
are due to activity level changes) and performance evaluation (for example, by using
activity-based budgeting).
ABM does include more than the activities mentioned above, however.
1.3 The correct answer is: (a) and (c) only
ABC is regarded as an improvement for reasons (a) and (c). All overheads are addressed
under traditional absorption methods.
1.4 The correct answer is: (d) only
(d) is a feature of traditional absorption costing methods which does not distinguish
between different classifications of overhead costs in the way that ABC does.
1.5 The correct answer is: (c) only
ABC recognises the impact of complexity, and it is often the case that low-volume products
incur similar overhead activities to high-volume products, meaning that under ABC their
cost per unit will be higher and their profits lower.
(a) ABC is particularly useful in an advanced manufacturing technology environment
where overhead costs are a significant proportion of total costs.
(b) This provides a means of controlling the occurrence of the overhead cost.
(c) ABC recognises the complexity of manufacturing with its multiple cost drivers.

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 1.6 The correct answer is: A factor which causes the costs of an activity
A factor which causes the costs of an activity is the correct description of a cost driver. It is
the factor which causes the costs of an activity to increase or decrease. For example, a
cost driver for materials handling costs could be the number of production runs: the higher
the number of production runs, the higher will be the cost of material handling.
1.7 The correct answer is: (a), (c) and (d)
(a) Short-term variable overhead costs vary with the volume of activity, and should be
allocated to products accordingly.
(b) This statement is not correct. Many overhead costs, traditionally regarded as fixed
costs, vary in the long run with the volume of certain activities, although they do not
vary immediately. However, 'unit' level costs do relate to volume, by definition (for
example power, machine depreciation)
(c) For example, the number of credit investigations undertaken within the credit review
department of a bank would be the cost driver of the department's costs.
(d) Following on from (c) above, a mortgage might require three credit investigations
and hence the mortgage should bear the proportion of the departments' costs
reflected by three credit investigations.
1.8 The correct answer is: Customer X
This is even though X receives a higher discount as the analysis below shows:
Customer X Customer Y
$ $
Revenue 16,000 20,000
Less discount 2,400 2,000
Net revenue 13,600 18,000
Less:
cost of items (at $20 each) 8,000 10,000
transport costs − 4,000
admin costs 400 200
Net gain 5,200 3,800

Number of units sold 400 500

Net gain per unit sold 13.00 7.60

Net gain per $1 of revenue 0.33 0.19

1.9 The correct answer is: Unit level

Here, equipment maintenance is a unit level cost because the more the machinery is used
(in production of whatever type of output) the more maintenance will be required.
This cost could be a product/process expense but only if the machinery was specifically
required to produce a specific product and that is not the case here.
1.10 The correct answer is: $24.50
Overhead allocation to Product A.
Set-up costs: $40,000
Number of production runs = 100 (35 + 40 + 25)
Set-up costs allocated to Product A = $400  35
= $14,000
Inspection costs: $37,500
Number of inspections = 75 (15 + 25 + 35)
Inspection costs allocated to Product A = $500  15
= $7,500

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 Inventory handling costs: $13,500
Number of inventory requisitions = 45 (10 + 15 + 20)
Inventory requisition cost per requisition = $13,500 / 45
= $300
Total overheads allocated to Product A = $24,500 ($14,000 + $7,500 + $3,000)
Total overheads per unit = $24.50 ($24,500 / 1,000)
1.11 The correct answer is: $47,500
The correct cost driver for set-up costs is the number of production runs. There are a total
of 100 production runs across the three products and therefore there is a cost of $950 per
production run ($95,000 / 100). There are 50 production runs allocated to Product X and
therefore the allocated set-up cost to Product X is 50 x $950 = $47,500.
1.12 The correct answer is: 30.0%
Total profits are $2m, 80% of this is $1.6m
Ranking the customers by profitability gives the following:
G E D A B F H J I C
$0.6m $0.5m $0.5m $0.4m $0.3m $0.2m $0.2m $0.0m ($0.2m) ($0.5)m
The top three companies (G, E and D) account for 80% of NBL's profits; 3/10 = 30% of
customers.
1.13 The correct answer is: $0.3
Warehousing costs are analysed as follows:
General costs are $720,000 - $160,000 = $560,000 ÷ 20,000 = $28 per cubic metre
$560,000 ÷ 20,000 = $28 per cubic metre
Refrigeration costs $160,000 ÷ 5,000 = $32 per cubic metre
Product A Product B Product C
Time spent in 1 week 2 weeks 4 weeks
warehouse
Space occupied in 0.0005 0.0025 0.0020
warehouse (per cubic metres cubic metres cubic metres
unit)
Cost 0.0005  1 week  28 (0.0025  2 weeks  0.0020  28  4
= 0.014 28) + (0.0025  32 weeks = 0.22
 2) = 0.30
1.14 The correct answer is: $0.33

SoapySuds WhiteyWhite
$ $
Contribution 0.60 0.60
Less
Delivery

80
3
= $0.80/m3
100m
 0.010m3 0.008
 0.025m3 0.02
Warehousing
480,000
= $1/m3/week
480,000m3

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  0.010m3  8 weeks 0.08
 0.025m3  6 weeks 0.15
Stores
100, 000
3
= $0.5/m3/week
200, 000m

 0.010m3  4 weeks 0.02

 0.025m3  8 weeks 0.10

DPP 0.412 0.33

General costs are not product specific so are ignored.

1.15 The correct answer is: $10
Overhead absorption rate (OAR) per batch: $4300,000/43 batches (w1)= $10,000 per
batch
For C: $10,000  30 batches = $300,000
Per unit this is $300,000/30,000 = $10
(W1)

Product Batches
A (36,000/4,000) 9
B (32,000/8,000) 4
C (30,000/1,000) 30
Total 43

2 Quality management
2.1 The correct answer is: Machine 2
Machine 2 is the bottleneck machine as it has the highest utilisation of all three machines
at 154%.
Utilisation rates:
Machine 1 (440/400) = 110%
Machine 2 (615/400) = 154%
Machine 3 (205/400) = 51%
Max time required on machine 1: (550) + (250) + (1.560) = 440 hours
Max time required on machine 2: (550) + (5.550) + (1.560) = 615 hours
Max time required on machine 3: (2.550) + (150) + (0.560) = 205 hours
2.2 The correct answer is: 30
Throughput contribution per unit of J = $40 - $10 = $30
Materials are the only variable cost in a throughput accounting system.
2.3 The correct answers are:
 It is dependent upon a close and mutually beneficial working relationship with
suppliers.
 It can result in much reduced inventory holding costs.
 It requires suppliers to operate sound quality control procedures.

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 The aim of JIT is to increase efficiency of inventory control systems in order to reduce
company costs, principally by minimising inventory levels and thus stockholding costs. This
is achieved by using reliable suppliers who can deliver goods of the right quality in the right
quantity at the right time. The burden of quality control is generally passed back to the
supplier to cut costs of the company.
JIT works best when a tied supplier relationship is formed, where the orders form a large
part, if not the entirety, of the supplier's business. This precludes the use of many different
suppliers. In a JIT system, steps will also be taken to improve customer relations and
communications, so that demand can be more accurately determined. This means that
reorder levels, and thus safety inventories, can be minimised without necessarily increasing
the risks (and thus costs) of stock-outs.
2.4 The correct answer is: All of the above.
External failure costs are costs arising outside the manufacturing organisation of failure to
achieve a specified quality (after transfer of ownership to the customer).
2.5 The correct answer is: (a), (b) and (c)
(a) A stock-out in a hospital could be fatal.
(b) JIT, originated by Toyota, was designed at a time when all of Toyota's
manufacturing was done within a 50 km radius of its headquarters.
(c) JIT is not suitable in all circumstances.
(d) Because inventory is held at minimum level, there is very little risk that it might
become obsolete.
2.6 The correct answer is: L2 should be produced before L1.
The product with the highest Throughput Accounting (TA) ratio should be produced first.
2.7 The correct answer is: All of them.
(a) JIT requires close integration of suppliers with the company's manufacturing
process.
(b) In other words, JIT requires the use of machine cells.
(c) JIT recognises machinery set-ups as a non-value-adding activity.
(d) Each component on a production line is produced only when needed for the next
stage.
2.8 The correct answer is: Material costs as throughput
The theory of constraints focuses on factors such as bottlenecks which act as constraints
to this maximisation.
2.9 The correct answers are:
 Employees are often viewed as the cause of problems.
 It is used for cost control.
Kaizen costing is used for cost reduction and employees are viewed as the source of (and
are empowered to find) solutions.
Employees are often viewed as the cause of problems when standard costing, which is
used for cost control, is applied.
2.10 The correct answers are:
A food producer produces one type of low cost food and production techniques have
remained largely unchanged for a number of years. It has been struggling with falling
sales. The company could improve its position by adopting kaizen costing. This is applied
during the manufacturing stage of the life cycle and focuses on achieving incremental
improvements. This type of costing is based on the assumption that the manufacturing
process is always able to improve.

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 2.11 The correct answer is: $153,000
Costs of non-conformance are internal and external failure costs.
Prevention and appraisal costs are the costs of conformance.
2.12 The correct answer is: (a) and (c)
JIT requires organisations to have a close relationship with their suppliers, and this will be
supported by having a long-term commitment between customer and supplier.
Workers are trained to operate all the machines within a machine cell, and to be able to
perform routine preventative maintenance on them.
2.13 The correct answer is: $16
Return per hour (w1)
Throughput accounting ratio or TPAR =
Cost per hour (w2)
(W1) Return per hour = Throughput contribution per unit/bottleneck time per unit
Return per hour = (50-26)/0.5 = $48
(W2) Total factory costs equate to the conversion costs
Cost per hour = Conversion costs per month/Machine K hours per month
Cost per hour = (144,000/12)/4,000
TPAR = 48/3 = $16
2.14 The correct answers are:

Division A's actions are an illustration of the application of Total Quality False
Management.

Division B's actions are an illustration of the application of Total Quality False
Management.

TQM emphasises the resolution of problems that cause poor quality (quality assurance)
rather than detecting and correcting problems once they have arisen (quality control).
Division A's actions provide quality control rather than quality assurance and therefore
cannot be said to demonstrate TQM.
The concept of continuous improvement is fundamental to TQM. Although Division B
correctly focused on quality assurance and encouraged participation across the
workforce, it was conducted as a one-off event rather than an ongoing process and
therefore cannot be said to demonstrate TQM.
2.15 The correct answers are:

Appraising completed products for quality pre-sale Internal failure cost

Refunding customers who received defective products External failure cost
Establishing a Quality Circle of production-line staff Prevention cost
Inspecting raw materials as they arrive at the factory Appraisal cost

Checking completed products is a quality control (as opposed to a quality assurance)

process. This is because it seeks to rectify a problem that has already occurred rather than
prevent the problem arising in the first place.
Costs incurred as a result of supplying a defective product to a customer are external
failure costs.

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 A Quality Circle is a group of staff who get together to improve processes. The intention is
to prevent problems from occurring, making this a prevention cost.
Inspecting raw materials as they arrive in the factory allows any defects to be dealt with
before they enter into production. This is therefore an appraisal cost.

3 Value management
3.1 The correct answer is: Neither (a) nor (b).
Cam Co's target costing system may take product development costs into consideration,
but recovery of product design and development costs is associated more with life cycle
costing. Even with life cycle costing, recovery of design and development costs is not
ensured: much depends on whether customers will buy enough webcams at the target
price.
In target costing, a cost gap is the difference between the current estimate of the cost per
webcam and the target cost that the Cam Co wants to achieve.
3.2 The correct answers are:
 Cost value
 Exchange value
 Use value
 Esteem value
Incremental and target values are not related to value analysis.
3.3 The correct answer is: Quality management identifies customer requirements and ensures
that these drive product design and process planning.
Reverse engineering involves analysing the construction of existing products.
Functional analysis is applied during the development stage of a new product.
Value analysis aims to improve quality without increasing costs.
3.4 The correct answer is: 10

Required profit = 20  20% = 4

Target cost =
20 − 4 = 16
Current cost = 26
26 − 16 = 10
3.5 The correct answer is: Market price - desired profit margin
Target cost means a product cost estimate derived by subtracting a desired profit margin
from a competitive market price.
3.6 The correct answer is: $38
Required return = 12%  $900,000
= £108,000
Expected revenue = 4,000  $65
= $260,000
Therefore total target cost = $(260,000 - 108,000)
= $152,000
Therefore unit target cost = $152,000/4,000
= $38

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 3.7 The correct answers are:
 Procurement
 Human resource management
These are support services in the value chain. The others are primary activities.
3.8 The correct answer is: (b) and (d)
Target costing focuses on costs at the development stage.
Kaizen costing is applied during the manufacturing stage.
3.9 The correct answer is: The cost gap is calculated as the selling price minus the target cost.
3.10 The correct answer is: $0.40
Target profit (25% of cost = 20% of sales price) = $2
Target cost $10 - $2 = $8
Target cost gap = $8.40 - $8 = $0.40
3.11 The correct answer is: $15.40
$
Projected revenue (200,000  $25) 5,000,000
Desired profit (0.12  $16m) 1,920,000
Total target cost 3,080,000

Unit target cost ($3,080,000/200,000) $15.40

3.12 The correct answer is: (a), (b) and (c) only.
Value analysis seeks to reduce unit cost and to provide the same (or a better) use value at
the lowest cost. Better use value may impact on sales volume. Value analysis does not
consider pricing.
3.13 The correct answer is: Life cycle costing is the profiling of costs over a product's production
life.
It also includes development costs and so on, prior to production, and any costs, such as
dismantling costs after production has ceased.
All the other statements are true.
3.14 The correct answer is: Maturity stage
During the introduction stage, brand awareness needs to be built. Advertising needs to be
stepped up during the growth stage to build brand preference. Promotional expenditure is
reduced during the decline stage and focuses on reinforcing the brand image of remaining
products in the product line.
3.15 The correct answer is: $0.25
Total sales revenue = 480,000  $5.20 = $2,496,000
Required return = $1,056,000  25% = $264,000
Therefore total target cost = $2,496,000 - $264,000 = £2,232,000
Target unit cost = $2,232,000/480,000 = $4.65
Current expected unit cost = $4.90
Therefore target cost gap = $4.90 - $4.65 = $0.25
$0.30 represents the difference between the expected selling price and the current unit
cost.
$1.00 is the difference between the expected cost ($4.90) and the cost required to generate
a gross margin of 25% ($3.90).

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 3.16 The correct answers are:
 It is a useful framework for benchmarking against other companies
 It involves the use of cost drivers to manage costs in each activity
 It provides a structure for understanding the relationship between cost and value
These are all features of value chain analysis.
Notes on incorrect answers:
It facilitates cost reduction by segregating activities into independent areas: the value
chain models interrelationships between activities, it does not treat activities as
independent areas.
It models the importance of environmental PEST factors on value creation: the extended
value chain recognises links to suppliers and customers, but does not directly model
broader environmental factors.
3.17 The correct answer is: Angela
Service is a primary activity in the value chain which entails maintaining or enhancing the
vale of the product after the sale has taken place
Steve, Sam, and Brian all have support roles.
The words 'administration' and 'information technology' should have immediately indicated
a support role for Steve and Sam. Brian's procurement role is not so clear cut but the
responsibilities for dealing with the suppliers are sufficient to conclude that Brian also has a
support role. Procurement is a support role which entails purchasing of raw materials,
consumables and capital items.

4 Data for decision making

4.1 The correct answer is: Tax allowable depreciation relating to a project
The tax saved on tax allowable depreciation would be a cash flow, but depreciation is in
itself not a cash flow.
The asset in question has not already been purchased so cash flow is required to use it on
the project. It is irrelevant that there is no opportunity cost as the asset has no further use
or resale value.
The fixed costs and materials used are all future cash flows that will arise only as a result of
implementing the project.
4.2 The correct answer is: Money invested in working capital which is released in full before the
end of the project.
The investment in working capital is a future cash flow that only arises if the project is
undertaken. Although the capital is released in full before the end of the project, the timing
of the cash flows is still relevant.
Although staff are paid an hourly rate, their idle time is used so no additional payment will
be made to them. Depreciation is not a cash flow, so is excluded from the project.
Although interest payable is a future incremental cash flow, it is reflected in the cost of
capital and therefore not treated as relevant.
4.3 The correct answer is: (a), (b) and (d) only.
The purchase price and sales proceeds are cash flows relating directly to the project. Tax
allowable depreciation is not a cash flow but is relevant to the analysis of relevant cash
flows because it impacts on the tax paid. Interest payments are included in the cost of
capital and therefore are not relevant.
4.4 The correct answer is: The impact of the project on market share
The impact of the project on market share is a quantitive measure.
4.5 The correct answer is: 2, 4, 5, 3

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 The creation phase involves the generation of ideas, this has already occurred since the
proposal has been presented.
The proposal should now be subjected to an initial feasibility study, before a qualitative
and quantitative analysis is carried out. The implementation stage is where the project is
finally delivered, having been signed off.
4.6 The correct answer is: (a) and (b) only.
Although ideas are being proposed by operational managers, OWS does not appear to
have conducted an environmental review to identify external opportunities and threats.
This means that the creation phase is incomplete and this step should therefore be added.
A post-completion review is also an important step to ensure that lessons can be learned
from what went well with previous projects and what could be improved.
A customer impact assessment is part of the stakeholder analysis and therefore does not
require a separate stage.
Financial analysis and quantitative analysis are the same.
4.7 The correct answers are:
 Time and money spent identifying information needs
 Time and money spent analysing existing information
Secondary data involves the use of existing data rather than the creation of new data.
Nevertheless, information needs still need to be identified and the data still needs to be
analysed, even if existing data is going to be used. However, there is no need to design a
data collection process or collect new data as this applies only to primary data.
4.8 The correct answer is: Dashboards summarise key pieces of information in a clear format
Dashboards are designed to present key pieces of information clearly and quickly to users.
A standard layout can be provided without the use of dashboards, and there may be no
standard dashboard layout – they can be tailored to the needs of specific user groups.
Although users can drill down into the detail, that detail is not visible at first glance.
The layout of a dashboard requires careful consideration and could not therefore be
described as quick and easy to design.
4.9 The correct answers are:
 The research is likely to take too long to acquire
 The cost of the research
Omega plc is facing urgent liquidity issues so will not have the time or the money to invest
in primary data analysis.
However, primary data would be specifically tailored to Omega plc's unique situation.
Omega's customer data is based on its own customers which have fallen dramatically and
are unlikely to be representative of the current market.
4.10 The correct answers are:

Quality of information prioritised: Timeliness

Quality of information compromised: Completeness

Brendan is under pressure to meet a deadline – in other words, to provide timely

information. However, while the information he has provided is accurate, it is not complete
as it excludes sales figures from some divisions.
4.11 The correct answer is: Relevant
The reconciliation of the report to the source data will ensure accuracy.

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 Kieran will wait until he has received all the necessary data so that his report will be complete.
Kieran has considered the needs of his users through his design of the reports.
However, the ten spending officials all operated independently and will not need to know
about the performance of the other nine departments. This means that 90% of the report
will not be relevant to each user.
4.12 The correct answer is: BI systems will provide more meaningful information to managers.
Managers are currently complaining about a lack of insightful analysis – something that a
BI system is specifically designed to do. A BI system will not make the finance office
supervisor redundant but, equally, he is clearly possessive of his current reports and
therefore is unlikely to receive the BI system with enthusiasm. A BI system is more complex
and expensive to run than the current spreadsheet system.
4.13 The correct answer is: $200,000.
The best alternative use for the machine is to use it for another purpose, saving a net
$220,000 - $20,000 = $200,000, rather than selling it for $150,000. The project should
thus be charged with the cost of this lost opportunity.
4.14 The correct answer is: A wide variety of unverified data from internal and external sources
The output of BI systems is only as meaningful as the inputs. If data is unverified, therefore,
the visualisations produced are at risk of being flawed or incomplete.
BI systems are designed to process a high volume of structured and unstructured data and
to offer a range of visualisations in volatile commercial environments.

5 Project appraisal
5.1 The correct answer is: $130
Discounting a cashflow to perpetuity involves multiplying by 1/r which here gives 1/0.1 = 10.
So $500 received from time 3  10 = $5,000.
However, this is the value in terms of time 2 (the time period before the first cash flow) and
so this has to be discounted at the time 2 discount factor of 0.826 to give a present value
of $5,000  0.826 = $4,130.
The NPV = $(4,000) + $4,130 = $130.
5.2 The correct answers are:

Both methods give the same accept or reject decision, regardless of False
the pattern of the cash flows.

IRR is technically superior to NPV and easier to calculate. False

The NPV approach is superior if discount rates are expected to vary True
over the life of the project.

NPV and accounting ROCE can be confused. False

First statement: The methods only give the same accept or reject decision when the
cash flows are conventional. When the cash flow patterns are non-
conventional, there may be several IRRs that decision makers must
be aware of to avoid making the wrong decision.
Second statement: On the contrary, NPV is technically superior to IRR and easier to
calculate.

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Answers 79
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 Third statement: Variable discount rates can be incorporated easily into NPV
calculations, but not into IRR calculations.
Fourth statement: NPV is dissimilar to accounting ROCE, but IRR can be confused with
ROCE since both measures are expressed in percentage terms.
5.3 The correct answer is: 17.9%

IRR = 10 + [(49/(49 - 18)  (15 - 10))] = 17.9%

5.4 The correct answer is 11.32%
Using the relationship between the money rate and real rate of inflation.
(1 + 0.18) = (1 + x)  (1 + 0.06)
1.1132 = 1+x
0.1132 = x

To the nearest 0.01%, x = 11.32%

5.5 The correct answer is: Before depreciation but after taxation
The returns should be calculated before depreciation but after taxation. Taxation is a cash
flow, depreciation is not.
5.6 The correct answer is: Initial cost of the investment outlay
The internal rate of return is therefore the rate of return at which the project's net present
value is zero.
5.7 The correct answer is: 2 years 7 months.
Annual depreciation on the equipment would be $(300,000 - 60,000)/6 years = $40,000.
Annual cash flows will be the profit plus depreciation.
Year Cash flow Cumulative
$'000 $'000
0 (300) (300)
1 100 (200)
2 115 (85)
3 140 55

Payback = 2 years + (85/140)  12 months = 2 years 7 months

5.8 The correct answer is: $7,900

If the contractor buys the material now, the present value of the cost is $(7,800 +($110 
0.909) = $7,900.
If he buys it in a year's time, the present value of the cost is $8,800  0.909 = $7,999.
The contractor should chose the lower of the two as he wishes to maximise NPV.
5.9 The correct answers are:
 Accept the project if the IRR of the real cash flows is greater than nominal cost of
capital.
 Reject the project if the IRR of the inflated cash flows is less than the nominal cost of
capital.
If the IRR of the real (uninflated) cash flows is already above the inflated cost of capital,
and so it will be even higher once inflation is included (which it should be because we can
either discount inflated (nominal) cash flows at nominal discount rates or discount real
cash flows at real discount rates) so the project is definitely acceptable.

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 If the IRR of the inflated cash flows is below the inflated cost of capital, then the project is
not delivering the required return and therefore should be rejected.
Notes on incorrect answers:
If we have used an inflated (nominal) cost of capital then we should include inflation in the
NPV, and if we do the NPV may well rise so we cannot reject the project if the NPV is in real
terms and the cost of capital is nominal.
Equally, we cannot accept the project if the cash flows include inflation but the cost of
capital does not. When we include inflation in the cost of capital it will rise and so the NPV
will fall and may become negative.
5.10 The correct answer is: 10.24%
1+ money cost of capital = (1 + real cost of capital) (1 + inflation rate)
= (1 + 0.06) (1 + 0.04)
= 1.1024

Money cost of capital is 10.24%.

5.11 The correct answer is: Make no adjustment to the cash flows for inflation and discount at
10%.
If the cash flows are expressed in constant price level terms, the real rate of 10% is used as
the discount factor.
If the cash flows are inflated then the appropriate cost of capital is 13.3% as shown below:
1+ money cost of capital = (1 + real cost of capital) (1 + inflation rate)
= (1 + 1) (1 + 0.03)
= 1.13.3

5.12 The correct answer is: (d) only

Payback ignores cashflows outside the payback period.
Notes on incorrect answers:
(a) Is not an advantage because both are simple techniques designed for use by
non-financial managers.
(b) Neither technique accounts for the time value of money.
(c) Payback places more emphasis on liquidity and is therefore more useful in a capital
rationing situation.
5.13 The correct answer is: $660,000
Since we are given a money cost of capital, and there is more than 1 rate of inflation, the
actual money cash flows must be used in the appraisal:

Fixed Net cash 14% Present

Yr Investment costs Contribution flow factor value
$ $ $ $ $
0 (700,000) (700,000) 1.000 (700,000)
1 (200,000) 620,000 420,000 0.877 368,340
2 (210,000) (+ 5%) 663,400 (+7%) 453,400 0.769 348,665
3 (220,500) (+ 5%) 709,838 (+7%) 489,338 0.675 330,303
4 (231,525) (+ 5%) 759,527 (+7%) 528,002 0.592 312,577
Net present value 659,885
= $660,000 to the nearest $'000

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Answers 81
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 5.14 The correct answer is: 4.5 years
The discounted payback period (DPP) is the time it takes for a project's cumulative NPV to
become positive.
With a cost of capital of 10% and the cash flows shown below, we can calculate a
discounted payback period.
Year Cash flow Discount factor 10% Present value Cumulative NPV
$'000 $'000 $'000
0 (450) 1.000 (450) (450)
1 130 0.909 118 (332)
2 130 0.826 107 (225)
3 130 0.751 98 (127)
4 130 0.683 89 (38)
5 130 0.621 81 43
Year 5 excludes the $20,000 residual value because this is a one-off that occurs at the end
of the year.
The DPP is during year 5.
DPP = 4 + (38/81)
= 4.5 years
5.15 The correct answer is: 1.5 years
Step 1
As payback is calculated using cash flows, we have to convert profits into cash flows by
adding back depreciations.
Cost - Residual Value
Depreciation per annum =
Expected useful life

400,000 - 50,000
= = $70,000
5

Year Profit Depreciation Cash flow

$ $ $
1 175,000 70,000 245,000
2 225,000 70,000 295,000
3 340,000 70,000 410,000
4 165,000 70,000 235,000
5 125,000 70,000 195,000

Step 2
Calculate payback period using the cash flows calculated in Step 1 above.
Year Cash flow Cumulative cash flow
0 (400,000) (400,000)
1 245,000 (155,000)
2 295,000 140,000

Payback is between one and two years. Use interpolation to obtain a more accurate answer:
155,000
Payback = 1+ years
295,000
= 1.5 years (to nearest 0.1 years)

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 5.16 The correct answer is: 15%, so the project should be accepted
The total present values of the cash inflows is $100,560 + $22,440 = $123,000
The annuity factor for 5 years at 7% is 4.1
So the cash inflows per year are $123,000 / 4.1 = $30,000
To generate an NPV of 0 the cash flows would have to be worth $100,560 in NPV terms
This means that the annuity factor would need to be $100,560 / $30,000 = 3.352
This corresponds to the annuity factor over 5 years at a discount rate of 15%.
Because this is above the cost of capital of 7% the project should be accepted.
Notes on incorrect answers:
22.3% is incorrectly calculated as the NPV divided by the initial investment.
4% is an estimate of the IRR if the $22,440 is incorrectly taken as the annual cash inflow.
5.17 The correct answer is: $223,400
The present value of the holiday home = $1.5m  (time 5 discount factor at 10%)
= $1.5m  0.621
= $931,500.
Therefore the present value of the annuity = $931,500.
931,500 = $a  AF 0-4

Where AF 0-4 is the annuity factor from time 0 to time 4.

AF 0-4 = 1 + AF 1-4
= 1 + 3.170
= 4.170
So 931,500 = $a  4.170
$a = 931,500/4.170
= 223,381 or $223,400 to the nearest $100

5.18 The correct answer is: $5,625

Year 20X0 - Plant cost = $100,000
TAD claimed (25%) = $100,000  0.25
= $25,000
Value carried forward to 20X1 = $75,000 ($100,000 - $25,000)
TAD claimed = $18,750 ($75,000  0.25)
Tax saved = $5,625 ($18,750  0.3)

5.19 The correct answer is: $4,981

The net present value of the annuity is 26,496, hence:

26,496 = ($a  AF 1-4) + 10,000

Where AF 1-4 is the year 4 8% annuity factor

16,496 = $a  3.312 (from tables)

$a = 16,496 / 3.313
= $4,981 (rounded up)

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Answers 83
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 5.20 The correct answers are:
Defective products per batch Quantitative
Levels of repeat business Quantitative
Employee morale Qualitative
Customer satisfaction Qualitative
Brand loyalty Qualitative
Level of customer complaints Quantitative
Employee turnover Quantitative
Corporate reputation Qualitative

Quantitative performance measures are something that can be actually measured and a
value assigned.
Volume of customer complaints, employee turnover, defective products per batch and
repeat business are all metrics which can be measured objectively.
Qualitative performance metrics are more difficult to measure because they are based on
judgement, and so measures are often subjective rather than objective.
Customer satisfaction, employee morale, brand loyalty and corporate reputation are all
examples of qualitative performance measures. They are very difficult to measure
objectively, and their rating tends to be based on judgement.

6 Further aspects of project appraisal

6.1 The correct answer is: W, X, Z then Y
Divide the PV of annual cash profits by the year 0 outlay to find the profitability index.
Project W Project X Project Y Project Z
Project NPV (PV of cash profits - outlay) $7,340 $5,200 $6,500 $8,860
Year 0 outlay $10,000 $8,000 $18,000 $17,000
Profitability index 0.734 0.65 0.361 0.521
1st 2nd 4th 3rd

6.2 The correct answer is: Project A and 80% of Project C

Since capital is rationed to $1,000,000, the aim should be to maximize the present value of
future cash flows per $1 invested.
Choice Higher profitability index Outlay required
$
Projects A or B Project A (0.50) 200,000
Projects C or D Project C (0.30) 1,000,000
1,200,000

Only $1,000,000 is available and as Project A has a higher profitability index than Project
C, the company should choose 100% of Project A and 80% (1,000,000 -
200,000/1,000,000) of Project C.
6.3 The correct answer is: The net present value of future cash flows of each cycle expressed as
an annuity.
This is how equivalent annual costs are calculated.
Remember, we can only compare the net present values (or terminal values) of future cash
flows if all the projects have equal lives.

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 6.4 The correct answers are:
 Future changes in the cost of capital
 Future changes in technology
 That the project is unlikely to be produced forever
Our calculations do reflect annual running costs and replacement costs.
6.5 The correct answer is: $10,000
To calculate the annual equivalent cost, divide the present value by the three-year
cumulative discount factor at 10%.
ie $24,870 / 2.487 = $10,000
6.6 The correct answer is: $11,000
The annual cash flows are the running costs less any income from the sale of the asset at
the year end. The cash flows over a replacement cycle with each replacement option are as
follows.
Year Every year Every 2 years Every 3 years Every 4 years
$ $ $ $
0 (15,000) (15,000) (15,000) (15,000)
1 5,000 (2,000) (2,000) (2,000)
2 (2,000) (6,000) (6,000)
3 (7,000) (8,000)
4 (9,000)

The PV of these cash flows, discounting at 15%, is as follows.

Year Every year Every 2 years Every 3 years Every 4 years
PV PV PV PV
$ $ $ $
0 (15,000) (15,000) (15,000) (15,000)
1 4,350 (1,740) (1,740) (1,740)
2 (1,520) (4,560) (4,560)
3 (4,620) (5,280)
4 (5,130)
(10,650) (18,260) (25,920) (31,710)
Every year Every 2 years Every 3 years Every 4 years
$ $ $ $
PV of costs over (10,650) (18,260) (25,920) (31,710)
replacement
cycle
Discount factor 0.87 1.63 2.29 2.86
Equivalent $12,241 $11,202 $11,319 $11,087
annual PV of
cost

6.7 The correct answer is: A company has insufficient cash to undertake all the projects that
have a positive NPV at its cost of capital.
It is more accurate to describe a situation where the company has insufficient cash to
undertake all the projects that have a positive NPV at its cost of capital.

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Answers 85
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 6.8 The correct answer is: $43,900

NPV = -150,000 + (25,000  0.233) - (5,000  2.106) - (8,000  2.991 × 0.579) = -168,559
EAC = 168,559/3.837 = $43,930
6.9 The correct answer is: (b), (d)
A negative NPV does not always mean that an investment proposal should be rejected.
There may be links with other projects and real options may be available.
Non-financial factors need to be considered.
6.10 The correct answers are:
Capital rationing arises when there is insufficient capital to invest in all available projects
which have positive NPVs. Hard rationing is where external limits exist on funds available.
Soft rationing is where internal constraints are imposed.
6.11 The correct answer is: 0.28
The profitability index is stated as the NPV of a project/initial outlay.
NPV = $140,500 and initial outlay = $500,000.
Therefore the profitability index is $140,500/$500,000 = 0.281 which is closest to 0.28.
6.12 The correct answers are:

Project Priority for Outlay

funding
(1-3) $'000
J 3 200
K 2 500
L 1 300

Profitability Ranking
Investment index as per Ranking
Project required NPV (PI)* NPV as per PI
$'000 $'000
J 400 31 0.08 =2 3
K 500 43 0.09 1 2
L 300 31 0.10 =2 1

However, only $1 million is available for capital investment.

*NPV /PV of total capital outlay.
As projects are divisible, it is possible to invest fully in projects L and K, with the remaining
balance of $200,000 being invested in J (so one half of the full investment would be made
to earn one half of the NPV).
Project Priority Outlay NPV
$'000 $'000
L 1st 300 31
K 2nd 500 43
J (balance) 3rd 200 (½ of $31,000) 15
1,000 89

6.13 The correct answer is: $1,250,000

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86 Advanced Management Accounting

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 Project Profitability index Amount of outlay NPV of inflows
$'000 $'000
Alpha 1.19 480 570
Gamma 1.06 (bal) 640 680
1,120 1,250

NPV Gamma = 850  640/800

6.14 The correct answer is: Projects B and C
As funds are not in short supply, NPV should be used to determine which projects to
undertake.
Project B has a higher NPV (800 - 600 = 200) than
Project A (300 - 200 = 100), and
Project C has a higher NPV (1,300 - 1,000 = 300) than
Project D (1,800 - 1,600 = 200)

6.15 The correct answer is: 10%

This item is best attacked by trial and error, using the costs of capital given in the question.
For the investor to be indifferent, the annual equivalent costs must be the same.
At 10%, the annual equivalent costs are:
2-year cycle = $17,360 / 1.736
= $10,000
4-year cycle = $31,700 / 3.170
= $10,000

6.16 The correct answer is:

An electronics company makes radios and is considering launching a new portable version
which will give the company a competitive advantage for three years. They would need to
buy new capital equipment for $400,000 which would have a scrap value of $60,000 in
three years' time. Launching the radio would give the company opportunity to launch
further models at a later date. This is an option to follow on. The opportunity to sell the
capital equipment provides an option to abandon.
6.17 The correct answer is: MIRR is calculated on the basis of investing the inflows at the cost of
capital.
The statement is correct. The others are incorrect. The central bank's cost of capital is
irrelevant to MIRR. MIRR takes into account capital outflows as well as inflows. Future
cashflows are discounted.
6.18 The correct answer is: 12%

19,965 (ie 15000 × 1.1^3) + 14,150 (ie 11694

Terminal value =
× 1.1^2) + 3,300 (ie 3000 × 1.1) +1,000
= 38,415
38,415
Total return (terminal/outlay) =
24,500
= 1.567959
Annual return (MIRR) = (4√1.567959) - 1
= 0.119009 or 11.9%
Rounded to = 12%

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Answers 87
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 6.19 The correct answer is: A project that undermines an organisation's strategy should still be
undertaken as long as it is profitable.
While profitability is a key consideration when assessing proposals, it is not the only factor.
If the project undermines the organisation's mission, the financial gains are unlikely to be
sufficient to offset the damage to the organisation's overall mission.
If a proposal offers an improved way of delivering the organisation's strategy, it may be
appropriate to review operational objectives. Soft capital rationing is the term used to
describe the situation when a proposal is insufficiently attractive to justify the investment,
even if the funds are available and the proposal is not expected to make a loss. The
definition of hard capital rationing is correct.
6.20 The correct answer is: The interest costs on the bank loan are a relevant cash flow in the
decision.
Finance costs are not included in the relevant cash flows. They will form part of the
calculations for an appropriate discount rate.

7 Pricing strategies
7.1 The correct answer is: Minimum pricing is based on relevant costs.
A minimum price is the price that would have to be charged so that the incremental costs of
producing and selling an item plus the opportunity costs of the resources consumed in
making and selling it are just covered.
Marginal cost plus pricing is also known as full cost plus pricing is false. Marginal cost plus
pricing is also known as mark-up pricing.
Full cost plus pricing is used for profit maximisation is false. Full cost plus pricing fails to
recognise that since demand may be determined by price, there will be a profit-maximising
combination of price and demand.
Demand is a main factor in the full cost plus approach to pricing is false. Full cost plus
pricing does not recognise the economic relationship between price and demand.
7.2 The correct answer is: $6.5
General storage costs are $400,000 / 100,000 = $4 per cubic metre.
Cold storage costs are $60,000 / 1,000 = $60 per cubic metre
Ice cost per unit = ($4  0.05) + ($60  0.05) + $2 (purchase cost) = $5.2 per unit.
If the question had referred to a mark-up of 20% then the answer would have been $5.2 
1.2 = $6.24.
However, margin is a % of price not cost, so the required price is $5.2 / 0.8 = $6.50 per unit.
The margin is then 0.2  $6.5 = $1.3 which corresponds to the difference between the sales
price and the cost per unit.
7.3 The correct answer is: $10,836
The lowest selling price of one batch of 200 units is one which covers the marginal cost of
production. This comprises the variable costs of materials, labour, overheads and setting
up. Fixed overheads are not a relevant cost because they are not incremental cash flows.

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 Marginal cost per unit calculation
Machine Machine Machine
group 1 group 7 group 29 Assembly Total
$ $ $ $ $
Materials 26.00 17.00 – 3.00 46.00
Labour 2.00 1.60 0.75 1.20 5.55
Variable overheads 0.65 0.72 0.80 0.36 2.53
Setting-up costs
( 200) 0.05 0.03 0.02 – 0.10
28.70 19.35 1.57 4.56 54.18

The lowest selling price per batch is therefore $54.18  200 = $10,836.
7.4 The correct answers are: A company manufactures and sells a number of products all of
which have a life cycle of six months or less. It has recently developed an innovative
product and has decided to launch it with a high price initially as the product is unique.
This is a market skimming pricing strategy which will allow the company to gain high
profits early in the product's life cycle. In the growth stage, selling prices are likely to
decrease.
7.5 The correct answer is: A strategy of penetration pricing could be effective in discouraging
potential new entrants to the market by charging a low price when the product is first
launched whereas the strategy of market skimming is to gain high unit profits early in the
product's life cycle, thus allowing the costs of developing the product to be recovered.
Distractors:
 Penetration pricing is a strategy that is often used in the introduction phase of a
product's life cycle. A low price is charged to penetrate an existing market when the
product is first launched to gain market share.
 Market skimming is a strategy that is mainly used in the introduction phase of the
product life cycle when the product is unique, technologically advanced. A high price
can be charged at launch in order to recover the research and development costs
already incurred.
 Penetration pricing is a policy of charging low prices when the product is first
launched in order to obtain sufficient penetration in the market whereas market
skimming is a policy of charging high prices when a product is first launched and
attracting customers through heavy advertising and sales promotion.
7.6 The correct answer is: Market skimming
Charging a high price when the product is first launched to gain high unit profits early in
the product's life cycle, thus allowing the costs of developing the product to be recovered.
Distractors:
 Penetration pricing is a strategy that is often used in the launch phase of a product's
life cycle. A low price is charged to penetrate an existing market when the product is
first launched to gain market share. Since the games console is a unique product this
strategy would not allow the company to maximize profits. However, after six months
when competitors enter the market, strategy can be changed to penetrate the
market.
 Dual pricing is an internal or transfer pricing strategy and not used for pricing
products for external sales.
 'Own label' pricing is used by supermarkets and retail stores who sell their 'own label'
products, often at a lower price than established branded products. They do this by
entering into arrangements with manufacturers, to supply their goods under the
'own brand' label. So this strategy will not apply to the games console.

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Answers 89
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 7.7 The correct answer is: (b)
Factors other than price will also affect demand, eg advertising, incomes.
Market skimming is often used for new and different products with a short product
life cycle.
7.8 The correct answer is: In the growth stage, costs are likely to be increasing.
Costs are likely to be decreasing as the fixed costs are shared over more units.
7.9 The correct answer is: If demand is highly elastic
If demand is highly elastic it responds well to low prices.
If a product is new and different, market skimming would be more appropriate. Customers
would be prepared to pay high prices so as to be one up on other people who do not own
the product.
Market penetration pricing is appropriate if there are significant economies of scale to be
achieved from a high volume of output, so that quick penetration into the market is
desirable in order to gain unit cost reductions.
7.10 The correct answer is: When the the product is expected to have a long life cycle.
Market skimming is an appropriate pricing policy when a product is expected to have only
a short life cycle; prices need to be set at a high level in order to recover development costs
quickly and maximise short-term profit.
The protection of a patent creates a barrier to entry to the market for competitors and
enables the holder of the patent to charge higher prices than would otherwise be
possible.When demand is unknown it is probably safer to charge a higher price, to improve
the chance of recovering development costs and making a profit.
7.11 The correct answer is: 3.2
Price elasticity of demand = % change in quantity demanded / % change in price
= (80,000 units / 200,000 units) / ($30 / $240)
= 40% / 12.5%
= 3.2
If you selected 2.0, you expressed the % change as a proportion of the new, not current,
price. (80/280)/(30/210)
If you selected 0.3, you expressed the change in price as a percentage of change in
quantity. ($30/$240)/(80,000/200,000)
If you selected 0.5, you expressed the change in price as a percentage of change in
quantity based on the new, not current, price. (30/210)/(80/280)
7.12 The correct answer is: $11.20
Marginal cost = $8 (excludes fixed overheads)
Mark-up of 40% = $8  140% = $11.20
If you selected $9.80, you calculated a mark-up of 40% but ignored the royalty ($7  140%)
If you selected $13.33, you calculated a margin of 40% ($8  100/60).
If you selected $14.00, you calculated a mark-up of 40% on the total cost ($10  140%)

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 7.13 The correct answer is: Premium pricing
Premium pricing involves making a product appear different (in this case, due to the
technology) in order to charge a higher price.
Own label pricing involves a retailer entering into arrangements with a manufacturer to
supply goods that the retailer sells under their own label. This is not the case here as
Apricot designs and manufactures its own phones.
Price discrimination is the practice of charging different prices for the same product to
different groups of buyers. In this scenario, Apricot has set a single selling price.
Price skimming involves charging high prices when a product is first launched and then
progressively lowering the price as the product moves later into its life cycle. There is no
evidence in the scenario that Apricot plans to do this and, given how far ahead it is of its
competitors, there is no obvious need to do so.
7.14 The correct answer is: 13.6%
($1.10 - $0.95) / $1.10 = 13.6%
If you selected 15.8%, you calculated the mark-up that Bridge Farm would earn (($1.10 -
$0.95) / $0.95).
25% is the margin on its current selling price.
33.3% is the mark-up on its current selling price.
7.15 The correct answer is: A small percentage increase in price results in a larger percentage
decrease in demand.
PED is calculated as % change in demand / % change in price. It is normal for PED to be
negative (ie an increase in price causes a decrease in demand), so the negative sign is
often ignored. As the PED is higher than 1, it means that a small increase in price results in
a large decrease in demand.
7.16 The correct answer is: $300
a = 1,100
b = 1/50
Profit maximising price = a - bx
P = 1,000 - (1/50  35,000)
P = 300

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Answers 91
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 7.17 The correct answer is: $1,365

change in price
b =
change in quantity
$1
=
5
= 0.2.
a = $250 + ((12,000/5)  $1)
= $2,650.
MR = 2,650 - (2  0.2)Q
= 2,650 - 0.4Q
Profits are maximised when MC = MR, ie when 80
= 2,650 - 0.4Q
To work out value for Q:
0.4Q = 2,650 - 80
Q = 2,570/0.4
= 6,425

Therefore, profit-maximising demand (Q) = 6,425.

Now, substitute the values into the demand curve equation to find the profit-maximising
selling price:
P = a – bQ
P = 2,650 – (0.2  6,425)
∴ Profit-maximising price = $(2,650 – 1,285) = $1,365
7.18 The correct answer is: By $2 per unit
When P = 24 - 0.004Q, the marginal revenue MR = 24 - 0.008Q.
Total sales revenue increases when the price is increased as long as the marginal revenue is
a positive value.
MR starts to go into negative values when sales demand exceeds the quantity where:
24 – 0.008Q =0
Q = 3,000
At this demand quantity, the sales price is P = 24 – 0.004 (3,000) = $12.
The company can raise the sales price by $2 to $12 per unit in order to increase sales
revenue, but at higher prices total sales revenue will fall.
(Check: If P = $12 and Q = 3,000, total weekly revenue = $3,600. This is $100 per week
more than the revenue from selling 3,500 units at $10 each.)
7.19 The correct answer is: P = 523 - Q/250
P = a - bQ/change in Q and a = current price + $b (current quantity at current
price/change in quantity when price is changed by $b). In this instance, a = $95 +
$10(107,000/2,500) = $523. The demand curve is therefore P = 523 - 10Q/2,500 = 523 -
Q/250.

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92 Advanced Management Accounting

These materials are provided by BPP
 7.20 The correct answer is: $24.50

P = a − bx
b = 1/100 = 0.01
P = $25
x = 1,000
25 = a − (0.01  1,000)
a = 25 + 10
a = 35
Marginal revenue (MR) = a − 2bx
MR = 35 − 0.02x
Marginal cost (MC) = $14
So if MC = MR then:
14 = 35 − 0.02x
0.02x = 21
x = 1,050 units
Substituting x = 1,050 in the demand function to find price:
Optimal selling price = $35 − (0.01  1,050) = $24.50 per unit

7.21 The correct answer is: $317

Profit is maximised at seven units of output and a price of $317, when MR is the closest to
MC.
The company would make a loss on the 8th unit as MC is greater than MR.

8 Decision making in responsibility centres

8.1 The correct answer is: $14,000
Production units sold 8,000
$'000
Sales ((35/5)  8) 56
Variable costs ((20/5)  8) 32
Contribution 24
Fixed costs 10
Profit 14

8.2 The correct answer is: A proportion of rent and rates for the building the production
department shares with other departments.
Managers should only be held accountable for costs over which they have some influence.
8.3 The correct answer is: 61,640
$
Budgeted contribution at 400 units 53,600
Budgeted contribution per unit (53,600 / 400) 134
Flexed budgeted contribution (460  134) 61,640

VL2020

Answers 93
These materials are provided by BPP
 8.4 The correct answer is: Both (a) and (b)
If the workforce knows in advance that the initial targets they are given will more than likely
be revised (as the same thing happens every period) then there is a risk that they will start
to ignore them.
A severe criticism of planning and operational variances is the lack of objectivity that may
be involved in deciding in retrospect what the standard cost should have been.
8.5 The correct answer is: Volatility
Volatility is not one of the 3 Vs. However, Veracity and Value can be added to the 3 Vs to
make the 5 Vs.
8.6 The correct answer is: Flexibility of layout
For management reports to be user-friendly, they should adopt a consistent approach.
This would be undermined if the layout of the reports was flexible.
However, when considering visualisations, format, colour and size are all factors that need
to be taken into account.
8.7 The correct answer is: Preparing the annual financial accounts
Financial accounts report historic performance not future expectations. They are prepared
in line with accounting standards and would not, therefore, benefit from data analytics.
However, machine efficiency and sales forecasts (both new and existing products) require
the forensic analysis of historic data in order to inform future decision making. These
would all benefit from data analytics.
8.8 The correct answers are:

Cost centre managers have a responsibility to minimise financial inputs

Revenue centre managers have a responsibility to maximise financial outputs

Cost centre managers are responsible for minimising costs (financial inputs).
Revenue centre managers are responsible for maximising revenue (financial outputs).
8.9 The correct answer is: $50m

$m
Revenue 285.0
Variable materials (105.0) Traceable to the division
Variable labour (45.0) Controlled locally (head office only administers payroll)
Variable overheads (25.0) Controlled locally in line with labour above
Fixed production costs (60.0) Traceable to the division
Fixed non-prod'n costs _____ Does not reflect the activity of the division
Controllable profit 50.0

8.10 The correct answer is: A long-term lease for the factory production facility
A long-term lease is not within the control of a local manager (ie the manager has no
authority to withdraw from it) and it is not therefore controllable.
However, all the other fixed costs are within the control of the manager (ie he/she can
avoid them through his/her action).

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94 Advanced Management Accounting

These materials are provided by BPP
 8.11 The correct answers are:
 Part-time staff costs
 Marketing and promotions
The manager cannot control the aspects of performance which are handled by head office
(rent and rate payments; buying inventory).
Although the manager can influence the volume of sales (for example, through the success
of their marketing and promotions), costs of sales will be determined by price of the
inventory ordered by the head office purchasing team, so the manager does not have
control over them.
8.12 The correct answers are:
 Faster decision making
 More informed decisions
 Increased motivation
By allowing each city to be semi-autonomous, Brian will lose control. However, this will
allow more informed decisions to be made faster at a local level. This is because Brian is
struggling to manage operations and this is likely to manifest in delays to decision making.
Instead, local managers can make decisions for themselves, taking into account local
issues.
Costs should be expected to increase as each manager is likely to require a salary
increase. Furthermore, more staff may need to be recruited to cover the operational work
the managers were doing. Local decision making also means that there is a degree of
duplication of labour and is therefore less efficient.
Promoting staff from within the organisation is likely to increase motivation, both among
the staff who are promoted and among other staff who can identify the potential for future
career progression. It is important to note that the consultant has identified that there are
highly skilled staff who would be able to take on this responsibility.
8.13 The correct answer is: A bonus paid to Aisha and her team in line with a company-wide
policy
Although the bonus is paid to Aisha and her team, it is paid in line with a company-wide
policy and therefore not within her control. The other items can be reasonably assumed to
be within her control as a manager.
8.14 The correct answers are:

Sales department Profit centre

Finance department Profit centre
Research & development department Cost centre
Gym Cost centre

The sales department is responsible for generating revenue, but also has discretion to incur
costs. This makes it a profit centre.
The finance department incurs costs in providing its services, but receives an internal
charge for its services. This makes it a profit centre.
The research and development department is a cost centre as it is tasked with identifying
potential new products without having any direct responsibility for associated revenue.
The gym is a cost to the business with no associated revenue and is therefore a cost centre.

VL2020

Answers 95
These materials are provided by BPP
 8.15 The correct answer is: $33,750
Note: there is no need to work through each line of the budget. It is sufficient, and quicker,
to do a single calculation for the total costs.
Total costs @ 1,000 units = $30,000
Total costs @ 1,500 units = $37,500
Therefore, an increase in 500 units causes a cost increase of $7,500
Variable cost per unit = $7,500 / 500 units = $15/unit
@ 1,000 units: $30,000 = Fixed cost + (1,000 units  $15/unit)
Fixed cost = $15,000
Therefore, 1,250 units = $15,000 + (1,250 units  $15/unit) = $33,750

9 Performance measurement
9.1 The correct answer is: Diagnostic
Diagnostic benchmarking involves reviewing the processes of a business to identify those
which indicate a problem and offer a potential for improvement. For example, a company
may critically assess each element of the value chain and conclude that there is potential
for improvement within the marketing and sales function.
Competitive benchmarking involves comparing internal performance with that of
(successful) competitors.
Metric benchmarking is the practice of comparing appropriate metrics to identify possible
areas for improvement. For example, IT investment as a percentage of total assets may be
compared across different departments within the same company to identify areas of the
company where additional investment is required.
Process benchmarking is the practice of comparing processes with a partner as part of an
improvement process. For example, a distributor of personal computers may analyse a
competitor's supply chain function in the hope of identifying successful elements of the
process that it can use to its advantage.
9.2 The correct answer is: ROI - yes, RI - yes
The ROI target is 10% and the cost of capital is 9%. The ROI is calculated as
($15,000/$100,000)  100% = 15% and so the project should be accepted and would be
accepted because the ROI is greater than the target.
The RI is calculated as $15,000 - (9%  $100,000) = $6,000. The project should be
accepted and would be accepted because the RI is positive.
9.3 The correct answer is: $2.16m
$m
Current profit (($21m  16%) + $0.8m) 4.16
Imputed interest ($25m  8%) (2.00)
Residual income 2.16

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96 Advanced Management Accounting

These materials are provided by BPP
 9.4 The correct answer is: $9.7m

$m $m
Net profit after tax 8.6
Add:
Development costs 6.3
Advertising 1.6
7.9
16.5
Less: 1/3 development costs (charging 1 year's development
costs as the product was launched in the current
period) (2.1)
14.4
Less: Capital charge on opening year asset values ($30m + (4.7)
$6.3m)  13%
EVA 9.7

9.5 The correct answer is: Environmental perspective

The missing perspective is the innovation and learning perspective, or 'can we continue to
improve and create value'?
9.6 The correct answer is: A learning and growth perspective
A target of providing at least 40 hours of training every year to improve skills and
productivity has a learning and growth perspective.
9.7 The correct answer is: (a) and (b) only.
Percentage of on-time deliveries and customer complaints per month, (a) and (b) would
both be appropriate for monitoring the customer perspective because they both represent
targets that would matter to customers.
Monitoring of the average set-up time (c) would be more appropriate from the internal
perspective. It focuses on improving internal processes but is not directly important to the
customer.
9.8 The correct answer is: How well the assets of a business are used to generate sales
Asset turnover = sales / capital employed.
9.9 The correct answer is: Delivery time
The other options are all financial performance measures.
9.10 The correct answer is: 3
Profit margin = PBIT / Sales = 27,500 / 550,000 = 0.05 = 5%
Profit margin  = ROCE
asset turnover
Therefore:
5%  asset turnover = 15%
Asset turnover = 15% / 5% = 3

9.11 The correct answer is: Competitive

Competitive benchmarking involves comparing performance with direct competitors, often
through analysing their products or services.
9.12 The correct answer is: -$577,500

RI = $300,000 - $6.75 million  13% = $300,000 - $877,500 = -$577,500

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Answers 97
These materials are provided by BPP
 9.13 The correct answer is: 4.44%

300,000
ROI =  100 = 4.44%
6,750,000

9.14 The correct answer is: 23.5%

Operating profit before interest

The divisional return on investment =
Total assets less current liabilities
400
=  100
2,100 – 400
= 23.5%

The profit is stated before interest so that we can assess the division's effectiveness in using
all of its assets, irrespective of how these assets are financed. We are told that all decisions
concerning the division's capital structure are taken by central management. Finance costs
and the way the assets are financed is therefore outside the control of the division. The
denominator will therefore include all sources of funds (equity and long-term borrowings)
and the numerator will be the operating profit before the deduction of attributable finance
costs.
9.15 The correct answer is: $196,000

400 - (1,700  12%) = $196,000

9.16 The correct answer is: ROI – no, RI – no
The current ROI = ($1,700,000/$5,000,000)  100 = 34%
The new ROI = ($(1,700,000 + 75,000) / $(5,000,000 + 150,000 + = 32.3%
350,000))  100%

The project would therefore be rejected because the ROI would fall.
The current RI = $1,700,000 - (18%  $5,000,000) = $800,000
The new RI = $(1,700,000 + 75,000) - (18%  $5,500,000) = $785,000

The project would therefore be rejected because the RI would fall.

9.17 The correct answer is: $24.84 million
The concept of EVA is that the economic profit of a business must exceed the cost of capital
invested.
EVA = Net operating profit after tax – Capital charge on the replacement cost of assets
The relevant rate is the division's risk-adjusted cost of capital of 11%.
Although not explicitly stated in the question we need to make the assumption that the new
product was launched at the beginning of the year and therefore one third of the launch
costs need to be amortised over the period. We also need to assume that the unamortised
launch costs are not included in the replacement cost of assets ($172m) and therefore need
to be added on.
EVA = NOPAT – Capital charge
= ($40.2m + $6m – $2m) – (11%  ($172m + $4m))
= $44.2m – $19.36m = $24.84m

9.18 The correct answer is: 44

ROCE = (Operating profit/Capital employed) × 100%
= (3,629,156/(4,582,000 + 4,619,582 + 442,443 - 949,339 - 464,692))  100%
= 44.1%

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98 Advanced Management Accounting

These materials are provided by BPP
 9.19 The correct answer is: Innovation and learning
Developing new products is clearly related to innovation.
9.20 The correct answer is: $169.9 million

$m
Operating profit 168.0
Less tax (8.0)
Net profit 160.0
Add back:
Marketing 7.4
Development costs 4.3
Depreciation 5.0
176.7
Less:
Economic depr'n (6.8)
NOPAT 169.9

10 Transfer pricing
10.1 The correct answer is: Both (a) and (b).
Internal transfers should usually be preferred to external purchases because the company
will have better control over output quality from Division A and the scheduling of
production and deliveries. Transfer prices determine how total profit will be shared between
the divisions.
10.2 The correct answers are:
Budgeted profit/(loss) for Division Y when the transfer price is set at
marginal cost. $(1,000)
Budgeted profit/(loss) for Division Y when the transfer price is set at the
total production cost. $1,400

(i) Budgeted loss - marginal cost transfer price

Sales $'000
Internal 60,000  $100 6,000
External 40,000  ($150  1.3333) 8,000
14,000
Variable cost 100,000  $100 10,000
Contribution 4,000
Fixed costs
Production 100,000  $40 4,000
Administration 100,000  $10 1,000
Loss (1,000)

VL2020

Answers 99
These materials are provided by BPP
 (ii) Budgeted profit - absorption cost transfer price

Sales £'000
Internal 60,000  $140 8,400
External 40,000  ($150  1.3333) 8,000
16,400

Variable cost 100,000  $100 10,000

Contribution 6,400
Fixed costs
Production 100,000  $40 4,000
Administration 100,000  $10 1,000
Profit 1,400

10.3 The correct answers are:

 Because there is often no external market for the product that is being transferred
 Because the external market is imperfect
If there is no external market there will be no suitable market price upon which to base the
transfer price.
If the external market is imperfect, the market price will be affected by factors such as the
amount that the company setting the transfer price supplies to it or limited external
demand.
The transferring division will want to maximise its profits but this is not a reason for using
cost-based approaches to transfer pricing.
The buying division will want to maximise its profits but this is not a reason for using cost-
based approaches to transfer pricing.
10.4 The correct answer is: $19 per unit

RI = Annual profit − (Cost of capital 

Capital
employed)
$200,000 = Annual profit − (10%  3,600,000)
Annual profit = 200,000 + 360,000
Annual profit = $560,000
required to
achieve the RI
target
Annual profit = External sales + Internal sales − Variable − Fixed costs
revenue revenue costs
560,000 = ((200,000 – + (60,000  P) − (200,000  − $1,200,000
60,000)  $20)
$33)
560,000 = 4,620,000 + 60,000P − 4,000,000 − 1,200,000
P = (4,000,000 + 1,200,000 – 4,620,000 + 560,000) / 60,000
P = $19

VL2020

100 Advanced Management Accounting

These materials are provided by BPP
 10.5 The correct answer is: $33 and $20
External sales demand is 160,000 Units. Maximum capacity is 200,000 Units so by
transferring 60,000 Units to Division B, external sales of 20,000 Units are lost.
The opportunity cost-based transfer price of these 20,000 Units = variable cost +
contribution lost from not selling externally.
This equals $20 + $13 = $33 = the external selling price.
The remaining 40,000 Units can be produced using spare capacity, so the transfer price of
these Units equals their variable cost ie $20.
10.6 The correct answer is: $132,400
If B buys from A:
Workings $
A's revenue 140,000  $33 4,620,000
60,000  $20.20 (1,212,000)
A's costs (200,000  $20) (4,000,000)
Net cash flow 1,832,000
Tax at 50% 916,000
916,000
B's costs 60,000  $20.20 (1,212,000)
30% tax allowed against this 363,600
(848,400)
Net position for Group 916,000 – 848,400 67,600

If B buys from W:
Workings $
A's revenue 160,000  $33 5,280,000
A's costs (160,000  $20) (3,200,000)
Net cash flow 2,080,000
Tax at 50% 1,040,000
1,040,000
B's costs 60,000  $20 (1,200,000)
30% tax allowed against this 360,000
(840,000)
Net position for Group 1,040,000 - 840,000 200,000

10.7 The correct answer is: It enables profit centres to make entirely autonomous decisions.
A task of head office is to try to prevent dysfunctional decision making by individual profit
centres. To do this, head office must reserve some power and authority for itself and so
profit centres cannot be allowed to make entirely autonomous decisions.
10.8 The correct answers are:
 When variable costs and market prices are constant
 When a perfect external market exists
If variable costs and market prices are constant, regardless of the volume of output, a
market-based transfer price is the ideal transfer price.
If a perfect external market exists, market price is the ideal transfer price.

VL2020

Answers 101
These materials are provided by BPP
 10.9 The correct answers are:
 Less than or equal to the selling price minus variable costs in the receiving division
 Greater than or equal to the variable cost in the supplying division
This transfer price will enable performance to be measured fairly as both divisions will at
least cover their variable costs.
10.10 The correct answer is: $6.00
Managers of each division will also be willing to increase output (above the budget)
provided that it is profitable to do so.
(a) The manager of M will increase output if the transfer price exceeds the variable cost
of $4 a unit.
(b) The manager of S will increase output if the transfer price is less than the difference
between the fixed selling price ($14) and the variable costs in S itself. This amount of
$9 ($14 - $5) is sometimes called net marginal revenue.
The range of prices is therefore between $4.01 and $8.99.
10.11 The correct answers are:
 The market price used may be a temporary one.
 Using it may act as a disincentive to use up spare capacity.
The use of market value will act as an incentive to control costs.
Negotiating a transfer price may result in inter-departmental disputes leading to head
office intervention.
10.12 The correct answer is: The message sent to the supplying division is that fixed costs must
be controlled.
A two-part tariff system can be used to ensure that the selling division's fixed costs are
covered. Transfer prices are set at variable cost and there is a periodic transfer of a fixed
fee to the supplying division (representing an allowance for fixed costs).
However the risk is that the supplying division does not control its fixed costs because the
company will subsidise inefficiencies.
10.13 The correct answer is: $182,000
Division X contribution will be:
$'000
Contribution: from external sales 170
12 (1,000 units)
182

10.14 The correct answer is: $11.50

A profit margin of 20% on transfer prices equates to a 25% mark-up on costs.
X Y Z
$ per unit $ per unit $ per unit
Transfer cost – 30.00 62.50
Added materials 8.00 6.00 6.00
Direct labour 6.00 4.00 8.00
Production overhead 10.00 10.00 12.00
Full cost 24.00 50.00 88.50
Profit per unit 6.00 12.50 11.50
Transfer price per unit 30.00 62.50 100.00

Profit per unit = $100 – 88.50 = $11.50

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102 Advanced Management Accounting

These materials are provided by BPP
 10.15 The correct answer is: $14
Contribution from external sales per unit = $(16 – 10 – 2) = $4 and so the company will
prefer internal sales if the contribution per unit on internal sales is greater than $4. The
variable cost per unit is $10 and so the transfer price should be $14 (the market price less
variable selling costs).
10.16 The correct answer is: It is not possible to tell without further information
If Q uses the external supplier, P loses the contribution of $18 ($52 – $34) per unit. The
group saves costs of $34 per unit but pays $49 per unit, and so group profit is reduced by
$15 per unit.
However, we do not know whether division P is able to sell component X externally, nor
whether the division has spare capacity. If division Q purchases externally, it may be
possible for division P to expand profits, for the division and for the group, by selling
externally.
Therefore it is impossible to tell the effect on profit without further information.
10.17 The correct answer is: The level of fixed costs can be reduced.
It may not be possible for the supplying division to reduce it's fixed costs, and even if it
does it's unlikely to be able to reduce them to zero, so some will always remain
unrecovered. The other measures suggested could help the supplying division to recover all
of its fixed costs.
10.18 The correct answer is: $14
Contribution from external sales per unit = $(16 – 1 0 – 2) = $4 and so the company will
prefer internal sales if the contribution per unit on internal sales is greater than $4. The
variable cost per unit is $10 and so the transfer price should be $14 (the market price less
variable selling costs).
10.19 The correct answer is: (b) and (c) only
Transfer prices based on standard costs provide an incentive for the transferring division to
control costs (not the receiving division), so option (a) is false.
Option (c) is true. A negotiated transfer price is the result of a bargaining procedure
between the selling division and the purchasing division, and there is a danger that the
price may be decided by the negotiating skills and bargaining power of the respective
divisions, rather than being an 'optimal' price.
If the proposed transfer price for an intermediate product is above the external market
price, the internal transfer should not happen. Instead the product should be bought from
the external market (at the lower price).

11 Risk and uncertainty

11.1 The correct answer is: 470
EV = (500  0.5) + (600  0.1) + (400  (1 – 0.5 – 0.1)) = 470
11.2 The correct answer is: 14.8%
Year Cash flow Discount factor Discounted cash flows
$'000 $'000
0 Investment (10,000) 1.000 (10,000)
1-3 Receipts 9,000 2.723 24,507
1-3 Costs (4,000) 2.723 (10,892)
3,615

Therefore sales must reduce by 3,615/24,507 = 14.8%.

VL2020

Answers 103
These materials are provided by BPP
 Alternative working
Discounted sales receipts 24,507 - 3,615 = $20,892
Annual sales receipts = 20,892/2.723 = $7,672
Reduction in sales receipts = 9,000 - 7,672/9,000 = 14.8%
11.3 The correct answer is: 0.44

No. of
units Variable Cont per Fixed
Prob sold costs unit Cont costs Profit/(loss)
$ $ $ $ $
0.2  0.1 = 0.02 20,000 12 8 160,000 175,000 (15,000)
0.2  0.6 = 0.12 20,000 14 6 120,000 175,000 (55,000)
0.2  0.3 = 0.06 20,000 16 4 80,000 175,000 (95,000)
0.5  0.1 = 0.05 30,000 12 8 240,000 175,000 65,000
0.5  0.6 = 0.3 30,000 14 6 180,000 175,000 5,000
0.5  0.3 = 0.15 30,000 16 4 120,000 175,000 (55,000)
0.3  0.1= 0.03 40,000 12 8 320,000 175,000 145,000
0.3  0.6 = 0.18 40,000 14 6 240,000 175,000 65,000
0.3  0.3 = 0.09 40,000 16 4 160,000 175,000 (15,000)

Probability of making a loss = 0.02 + 0.12 + 0.06 + 0.15 + 0.09

= 0.44
11.4 The correct answer is: $1,000

Var Unit Fixed Profit/ Expt

Prob No sold costs cont Cont costs (loss) Value
000
0.3  0.2 = 0.06 20 12 8 160,000 175,000 (15,000) (900)
0.3  0.5 = 0.15 20 14 6 120,000 175,000 (55,000) (8,250)
0.3  0.3 = 0.09 20 16 4 80,000 175,000 (95,000) (8,550)
0.4  0.2 = 0.08 30 12 8 240,000 175,000 65,000 5,200
0.4  0.5 = 0.2 30 14 6 180,000 175,000 5,000 1,000
0.4  0.3 = 0.12 30 16 4 120,000 175,000 (55,000) (6,600)
0.3  0.2 = 0.06 40 12 8 320,000 175,000 145,000 8,700
0.3  0.5 = 0.15 40 14 6 240,000 175,000 65,000 9,750
0.3  0.3 = 0.09 40 16 4 160,000 175,000 (15,000) (1,350)
(1,000)

11.5 The correct answer is: 37.5%

Sensitivity = NPV of a project/PV of the cashflow affected  100%.

Here the NPV of the project is $6,000,000 - $4,000,000 - $750,000 - $250,000 - outlay of
$400,000 = $600,000
The cash flows affected are sales revenue and variable costs which have a pre-tax present
value of $6,000,000 - $4,000,000 = $2,000,000 which has a post-tax value of
$2,000,000  (1-0.2) = $1,600,000.
Sensitivity = $600,000/$1,600,000  100% = 37.5%

VL2020

104 Advanced Management Accounting

These materials are provided by BPP
 11.6 The correct answer is: 44.75%
This requires you to run through the different combinations of selling price and variable
cost that will give a contribution exceeding $20,000/week or $20 per unit.
Clearly at a selling price of $40/unit all contributions of 1,000 units will be less than
$20,000. So you should be able to eliminate a few combinations using this basic logic.
Thus the combinations of selling price and variable cost that give at least $20,000 and the
probability resulting:
Selling price (unit) Variable cost Probability
$ $
50 20 0.45  0.55
60 30 0.25  0.25
60 20 0.25  0.55
44.75%

11.7 The correct answer is: M

EV of L = (0.2  $500 + 0.5  $470 + 0.3  $550) = $500,000
EV of M = (0.2  $400 + 0.5  $550 + 0.3  $570) = $526,000
EV of N = (0.2  $450 + 0.5  $400 + 0.3  $475) = $432,500

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

11.8 The correct answer is: 89%

Sensitivity = NPV of project/PV of variable  100%

= ($160,000/($50,000  3.605))  100%
= 88.77%
11.9 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
11.10 The correct answer is: $6.00

Weekly contribution
Price P1 Price P2 Price P3 Price P4
$ $ $ $

Best possible 30,000 31,500 32,000 31,500

The maximax decision rule is to select the price offering the maximum possible benefit,
which is P3. This will provide the biggest weekly contribution, provided that the best
possible sales demand is achieved.

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 11.11 The correct answer is: Gain insight into which assumptions or variables in a situation are
critical
Sensitivity analysis does not use probabilities so it does not predict outcomes (points 1-3 in
the question).
However, because it identifies the variables that only have to change by a small
percentage for the NPV of a project to fall to zero then it does identify the input variables
that are most critical to the situation or decision.
11.12 The correct answer is: P1

Weekly contribution
Price P1 Price P2 Price P3 Price P4
$ $ $ $
Worst possible 18,000 17,500 16,000 13,500

The maximin decision rule is to select the price offering the maximum possible benefit under
the worst of circumstances. Price P1 will provide the biggest weekly contribution under the
worst of circumstances, which is a contribution of $18,000 if the worst possible demand
occurs.
11.13 The correct answer is: (d) only
Expected values (EVs) are more valuable as a guide to decision making where they refer to
outcomes which will occur many times over, because EVs represent a long-run expected
average outcome.
Explanation of the incorrect statements.
(a) The second part of this statement is not true, it should say 'is undertaken many
times'.
(b) A risk-averse decision maker may minimise risk but cannot eliminate it.
(c) EVs support a risk-neutral attitude to decision making.
11.14 The correct answer is: Choice 4
A risk-neutral approach will select the choice with the highest expected value, this is
choice 4.
EV of Choice 1 = $9,500m
EV of Choice 2 = (0.3  14,000) + (0.3  10,000) + (0.4  5,000) = $9,200m
EV of Choice 3 = (0.4  10,000) + (0.6  9,000) = $9,400m
EV of Choice 4 = (0.7  8,000) + (0.3  14,000) = $9,800m
11.15 The correct answer is: P3

Prob Price P1 Price P2 Price P3 Price P4

Cont'n EV Cont'n EV Cont'n EV Cont'n EV
$ $ $ $ $ $ $ $
Best 0.2 30,000 6,000 31,500 6,300 32,000 6,400 31,500 6,300

Most likely 0.5 24,000 12,000 26,250 13,125 28,000 14,000 27,000 13,500

Worst 0.3 18,000 17,500 16,000 13,500

5,400 5,250 4,800 4,050

Total EV 23,400 24,675 25,200 23,850

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 11.16 The correct answer is: P2

Weekly contribution
Price P1 Price P2 Price P3 Price P4
$ $ $ $
Best possible 30,000 31,500 32,000 31,500

Most likely 24,000 26,250 28,000 27,000

Worst possible 18,000 17,500 16,000 13,500

Regret vs best outcome under each scenario

Price P1 Price P2 Price P3 Price P4
$ $ $ $
Best possible 2,000 500 0 500

Most likely 4,000 1,750 0 1,000

Worst possible 0 500 2,000 4,500

Maximum regret 4,000 1,750 2,000 4,500

The maximum regret is minimised by selecting P2.

11.17 The correct answer is: (b) and (c) only
Statement (a) is false. As an average the expected value probably won't actually occur in
any single event so it does not represent a probable outcome. It is more appropriate for
repeated events (for example expected sales each year for many years). By the same logic
statement (c) is true.
Statement (b) is true. Expected values fail to show the spread of possible values, therefore
hiding the best/worst outcomes from the decision-making process.
Statement (c) is true, the expected value is a long-run average and is unlikely to occur as a
single outcome in the short-run.
Statement (d) is false. Risk is calculable (known or estimated probabilities and/or
outcomes), uncertainty is not (either probabilities or some outcomes are unknown). In any
event expected values show a long-run average outcome but they do not eliminate risk (or
uncertainty).
11.18 The correct answer is: 2.6%
Sales price affects sales revenue. A sensitivity calculation states how far in percentage
terms contribution can fall before NPV (currently $1,300) reaches zero.
The present value of sales revenue is currently $50,025, so this could afford to drop by
$1,300/$50,025, or 2.6%.
11.19 The correct answer is: Statement 2 – with simulation, more than one variable can change
at a time
Statement 1 – there is no decision rule with simulations – it is not an 'optimising' technique.
Statement 2 – this a clear advantage that simulations have over sensitivity analysis.
Statement 3 is incorrect. The input variables and distributions are estimates.
Statement 4 has some validity potentially, but is not necessarily the case. This advantage
relates more to decision trees.

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 11.20 The correct answer is: $7,500
EV of Project 1 = (0.1  70,000) + (0.4  10,000) – (0.5  7,000) = $7,500
EV of Project 2 = (0.1  25,000) + (0.4  12,000) + (0.5  5,000) = $9,800
EV of Project 3 = (0.1  50,000) + (0.4  20,000) – (0.5  6,000) = $10,000

Project 3 would be chosen on the basis of EV without perfect information. With perfect
information, this decision would be changed to Project 1 if market research indicates strong
demand and Project 2 if market research indicates weak demand.
EV with perfect information: (0.1  70,000) + (0.4  20,000) + (0.5  5,000) = $17,500.
Value of perfect information = $(17,500 – 10,000) = $7,500 – ignoring the cost of obtaining
the information.
11.21 The correct answer is: 73.7%
Choosing 1,000 as a suitable multiple, ie considering 1,000 mobile phones are
manufactured, the contingency table is:
Factory X Factory Y Total
Has major fault 30 (30%  1,000  10%) 84 (70%  1,000  12%) 114

Factory Y with a major fault = 84/114 = 73.7%

11.22 The correct answer is:
The number of standard deviations required for profit to rise to $5 million is $1m/$2m = 0.5.
Using the normal distribution table, 0.5 standard deviations is assessed as having a
probability of 0.1915.
So, the chance of the outcome being at least 0.5 standard deviations above the expected
outcome is therefore 19.15% + 50% (the probability of profits being below expected) which
equals 69.15%.
This means that the chance of the outcome being better than this is 100% – 69.15% =
30.85%.
11.23 The correct answer is:
The number of standard deviations required for profit to fall to zero is $3m/$2m = 1.5.
Using the normal distribution table, 1.5 standard deviations is assessed as having a
probability of 0.4332.
So, the chance of the outcome being no worse than 1.5 standard deviations below the
expected outcome is therefore 43.32% + 50% which is 93.32%.
This means that the chance of the outcome being worse than this, and a loss being made is
100% – 93.32% = 6.68%.

12 Analysis and management of risk

12.1 The correct answer is: Risk reduction
Where a risk falls into the low impact, high probability quadrant of the risk map the most
appropriate response is risk reduction, focusing on reducing the likelihood of the adverse
event occurring.

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 12.2 The correct answers are:
 The speed of processing is improved.
 The cost of a computer system is lower than the manual system it replaces, mainly
because the jobs previously performed by human operators are now done by
computers.
 The accuracy of data/information and processing is improved, because a computer
is less likely to make mistakes.
Three examples of efficiency are: firstly, the speed of processing is improved, eg response
times in satisfying customer orders are improved; secondly, the cost of a computer system
is lower than the manual system it replaces, mainly because computers now do the jobs
previously performed by human operators; the third example is the accuracy of
data/information and processing is improved, because a computer does not make
mistakes. Effectiveness focuses primarily on the relationship of the organisation with its
environment. An example is where automation is pursued because it is expected the
company will be more effective at increasing market share or satisfying customer needs.
Another example is where front office systems are developed to improve the organisation's
decision-making capability to improve the effectiveness of the organisation.
12.3 The correct answers are:
 Information about personnel from the payroll system
 Value of sales from the accounting records
 Information on decisions taken from the minutes of a meeting
Data and information captured from internal sources come from transaction systems, such
as the payroll system and the receivables ledger, or is communicated formally or
informally, as in a decision taken at a meeting.
Although the other two types of information mentioned are circulated within the
organisation, they are both captured from outside. For example, the source of employment
legislation is the government and the source of the market information is the market itself,
which is clearly external to the organisation.
12.4 The correct answer is: Risk hedging is taking action to offset one risk by incurring a new risk
in the opposite direction.
Some operational risks will be high frequency, high severity risks. The management of a
portfolio of different risks is risk pooling or risk diversification. Insurance companies will
insist that businesses take some action to reduce many risks as a condition of insuring
those risks.
12.5 The correct answer is: A framework of fundamental principles
CIMA's Code of Ethics is based on fundamental principles.
12.6 The correct answer is: Risk transfer
Insurance transfers risk. In return for an insurance premium, the insurance company
agrees to take on an agreed proportion of the financial burden of a risk.
12.7 The correct answer is: Severity high, frequency low
Insurance might be the most appropriate risk hedging strategy when the potential cost is
high, but the likelihood of the adverse outcome happening is fairly low. When the
frequency is high, internal measures to manage the risk would probably be more
appropriate.

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Answers 109
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 12.8 The correct answers are:
Severity
Low High

Low Accept Transfer

Probability

High Reduce / control Abandon / avoid

This framework can be remembered as TARA (Transfer, Accept, Reduce/control, Abandon).

12.9 The correct answer is: The risk is an inevitable but low-impact consequence of a
commercial decision.
Risks should only be accepted without further action if they are both low probability and
low severity. If a risk is an inevitable but low-impact consequence of an otherwise
attractive action, it is likely to be accepted.
However, risks should not be accepted just because they are expensive to address or
because they are statistically unlikely to occur. If the probability of a risk occurring and
the severity of the impact are both high, it may be appropriate to withdraw from the
market.
12.10 The correct answer is: The risk of a key member of staff resigning
Business risk is 'the risk faced due to a business's operations or products.' The risk of a
member of staff resigning is an event risk (ie due to an adverse event).
12.11 The correct answer is: Is it consistent with the organisation's strategy?
Ethics are the moral principles or standards of behaviour by which people act or do
business. The criteria used to establish whether an action is ethical is based on legality,
fairness and public perception.
12.12 The correct answer is: Integrity
Integrity is the duty to be straightforward and honest in all professional and business
relationships – something that Justin has failed to do.
The error was a one-off example of human error which is not severe enough to cause
Justin's professional competence and due care to be called into question.
Professional behaviour relates to compliance with relevant laws and regulations – the
mistake would not be sufficient to bring the accountancy profession into disrepute.
Objectivity is not relevant here as it relates to the duty not to allow bias, conflict of interest
or undue influence of others to impact on judgements.
12.13 The correct answers are:
 Switching costs
 Locking in costs
Switching costs relates to reduced efficiency arising from a new, unfamiliar system. This is
a particular issue here given the need to convert existing data.
Locking in costs relates to having to commit to a supplier. Having signed the new contract,
Epsilon will not be able to transfer to another supplier for the next five years.

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 12.14 The correct answer is: Social responsibility
Social responsibility refers to actions which the organisation is not obliged to adopt for
business reasons, but which it adopts for the good and wellbeing of stakeholders (in this
case, the local community).
The decision is not driven by a moral principle or overall standard of behaviour on the part
of O3 but rather assertive negotiation by local residents and businesses. As a result, it is
based on stakeholder management rather than an ethical principle.
12.15 The correct answer is: IT staff need to be managed effectively.
Earl identifies that effective management is required, but this relates to the highly technical
nature of the technology, not the IT staff themselves. The nine reasons are as follows:
Critical to the success of a business
High cost (especially capital investment)
Effective management required due to the highly technical nature
Source of competitive advantage for most organisations
Structural changes may be achieved as a result of IS/IT
Stakeholders are affected, so the impact on them needs to be considered
Technical issues arise both inside and outside the IT department
All staff have the potential to be impacted by IS/IT developments
Revolutionary changes are possible

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Answers 111
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112 Advanced Management Accounting

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 Practice mock
questions

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114 Advanced Management Accounting

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 Questions
1 Strudel Co is a pet food manufacturer whose main production lines are dog food and cat
food, in addition Strudel Co also produces food for birds and other small animals. An ABC
system has recently been introduced to apportion set-up costs to Strudel Co's product
lines.
In the latest period there were 800 production runs, 400 related to dog food and 200 to cat
food.
Total set-up costs were $180,000.
Calculate the set-up costs that were charged to the cat food product line.
Enter your answer in $, without the currency sign and without commas.

2 Costs are often classified into four categories:

(a) Unit
(b) Batch
(c) Product
(d) Facility sustaining
When will ABC deliver most value as a device for costing a business's different products?
 If most costs consist of (a) and (d)
 If most costs consist of (a) and (c)
 If most costs consist of (b) and (c)
 If most costs consist of (c) and (d)

3 Which of the following organisational characteristics make it LEAST likely that a JIT
manufacturing approach will be beneficial?
 Low inventory holding costs accounting for less than 5% of total costs
 Poor industrial relations, strikes are common
 Short production lead times
 Seasonal demand, 75% of output is sold in the Christmas trading season

4 V provides administrative and support services such as call centre work, payroll, invoicing
and other documentation processing.
Currently, V has three clients, client A, E and S.
Client E:
is a health service provider. V carries out routine administrative tasks on medical records
for E.
Client A:
is a manufacturer of electrical components. V undertakes invoicing payments for A.
Client S:
is a bank. V provides a call centre service for S.

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Practice Mock – Questions 115

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 Other information:
Total overheads incurred in the year were $1,900 million.
The Finance Director has advised that overheads for Clients A and S should be apportioned
according to the equivalent units of work activity completed.
It is estimated that approximately 30% of total overheads can be attributed to Client E.
Client A:
32 million invoices have been processed.
Client S:
Calls handled: 80 million by an average of 4,000 direct employees. On average, each call
dealt with for client S takes approximately 20% more time to process than the average time
spent processing an invoice for client A. Hence, the equivalent units of work activity should
reflect the average extra time taken to deal with a call compared with processing
accounting records for client A.
What is the amount of overhead that Client S will be charged with?
Enter your answer in $m, without the currency sign and without commas.

(to one decimal place)

5 Complete the following text by matching each statement to the appropriate cost
management technique:
Each term in the pick-list below may be used more than once:

Where the majority of a product's costs are are fixed by its 

design – this makes it important to consider using

Even if the cost targets are not achievable immediately after a

product is launched – a company operating with an automated 
production line may launch a new product if they believe that
cost may be reduced by the application of

Where decommissioning costs are likely to be high, this is an 

argument for the use of

Reducing material costs in a complex low-tech product in the 

mature phase of its product life cycle is likely to involve the use of

Pull down list:

ABC
BPR
target costing
kaizen
life cycle costing
value analysis

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 6 A management accountant in a public sector (ie government financed and not for profit)
hospital is examining the viability of using activity-based costing.
Which of the following is a valid argument against the use of ABC in this context?
 Many different medical services are being provided so using ABC would be
complicated
 Overheads are likely to be high relative to direct costs in this context
 Customers do not pay for their medical treatment
 The finance required could alternatively be used to improve medical services

7 The latest financial results (and forecasts) of Company C are disappointing. The board of
C have made the following observations:

Director A – poor logistics and quality combined with out-of-date designs have
led to the loss of contracts with major clients
Director B – product innovation is being held back by a conservative culture
within senior management
Director C – staff feel they are ignored by senior management
Director D – C Ltd's products are complex and therefore expensive to produce

A TQM programme is being recommended by the CEO of Company C.

Which of the Director's observations are LEAST likely to be addressed by the
implementation of a TQM programme?
 Director A
 Director B
 Director C
 Director D

8 Which THREE of the following may result from a successful value analysis program?
 A reduction in costs and quality
 Out-sourcing parts of the production process
 A reduction in the target cost
 The development of more cost-effective product designs
 Better prices from suppliers by narrowing the product range to generate larger order
sizes

9 Supermarket X has re-designed its milk cartons so that they are sold in large plastic
sachets. As a result the amount of non-recycled plastic being used by X has fallen by 22%.
The new approach required the following:
 Making customers aware of how much non-recycled plastic was being used in the
original product
 Training staff and customers in handling the sachets carefully to avoid breakage
 Setting targets for reduction in use of non-recycled plastic

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Practice Mock – Questions 117

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 What are the above measures an example of?
Select THREE of the following.
 Value analysis
 Reverse engineering
 Value chain analysis
 TQM
 BPR

10 Company Z is evaluating a proposal to produce a new type of bus, which will be powered
by a radical new fuel cell that will reduce its emission of harmful greenhouse gases to zero.
The target selling price is $100,000, and the target profit is $10,000 per vehicle.
As a result of a target costing analysis based on a prototype design, Z has identified a cost
gap of $2,000 per vehicle.
Which of the following would be an appropriate response to this cost gap?
 Increase the selling price by $2,000 per vehicle
 Abandon the proposal
 Apply value engineering to attempt to reduce costs
 Reduce the desired margin by $2,000 per vehicle

11 Z Co produces a product using two processes, process 1 and process 2. A product must go
through both processes, both of which are highly automated.
Process 1 has a capacity of 1,000 machine hours per week.
Process 2 has a capacity of 800 machine hours per week.
Z Co is operational for 50 weeks per year.
A product takes an hour per unit in process 1 and half an hour per unit in process 2.
Each product incurs material costs of $1 per unit, and conversion costs of $2,000 per week.
The product sells for $4 per unit.
What is the Throughput Accounting ratio for Z Co?
 2.0
 1.5
 1.2
 1.6

12 Which of the following is NOT a technique that can be used to implement value analysis?
 Functional analysis
 Target costing
 Reverse engineering
 Value chain analysis

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 13 A company is able to sell different versions of the same core product to different market
segments at different prices.
Which one of the following pricing strategies is being applied?
 Market skimming
 Price differentiation
 Price discrimination
 Premium pricing

14 Which of the following statements is likely to be true?

 Market skimming is less common where a product is expected to have a shorter
product life cycle.
 Product bundling can be used to maximize revenues where demand is elastic.
 Losses in the early stages of the product life cycle are due to a loss leadership
strategy being followed.
 Market penetration is especially suitable where a significant experience curve effect
exists.

15 Barium Co sells health food snacks called Nibbles. Each pack currently sells for $1.50, and
demand is currently 120,000 packs per month. Based on a trial of higher prices in a test
market, Barium Co estimates that demand would fall by 5,000 for every $0.10 increase in
the price of a pack. The contribution per unit is $0.30 per pack.
Calculate the optimal selling price of a pack of Nibbles.

(to two decimal places)

16 Which one of the following conditions are likely to fit well with a market-penetration
pricing strategy?
 A firm has high levels of liquidity
 The product life cycle is short
 The product is unique and has no direct competitors
 Intense competition with a small number of large well-resourced rivals

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Practice Mock – Questions 119

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 17 Division G is a division of Axio Co, and has been set up as an investment centre. Axio is a
conglomerate that supports its business units with an active Finance Department that
deals with cash management and credit control for the group as a whole. Other matters
are under divisional control, although often require Head Office approval.
Axio intends to evaluate Division G on the basis of its ROCE.
Which TWO of the following should be included in the calculation of Division G's ROCE?
 Interest payments on Division G's borrowings
 Division G's cash holdings
 Division G's receivables
 Apportioned overheads from Axio Co analysed using ABC
 Division G's non-current assets

18 Sparkle is a division of Crystal Co. The latest information for Sparkle is shown below
together with further detail on Sparkle's profits:
Asset base $15m
Profits before tax $1.2m
 Depreciation on Sparkle's controllable asset base was $0.3m
 Apportioned Head Office expenses were $0.2m
 Finance costs were $0.1m
Crystal Co expects a return of 10% on the assets of this division.
Calculate the controllable residual income (RI) of Sparkle in $m, to the nearest million.

$ m

19 Which of the following ratios is used to measure an organisation's financial risk as part of
the financial aspect of the balanced scorecard?
Select ALL that apply.
 Interest cover
 Asset turnover
 Gearing
 Profit margin

20 Which of the following is NOT an advantage of using non-financial performance

measures (NFPIs) compared to financial performance measures (FPMs)?
 NFPIs are easier to manipulate
 FPMs are backward looking
 FPMs are not available as quickly as NFPIs
 NFPIs provide less of a short-term focus

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 21 An airline is considering the design of its balanced scorecard.
Match the following performance measures with the appropriate part of the balanced
scorecard.

Market share 

Production lead time 

Staff turnover 

EVA 

Pull down list:

Internal business
Innovation and learning
Financial
Customer

22 Division W is currently making operating profits of $3m on an asset base of $18m. It is

considering the following two investments:

Project A Project B
Investment $2m $3m
Forecast annual operating profit $0.26m $0.54m

Division W has been set a target ROCE of 12% by its Head Office.
Which of the following investments decisions would be taken by Division W, based on the
above information?
 Invest in Project A
 Invest in Project B
 Invest in neither project
 Invest in both projects

23 The following statements each relate to a different performance measure.

Match the following criticism with the one performance measure that it is most relevant
to:

Difficult to use to compare divisions 

Hard to use because of the complications in calculations 

May lead to information overload 

Likely to lead to sub-optimal decision making 

Pull down list:

ROI
RI
EVA
Balanced scorecard

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Practice Mock – Questions 121

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 24 L Co is a DIY retailer. A summary of L Co's latest financial results are as follows:

$m
Sales 225
Operating profit 50
Profit before tax 40
Profit after tax 30
Non-current assets 150
Net current assets 50
Long-term liabilities 100
Equity 100

Which of the following is a correct summary of L Co's performance?

 Asset turnover 1.5 Operating margin 22.2%
 Asset turnover 2.0 Operating margin 17.8%
 Asset turnover 1.125 Operating margin 22.2%
 Asset turnover 2.25 Operating margin 22.2%

25 D Co is an under-performing parcel delivery company.

It has been suggested that D Co should use benchmarking to attempt to achieve a radical
breakthrough in performance that is required to ensure corporate survival.
Which one of the following types of benchmarking is most likely to be appropriate for
D Co?
 Competitive benchmarking
 Joining an industry database to analyse performance against KPIs for the parcel
delivery industry
 Internal benchmarking
 Benchmarking against a company outside the parcel delivery sector with a
reputation for excellent logistics

26 At a recent Board meeting to discuss the implementation of the balanced scorecard the
following statements were made.
Which of these statements is true?
 There must be a maximum of two performance measures in each part of the
balanced scorecard to avoid information overload.
 The measures in the scorecard must be given a weighting – with the financial
measures being given the highest weighting.
 Care must be taken to ensure that the innovation and learning measures
complement the key internal business and customer measures.
 There must be a minimum of two performance measures in each part of the
balanced scorecard to ensure that enough KPIs are being given visibility at corporate
level.

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 27 Division Y is currently making operating profits of $6.5m on an asset base of $130m.
It is considering the following investment:
Project 315

Investment $25m
Forecast annual operating profit $1.75m

Division W has been set a target return of 8% by its Head Office.

How would the use of ROI or RI motivate the senior managers at Division Y to operate in
the best interest of the company as a whole?
 ROI (only) would incorrectly reject Project 315
 RI (only) would incorrectly reject Project 315
 Neither ROI or RI would incorrectly reject Project 315
 Both ROI and RI would incorrectly reject Project 315

28 Poggeral Co makes coffee beans which are sold internally to is coffee shop division, and
also to up-market food retailers. When Poggeral Co sells to these retailers it incurs
packaging costs of $2 per kg of coffee beans. At present Poggeral Co is operating at full
capacity.
The external market price available to Poggeral Co is $20 / kg, and at this price Poggeral
Co achieves a contribution / sales ratio of 30%.
Poggeral has sufficient capacity to sell to both the internal and the external market.
At what price per kg should the coffee beans be sold to the coffee shop division?
Insert your answer in $, to the nearest $, without using the currency symbol.

29 Division Z has high levels of surplus capacity and as a result has agreed to manufacture a
significant order for Division T at a transfer price equal to its variable cost.
The Head Office of the company that Division Z is a part of has decided that it is unfair
that Division Z has not made a profit on this transaction and has decided that a change
should be made to the agreed transfer price. Head Office have made it clear that this is not
a matter for debate, saying that 'it is clearly fair that division Z makes a fair share of the
profit, and we will not allow any further time to be spent on this issue. We all have far
better things to spending time on.'
Which TWO of the following courses of action will be likely to be appropriate here?
 A dual tariff transfer pricing system could be introduced.
 A two-part tariff system could be introduced.
 A full cost + basis could be used as the transfer price.
 An opportunity cost basis could be used.

VL2020

Practice Mock – Questions 123

These materials are provided by BPP
 30 Division X makes windscreen wipers which are sold internally to other divisions who use
them in the manufacture of various types of vehicles.
Division X also sells these externally for $10 / unit but incurs selling costs of $2 and
ultimately makes contribution of $3 / unit.
Division X is currently operating with high levels of surplus capacity.
The current transfer price for internally sold units is $5 /unit but this has caused
considerable debate at Division X.
Which one of the following is true?
 The current transfer price is too low because it will fail to motivate Division X to make
units for internal sale.
 The current transfer price is too low because it will encourage external sales and
deprive internal divisions of this component, forcing them to buy externally for
$10/unit.
 The current transfer price recognizes the true cost of the internally transferred units
and therefore should not be changed.
 A transfer price of $9 would be better as an estimate of the true cost of the internally
transferred units.

31 A consumer electronics firm, Moover Co, currently makes all of its products from its home
country, which is in Europe.
Moover Co is assessing a proposal to build a new factory in Asia and to transfer some of
the operations from Europe to Asia, to reduce its operating costs.
Which TWO of the following are relevant cash flows that should be included in the
appraisal of this project?
 Sales revenue from the products being sold by the Asian factory
 Redundancy costs for European workers that are affected by this investment
 A cut in dividends that would be needed to free up cash for the project
 Opportunity cost of lost sales due to disruption to production caused by the
investment
 Interest costs on a loan that would be taken out to build the Asian factory

32 West College is a college based in Region X.

In order to expand its student intake it is exploring the possibility of opening up a new
campus in Region Y.
If student numbers are poor after the first year the venture will be abandoned.
However, because students will have booked on a two-year course the venture cannot be
fully closed until the end of year 2.
West College estimates the chance of abandonment to be 25%.
The facilities management department have identified two suitable sites.
Site A will require refurbishment costs of $100,000 and will cost $300,000 per year to
lease. The term of the lease is four years.
Site B will be leased fully furnished and will also cost $300,000 per year to lease. The term
of the lease is also four years, but there is a break clause at the end of year 2 which allows
West College to cancel the lease at that point with no further penalty. This site will require
an additional up-front payment which is currently being negotiated.
West College's cost of capital is 10%.

VL2020

124 Advanced Management Accounting

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 Which of the following is the maximum acceptable additional up-front payment that
West College should make in order to secure Site B instead of Site A?
 $530,200
 $430,200
 $207,550
 $107,550

33 Spice Co is a dynamic and fashionable manufacturer of IT and communications devices.

Recently it has launched a new virtual reality headset, the NL. This has not had the success
that Spice Co had hoped for.
Technological problems with the NL meant that Spice Co spent twice as much on start-up
costs. Sales have also been sluggish and as a result Spice Co has not been able to sell at as
high a price as it had originally planned.
Currently the NT is making significant losses, although it is making a positive contribution.
Spice Co is considering whether or not to stop production of the NT.
Which TWO of the following are valid factors to consider in this decision?
 The overspend on NT's set-up costs
 The losses being made by NT
 The impact on Spice Co's brand name of exiting from this market
 The price that the NT is currently being sold for
 The future prospects for NT sales

34 Poison Co is planning a new investment. The cost will be $1,200,000 and the investment
will attract tax allowable depreciation at a rate of 20% on a reducing balance basis. The
investment will be made in the final week of the current financial year.
The project has an expected life of 10 years and an expected residual value of $100,000.
The company pays tax at a rate of 25%, and tax is paid one year after the end of the year
in which the profit was earned.
Poison Co has a cost of capital of 10%.
Calculate the present value of tax saved in year 2 from tax allowable depreciation.

(to the nearest $)

35 A finance manager chooses to evaluate an investment project using IRR rather than NPV.
Which TWO of the following explanations would justify her decision?
 Low interest rates mean that there is less emphasis placed on the time value of
money.
 Managers understand IRR better than NPV.
 An absolute measure is required, to measure the extent to which competing projects
create shareholder wealth.
 There is uncertainty over the appropriate cost of capital to use.

VL2020

Practice Mock – Questions 125

These materials are provided by BPP
 36 A project has an initial investment of $225,000 and is expected deliver an IRR of 12% over a
four-year period.
Assuming that the cash flows are received equally every year, what are the annual cash
inflows from the project?

(to the nearest $)

37 Two alternative types of new aircraft are being evaluated for use by new airline, Drucken
Co.
The key details are as follows:

Type A NPV $32,000 IRR 22%

Type B NPV $22,000 IRR 30%

The NPV has been calculated at Drucken Co's cost of capital of 10%.
Which one of the following statements will be true?
 At a cost of capital of higher than 22%, type B will be chosen.
 Type A will be chosen, assuming the financial analysis has been performed correctly.
 In the absence of capital rationing constraints, both type A and type B should be
fully financed.
 IRR is not appropriate for this decision because it ignores the time value of money.

38 Sid Co is evaluating an investment using NPV.

During the analysis it has been noted that there is only one rate of inflation (3%) that
affects sales revenue and operating costs in the same way.
The rate of tax is 25%, and Sid Co will benefit from tax savings due to capital allowance
that result from the capital investment.
Sid Co is all equity financed and its shareholders expect a return of 10%.
Which one of the following statements is true?
 It will be simpler and equally accurate to discount the real cash flows at 10%.
 The cost of capital will have to be adjusted to 6.8% before being used to discount the
money cash flows.
 The cost of capital will have to be adjusted to 6.8% before being used to discount the
real flows.
 It will be more accurate to discount the money cash flows using the 10% cost of
capital.

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126 Advanced Management Accounting

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 39 Carmelita Co is a company that in the past has specialised in training medical
professionals. It is now planning a diversification into drama schools.
Carmelita Co has projected the following operating profits based on a start of cost of
$100,000 which will be fully written off during the five-year life of the project, starting from
year 2 when the school will open.

Year 1 2 3 4 5
Forecast profit ($'000) 20 40 45 60

Calculate the payback period for this project.

Insert your answer below in years, to one decimal place.

40 VFD Co is a small company that is experiencing cash flow pressures. VFD Co have just had
an animated board meeting at which the topic of project appraisal was discussed.
Which TWO of the following statements are likely to be true for VFD?
 Payback should be emphasised much more strongly given our circumstances.
 We should change our simple payback period target of two years to a discounted
(adjusted) payback period of two years.
 Project investment should be suspended during periods of cash shortages.
 We need to focus on short-term profitability so we should primarily use ARR as our
main project appraisal technique.

41 F Co is evaluating a two-year project which will provide a return of $0.75m per year on an
investment of $1.2m.
The project has been correctly analysed as follows:
 NPV at 10% $101,250
 NPV at 17% ($10,673)
F Co's cost of capital is 10%.
Using this data, assess which one of the following is the correct estimate for F Co's
modified IRR.
 19.8%
 18.3%
 14.6%
 16.5%

42 Pavlova Co runs a chain of up-market confectionery stores.

Currently Pavlova Co has a cash surplus of $1,000,000 which it is planning to return to
shareholders.
However an opportunity has come up to buy a new store for $1 million.
Pavlova Co has decided to obtain the new store, but is unsure whether to rent it or buy it.
Pavlova Co has a cost of capital of 8% and evaluates projects over a five-year period.
In five years' time the disposal value of the Store will have depreciated by 40% from the
price paid by Pavlova Co.

VL2020

Practice Mock – Questions 127

These materials are provided by BPP
 Rent payments would be made at the end of each year.
What is the maximum rent per year that Pavlova Co would be willing to pay (ignore tax)?
Insert your answer in $ below, to the nearest $, without inputting the $ sign or commas.

43 A project has the following characteristics:

 It has an initial cash outflow followed by a series of positive cash flows.
 The NPV is positive at a cost of capital of 10%.
 The IRR is 20%.
In this situation which TWO of the following statements are true?
 The MIRR will be lower than the IRR
 The MIRR will be above the IRR
 The MIRR may be below the cost of capital
 The MIRR will be above the cost of capital

44 A company has $200,000 to invest in new projects this year.

All investments must be started now and all projects are indivisible.
There are four investment opportunities - these are outlined below.
Project Initial investment NPV PI
($'000s) ($'000s)
1 110 40 0.36
2 120 63 0.54
3 70 36 0.51
4 20 20 1
What is the NPV of the optimal project selection to the nearest $'000?
 114
 99
 143
 159

45 Conrad Co has a number of projects that it would like to invest in this year. All of the
projects are divisible and are projected to deliver a positive NPV. All of the projects will
deliver cash inflows from next year onwards.
However, Conrad Co is facing a soft capital rationing problem and is unable to finance all
of these projects.
In this situation, which TWO of the following courses of action may be appropriate?
 Rank the projects using MIRR
 Rank the projects using NPV
 Use external sources of finance, eg borrowing
 Rank the projects using the profitability index

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128 Advanced Management Accounting

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 46 Ent Co is a car rental company. Ent Co's customers expect to rent new cars that are in
excellent condition, so Ent Co has in the past bought new cars and kept them for a year
and then has sold them.
The typical costs of this are as follows:
Time 0 1

purchase ($25,000)
running cost ($2,000)
disposal proceeds $11,000

net cash flows ($25,000) $9,000

discount @ 10% 1 0.909
present value ($25,000) $8,181

total present value ($16,819)

Ent Co is now considering moving to a two-year replacement cycle.
The estimated net cost (taking into account disposal value and running costs) is $6,500 in
year 2.
What is the equivalent annual cost of the optimal replacement cycle?
 $18,503 for a one-year replacement cycle
 $18,541 for a two-year replacement cycle
 Not relevant because the negative NPV indicates that it is not worth leasing the
vehicles
 $12,743 for a one-year replacement cycle

47 Café Salo orders fresh pastries every day for $10 / batch and then sells them in store for
$25. At the end of each day any unsold pastries are given to staff or thrown away.
The café has estimated the following demand:
Daily demand
(batches) Probability
20 0.25
40 0.3
60 0.45

Café Salo is experiencing liquidity problems and wishes to choose the order quantity with
the best 'worst-case' outcome.
What profit per day will Café Salo make if it selects the appropriate order quantity?

(to the nearest $)

VL2020

Practice Mock – Questions 129

These materials are provided by BPP
 48 Match the criticisms below to the risk analysis technique that they are most relevant
to.

Based on subjective probabilities 

Complex and time-consuming 

Ignores the importance of later cash flows 

Only considers the impact of changing one variable at a time 

Pull down list:

IRR
Discounted payback period
Expected values
Simulation
Sensitivity analysis

49 The risk of a project is being analysed by a company using sensitivity analysis.

The project is for four years and is expected to generate annual revenues of $420,000,
annual variable costs of $160,000, and annual fixed costs of $50,000.
The initial investment will be $650,000 and the cost of capital is 10%.
The project NPV has been correctly calculated as $15,700.
Calculate the sensitivity of this project to the assumed level of sales volume.

(to one decimal place)

50 An oil exploration company, S Co, is reviewing the results of a preliminary analysis of four
oil fields that it is considering investing in.
The W field is based on land and is estimated to contain mainly oil with a small amount of
natural gas.
The X field is also based on land (in Country B) and would require a controversial technique
known as fracking to access the oil and gas reserves.
The Y field is based at sea, in shallow water, and is estimated to contain equal amounts of
oil and gas; and the Z field is based at sea, in deep water, and is estimated to contain
equal amounts of gas and oil.
The estimated profits from these four proposed investments have been evaluated using
three possible scenarios – which are based on three possible scenarios concerning the oil
price, the price of gas, the pace of technological change and the likelihood of gaining
public approval for fracking in Country B.
Scenario W field X field Y field Z field
1 $90m $100m $20m $60m
2 $70m $80m $40m $50m
3 $65m $60m $90m $40m
S Co intends choose the field that leads to the lowest maximum regret.

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130 Advanced Management Accounting

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 Which field will S Co select?
 W
 X
 Y
 Z

51 P Co is a house-builder. It has been offered the possibility of buying land and then
applying for planning permission to build a new housing estate.
If the planning application is successful then the profit from building the housing estate is
predicted to be $120m or $80m (before considering the cost of the land) depending on the
amount of lower value social housing that P Co is required to build. There is an equal
chance of either outcome.
There is also a small chance (estimated as having a 20% probability) that planning
permission will be refused, in which case the land will be worth 5% of the expected gain
from this investment.
The current land owner is asking for $40m for the land.
What would P Co's expected profits be if it proceeded with this investment?
Work to one decimal place and insert your answer in $m without using the $ sign.

$ m

52 Z Co is a European retailer. Most of its clothes are made in Asia and then transported to its
single warehouse in Spain.
A risk assessment has identified this warehouse as a key area of risk. If there was any
disruption to the operation of this warehouse then there would be a major impact on Z Co's
ability to trade.
To date there have been no problems but if any did occur (eg earthquake, strike action)
then there would be serious problems for Z Co.
Which TWO of the following courses of action would be the most appropriate response to
handling this type of risk?
 Business continuity insurance
 Careful review of the performance of the warehouse to ensure its reliability
 Take no action because there is risk inherent in any business, and this appears to be
acceptable because there have been no problems to date
 Diversify by building another smaller warehouse in another part of Europe

53 Fearless Co is a retailer of film memorabilia, eg posters, watches, wallets etc.

Fearless has been approached by Wermer Co, a large film studio, who have offered
Fearless exclusive rights to sell a range of tee-shirts related to the launch of a new
'blockbuster' film planned for the next summer holidays. Fearless would be expected to
promote the range of tee-shirts at an expected cost of $100,000.
It is in the nature of the industry that the products have a short shelf-life and any unsold
stock would be disposed of at a fraction of the cost of producing them.

VL2020

Practice Mock – Questions 131

These materials are provided by BPP
 Fearless estimate that they could sell the tee-shirts for an average price of $10 during the
summer period when the film is launched, but would have to sell unsold stock for a price of
$1 / unit.
The tee-shirts would be supplied at a cost of $6 / unit.
Fearless estimates sales demand and payoffs (in $'000) as follows:

Order size 50,000 300,000 1,000,000 10,000,000

Demand Probability
50,000 0.1 100 -1,150 -4,650 -49,650
300,000 0.4 100 1,100 -2,400 -47,400
1,000,000 0.3 100 1,100 3,900 -41,100
10,000,000 0.2 100 1,100 3,900 39,900

Which order size should Fearless choose in order to maximise its expected profit?
 50,000
 300,000
 1,000,000
 10,000,000

54 Which TWO of the following are benefits of sourcing primary data compared to sourcing
secondary data?
 It can be a source of competitive advantage.
 Data is available very quickly.
 Sourcing primary data is cheaper than sourcing secondary data.
 Information is targeted precisely to needs.

55 Which TWO of the following factors below have enabled dramatic advances in the field
of data analytics?
 An increased focus on the right to privacy of data creators
 An increase in the volume of renewable energy being produced
 A wider variety of data becoming available
 The ability to process data high volumes of data at a dramatically faster speed

56 Which one of these statements about big data is correct?

 Big data uses unchanging sources to extract a dramatically higher volume of
information.
 Big data allows decisions to be implemented with increased velocity.
 Big data can be used to solve a wide variety of complex problems.
 Big data has veracity (ie is always truthful).

VL2020

132 Advanced Management Accounting

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 57 Avocado plc has divisionalised its decision making on a geographic basis. The head office
management accountant has prepared the following figures for December 20X8:

$m
Revenue 285.0
Variable materials (105.0) Purchased through a central supplier contract
Variable labour (45.0) Recruited locally but payroll administered by
head office
Variable overheads (25.0) Labour-related overheads
Fixed production costs (60.0) Long-term lease on factory
Fixed non-prod'n costs (22.0) Allocation of head office costs
Profit 28.0

When measuring managerial performance, what profit figure should be reported?

$ m

58 How might a Business Information (BI) system enable a business to cut costs?
 By providing a monthly variance analysis of key cost drivers
 By tracking cash flow to ensure optimum liquidity
 By using spreadsheets to analyse historic information and predict future needs
 By using algorithms to analyse forensic data to predict future patterns of activity

59 If a risk has been identified as low probability but high severity risk, which two of the
following actions would be appropriate?
 Taking out an insurance policy to provide compensation if the risk materialises
 Accepting that the risk is unavoidable if the cost of avoiding it is high
 Preparing a contingency plan to react promptly if the risk materialises
 Improving controls in order to reduce the probability of the risk materializing

60 In what way can big data be used to manage risk?

 Big data enables a clear understanding of historic events
 Big data removes problems associated with uncertainty
 Big data predicts future possible scenarios
 Big data ensures that IT hardware is robust

VL2020

Practice Mock – Questions 133

These materials are provided by BPP
VL2020

134 Advanced Management Accounting

These materials are provided by BPP
 Practice mock
answers

VL2020

These materials are provided by BPP

VL2020

136 Advanced Management Accounting

These materials are provided by BPP
 Answers
1 The correct answer is: 45000

$180,000 / 800 production runs = $225 per run

$225  200 = $45,000

It is easy to misread this question and to assume that there were 600 production runs (400
dog food and 200 cat food) but the question says that these are the MAIN products not the
only products, and clearly states the total production runs as 800.
2 The correct answer is: If most costs consist of (b) and (c).
Unit related costs are typically direct costs and as such can be identified without using
ABC.
It is very difficult to find accurate or meaningful cost drivers for facility-sustaining costs
(eg security / corporate advertising).
However, if overhead costs can be tracked to batches or products then this can provide
insight in terms of differing product costs.
3 The correct answer is: Seasonal demand, 75% of output is sold in the Christmas trading
season
This will make it very unlikely that zero inventory can be held in the run up to the Christmas
season. It is hard for a business to change the pattern of sales demand so this is the
scenario where JIT is least likely to be beneficial.
Notes on incorrect answers:
 Low inventory holding This makes JIT less attractive but saving on inventory costs
costs accounting for less is only one of the benefits of JIT. Other benefits (improved
than 5% of total costs quality / quicker lead times) could still make JIT attractive.

 Poor industrial relations, This makes JIT harder to use because stock-outs will occur
strikes are common during strike action. However, it could be argued that a
zero inventory philosophy will force a company to deal with
its industrial relations problems and this could be beneficial.

 Short production lead This makes JIT more practical because it is more practical
times to wait for customer orders before commencing production.

4 The correct answer is: 997.5

Total overheads $1,900m
Client E (30%  $1,900m) $570m
Balance to apportion $1,330m

Equivalent units
Client A 32m
Client S (80m  1.2) 96m
Total equivalent units 128m

Apportionment
Client A: $1,330m  32/128 $332.5m
Client S: $1,330m  96/128 $997.5m

VL2020

Practice Mock – Answers 137

These materials are provided by BPP
 5 The correct answers are:

Where the majority of a product's costs are are fixed by its design – target costing
this makes it important to consider using

Even if the cost targets are not achievable immediately after a product kaizen
is launched – a company operating with an automated production
line may launch a new product if they believe that cost may be
reduced by the application of

Where decommissioning costs are likely to be high, this is an argument life cycle costing
for the use of

Reducing material costs in a complex low-tech product in the mature value analysis
phase of its product life cycle is likely to involve the use of

 Target costing is appropriate for designing a product that is capable of making

profits at the predicted selling price. Value analysis is more likely to be used during
the production phase.
 Activity-based techniques can be applied during the design phase but are more
likely to be used in the production phase.
 An automated production line does not suit itself to learning by doing – ie does not
align with learning curve theory which is based on workers learning through
experience.
 Life cycle costing is based on analysing the costs over the whole life cycle including
decommissioning – it can be used to evaluate whether a product launch is viable if
decommissioning costs are high.
 ABC will impact on overheads.
6 The correct answer is:
 The finance required could alternatively be used to improve medical services
ABC is useful in understanding the true cost of providing different services (or products) in
complex environments where overheads are a key cost category:
Notes on incorrect answers:
 Many different services are being provided
– ABC is most useful when dealing with complex situations of this type so this is
not a valid argument against its use.
 Overheads are likely to be high
– ABC is most useful when dealing with situations where overhead is a material
cost so this is not a valid argument against its use.
 Customers do not pay for their medical treatment
– Central government will be funding the hospital and will be concerned about
cost control, so this does not impact on the decision to use ABC.
7 The correct answer is:
 Director B
Although TQM can help to improve innovation by challenging existing procedures, but does
not directly address quality of the senior management team.

Director A – TQM will address quality issues

Director C – TQM encourages dialogue with staff and should mean that they do
not feel ignored by senior management
Director D – TQM should address the need for product complexity

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138 Advanced Management Accounting

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 8 The correct answers are:
 Out-sourcing parts of the production process
 The development of more cost-effective product designs
 Better prices from suppliers by narrowing the product range to generate larger order
sizes
Value analysis aims to raise value or reduce cost with no reduction in quality.
As such it may result in outsourcing if appropriate, or the use of a narrower product range.
Notes on incorrect answers:
 A reduction in costs and possibly quality
– Value analysis does not accept compromises in quality.
 A reduction in target cost
– Value analysis aims to allow the target cost to be achieved
9 The correct answers are:
 Value analysis
 Value chain analysis
 BPR
Value analysis identifies non-value-added materials and implements appropriate change.
Value chain analysis examines how an organisation 'creates' value eg by linking its
activities together (internally or with external parties such as suppliers) in such a way as to
provide a unique product or service.
BPR involves fundamental process redesign to achieve dramatic improvements, and this is
happening in this case.
Reverse engineering relates to stripping down the components of a product and working
out how this product has been put together and has not been specifically employed here.
TQM aims to eliminate defects and this is not the issue here.
10 The correct answer is: Apply value engineering to attempt to reduce costs
Notes on incorrect answers:
 Increase the selling price by $2,000 per vehicle
– The selling price is the starting point for target costing and will be the result of
careful analysis of the appropriate positioning of the product. Adjusting the
cost is the only acceptable way forward here.
 Abandon the proposal
– This would be potentially acceptable as an answer except that Z is looking at
a prototype and therefore is at any early stage of the product evaluation, so
abandoning at this stage would not be appropriate.
 Reduce the desired margin by $2,000 per vehicle
– This margin will have been chosen to deliver an acceptable return to investors,
in line with the risk of the project, so by reducing the margin the project will no
longer be generating an acceptable return. This is not acceptable.
11 The correct answer is: 1.5
Process 1 is the bottleneck area since it has total weekly capacity of 1,000 units compared
to Process 2's 1,600 (800 hours ÷ 0.5).
Return per hour in the bottleneck = ($4 price - $1 material cost) ÷ 1 hour = $3
Cost per hour in the bottleneck = $100,000 (2,000  50) ÷ 50,000 hours in Process 1
(1,000  50) = $2

VL2020

Practice Mock – Answers 139

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 Throughput Accounting ratio = $3 ÷ $2 = 1.5
Notes on incorrect answers:
2.0 is obtained if the material cost is omitted from the calculation.
1.2 is obtained if Process 2 is chosen as the bottleneck and the time taken to produce each
unit is ignored.
1.6 is obtained if a 52 week year is assumed.
12 The correct answer is: Target costing
Value analysis aims to reduce cost without compromising other aspects of value.
This can involve the use of value chain, functional analysis or reverse engineering.
Value chain analysis is often associated with target costing but it is a technique used to
implement target costing (eg closing a cost gap) not the other way around.
13 The correct answer is: Price differentiation
Market skimming is a premium pricing strategy – this is not necessarily implied by the
wording of the question.
Price discrimination involves selling the SAME product to different market segments at
different prices.
14 The correct answer is:
 Market penetration is especially suitable where a significant experience curve effect
exists.
Market penetration is especially suitable where a significant experience curve effect exists
because an experience curve suggest that the quicker output rises the lower costs per unit
will be. Low (penetration) pricing helps to stimulate higher demand and therefore higher
output.
Notes on incorrect answers:
Market skimming is more common where a product is expected to have a shorter product
life cycle because there is a need to recoup the products costs via a high price during the
product's short life.
Elastic demand (% change in demand / % change in price) means that consumers are
sensitive to price rises. Bundling products together and selling at a higher price is unlikely
to increase revenues in this case.
It is possible / probable that products may not make profits in the early stages of the
product life cycle but this does not necessarily imply that a loss leadership is being used.
15 The correct answer is: 2.55
Marginal revenue = a – 2bx
'a' is the price level at which demand falls to zero
Demand is currently 120,000 and would fall by 5,000 for every $0.10 price rise – so
demand falls to zero when it has fallen by 120,000 and this would require 120,000 / 5,000
= 24 price rises of $0.10 ie a $2.40 price rise from its current level of $1.50 to $3.90.
'a' is $3.90
b = change in price / the change in quantity = 0.1/ 5,000 = 0.00002
so marginal revenue = 3.90 – 0.00004x
Profit is maximized where marginal revenue = marginal cost
If the contribution per pack is $0.30 per pack then the marginal cost is selling price -
contribution = $1.50 - $0.30 = $1.20.
So marginal revenue = marginal cost where:

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140 Advanced Management Accounting

These materials are provided by BPP
 3.90 – 0.00004x = 1.20
So 3.90 - 1.20 = 0.00004x
So 2.70 = 0.00004x
So 2.70 / 0.00004 = 67,500 units
The price that is needed to achieve this can be calculated using
P = a – bx
So P = 3.90 – 0.00002 (67,500) = $2.55
16 The correct answer is: A firm has high levels of liquidity
This strategy is likely to require high set-up costs in order to build capacity, therefore high
levels of liquidity are helpful.
Notes on incorrect answers:
 The product life cycle is short
– This is more commonly associated with a price skimming strategy.
 The product is unique and has no direct competitors
– This is more commonly associated with a price skimming strategy.
 Intense competition with a small number of large well-resourced rivals
– This makes a price war likely if a penetration pricing strategy is followed.
17 The correct answers are:
 Apportioned overheads from Axio Co analysed using ABC
 Division G's non-current assets
These are areas for which Division G can be held responsible because they are at least
partly under its control (the use of ABC implies that the cost drivers used to apportion
overheads are under the control of Division G).
Notes on incorrect answers:
 Interest payments on Division G's borrowings
– ROCE is calculated using profits before interest.
 Division G's cash holdings & receivables
– These areas are controlled by Head Office in this particular case.
18 The correct answer is: 0
RI = controllable divisional profit before interest and tax – (required return x controllable
asset base).
Here the controllable divisional PBIT = $1.2m + $0.2m (Head Office expenses are assumed
to be uncontrollable) + $0.1m (interest) = $1.5m.
Required return = 0.1.
Controllable asset base is assumed to be $15m.
So RI = 1.5 – (0.1  15) = 0
19 The correct answers are:
 Interest cover
 Gearing
Both of these ratios measure the exposure of a firm to its debt liabilities, ie financial risk.
Asset turnover examines the efficiency with which assets are being used and profit margin
measures return not risk.
20 The correct answer is: NFPIs are easier to manipulate

VL2020

Practice Mock – Answers 141

These materials are provided by BPP
 FPMs are typically made available to management on a monthly or quarterly basis
whereas NFPIs are typically available instantly (eg defects per shift, customer complaints
per day). FPMs mainly focus on the past and the short-term, but if a company is achieving
good performance in its key NFPIs then this is likely to indicate FUTURE success.
It is debatable whether NFPIs are more or less open to manipulation than profit, much will
depend on the independence / objectivity of the data-gathering process – but clearly IF
NFPIs were easier to manipulate then this would not be considered as an advantage
anyway.
21 The correct answers are:

Market share Customer

Production lead time Internal business

Staff turnover Innovation & learning

EVA Financial

Stakeholder satisfaction is not a formal part of the balanced scorecard.

High market share is a measure of how well a business is pleasing the customer, staff
turnover is an indicator of an organisation's ability to learn.
22 The correct answer is: Invest in Project B

Current position Project A Project B

Investment $18m $2m $3m
Forecast annual operating profit $3m $0.26m $0.54m
ROCE (profit / investment) 16.7% 13% 18%

Project A does meet the criteria set by Division W's Head Office but if adopted it would
dilute the existing ROCE of 16.7% and therefore would worsen Division W's reported
performance. Based on this Division W would not accept Project A. Project B will improve
Division W's reported performance and therefore will be accepted.
23 The correct answers are:

Difficult to use to compare divisions RI

Hard to use because of the complications in calculations EVA

May lead to information overload Balanced scorecard

Likely to lead to sub-optimal decision making ROI

Note that EVA is an absolute measure like RI and is therefore also hard to use to compare
divisions - but this is not the main problem with EVA and each statement can only be
matched to a single technique.
24 The correct answer is:
 Asset turnover 1.125 Operating margin 22.2%
Operating margin is operating profit / sales
ROCE = operating profit / (non-current assets + net current assets)
Alternatively ROCE = operating profit / (non-current assets + book value of equity)
Operating margin = sales / (non-current assets + net current assets)

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142 Advanced Management Accounting

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 25 The correct answer is: Benchmarking against a company outside the parcel delivery sector
with a reputation for excellent logistics
Given D Co's need for a strategic breakthrough then new thinking will be required – and
this is most likely to be available from partnering with, and analysing, a high-performing
company outside D Co's industry.
Notes on incorrect answers:
 Competitive benchmarking – while useful it is not going to be enough for D Co to
copy existing practice.
 Joining an industry database to analyse performance against KPIs for the parcel
delivery industry – this will not identify best practice in the parcel delivery industry
but only average performance; again it will not be enough for D Co.
 Internal benchmarking – D Co is underperforming so is unlikely to allow D Co to
identify dramatic performance improvements.
26 The correct answer is: Care must be taken to ensure that the innovation and learning
measures complement the key internal business and customer measures.
It is essential that the measures in the balanced scorecard are consistent with each other
and these observations seem fair and valid.
Notes on incorrect answers:
Two of the statements are not unreasonable (max two measures, weighting of the
measures) but cannot be said to be 'true'. More than two measures may sometimes be
appropriate.
Having more than two measures for each part of the scorecard MAY be appropriate but
also may create information overload, so again this cannot be said to be 'true'.
27 The correct answer is: Neither ROI or RI would incorrectly reject Project 315.
The project's return is 1.75 / 25 = 7%.
This is below the minimum threshold of 8% and therefore it should be rejected.
The project would be rejected using RI because it delivers negative residual income
(1.75 – 0.08  25 = -0.25m).
The project would be accepted using ROI because the project's return is above the
company's current ROI of 5%.
Therefore neither technique (for different reasons) incorrectly rejects the project – RI
correctly rejects the project and ROI incorrectly accepts it.
28 The correct answer is: $18
The true cost of the internal transfer is the relevant cost of internal sales, ie lost sales
revenue less saved external packaging costs. This is $20 - $2 = $18.
Alternatively, to work out the lost contribution we can multiply the market price by 0.3
(reflecting the 30% contribution / sales margin). This gives 20  0.3 = $6/kg of opportunity
cost.
Variable cost = 0.7  $20 = $14 but this includes packaging costs which would not be
incurred internally so this cost is adjusted to $14 - $2 = $12.
The cost of the transfer can then be assessed as variable cost + opportunity cost = $12 + $6 = $18.

VL2020

Practice Mock – Answers 143

These materials are provided by BPP
 29 The correct answers are:
 A two-part tariff system could be introduced.
 A full cost + basis could be used as the transfer price.
Both of these will be simple ways of ensuring that Division Z takes a share of the gain from
the transfer. A two-part tariff simply involves a lump sum payment in addition to the
payment of a transfer price based on a variable cost.
Notes on incorrect answers:
 A dual tariff transfer pricing system could be introduced.
– This involves Division Z billing Division T at a high price and Division Z
recording the cost in its books at variable cost – and Head Office maintaining
an account showing the difference between these amounts. However this is
complex and against the spirtit of the statement made by Head Office.
 An opportunity cost basis could be used.
– This IS the basis of the CURRENT price, there is not opportunity cost because
Division Z has surplus capacity.
30 The correct answer is: The current transfer price recognizes the true cost of the internally
transferred units and therefore should not be changed.
The true cost of the internal transfer is the relevant cost of internal sales, ie the variable
cost of producing a unit (there is no opportunity cost because the division has surplus
capacity).
Variable cost = $10 – $3 contribution = $7 but this includes selling costs which would not be
incurred internally so this cost is adjusted to $7 – $2 = $5.
The transfer price has therefore been set at a level that will cover the relevant cost of an
internal transfer. So internal transfers will still happen.
If more effort is made to sell externally then this will not be at the expense of internal sales
because there is spare capacity at Division X.
31 The correct answers are:
 Redundancy costs for European workers that are affected by this investment
 Opportunity cost of lost sales due to disruption to production caused by the
investment
Notes on incorrect answers:
 Sales revenue from the products being sold by the Asian factory
– This would occur anyway even if the products were made in Europe (the
motive for the investment is to reduce costs).
 A cut in dividends that would be needed to free up cash for the project.
 Interest costs on a loan that would be taken out to build the Asian factory
– Both the interest and dividends are financing costs and would be accounted
for by using the cost of capital to discount the project's operating cash flows.
32 The correct answer is: 207,550

Time 0 3 4
expected value of saving 100,000 75,000 75,000
df 1 0.751 0.683
Present value 100,000 56,325 51,225 $207,550

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144 Advanced Management Accounting

These materials are provided by BPP
 The expected value of the savings in years 3 and 4 represent the lease saved of $300,000
multiplied by the probability of this saving (25%). Note that the refurbishment costs for Site
A are definitely saved.
If you have chosen 107,550 you have forgotten the saving at time 0.
If you have chosen the higher numbers then you have forgotten that the lease payments
are not definitely saved.
33 The correct answers are:
 The impact on Spice Co's brand name of exiting from this market
 The future prospects for NT sales
Notes on incorrect answers:
 The overspend on NT's set-up costs
– Though serious, this is a sunk cost and not relevant for decision making.
 The losses being made by NT
– NT is making a positive contribution so the fact that it is loss making is not
relevant because profits are influenced by fixed overheads which may not be
saved if production ceases.
 The price that the NT is being sold for
– This influences contribution, this is the factor that need to be considered.
Future price levels are a significant issue but not the current price.
34 The correct answer is: 39,648

Tax cash flows

Time 0 1 2

Written value of the investment 1,200,000 960,000 768,000

Claim (25% of b/f value) 240,000 192,000 153,600

Tax saved (25% of claim, 1 year delay) 60,000 48,000

df at 10% 1 0.909 0.826

PV 54,540 39,648

Note that the question asks for the present value of the cash flows ARISING in time 2 not
the cash flows from the tax depreciation arising in time 2.
35 The correct answers are:
 Managers understand IRR better than NPV.
 There is uncertainty over the appropriate cost of capital to use.
IRR is a percentage measure and so is easier for non-financial managers to understand, it
does not require a precise cost of capital (although IRR needs to be compared to the
expected return in order to make an investment decision).
Note that IRR (unlike ARR) does allow for the time value of money.
IRR is a % measure, if an absolute measure is required then NPV would be chosen.

VL2020

Practice Mock – Answers 145

These materials are provided by BPP
 36 The correct answer is: 74,086

Time 1-4
Cash flow 74,086
Discount factor 3.037
12%
Required PV 225,000

Cash flow is calculated as 225,000 / 3.037

37 The correct answer is: Type A will be chosen, assuming the financial analysis has been
performed correctly.
NPV should guide the investment decision, unless there is capital rationing with divisible
projects, in which case the profitability index should be used.
Notes on incorrect answers:
 In the absence of capital rationing constraints, both type A and type B should be
fully financed.
– Type A and type B are alternatives to each other so this is not true.
 At a cost of capital of higher than 22%, type B will be chosen.
– Not true if the cost of capital is above 30%.
 IRR is not appropriate for this decision because it ignores the time value of money.
– No, this is true of ARR but not IRR.
38 The correct answer is: It will be more accurate to discount the money cash flows using the
10% cost of capital.
We can assume that the 10% return includes an expectation of inflation, so it is a money
cost of capital.
It is more accurate to use this approach because although all the operating cash flows are
inflating at the SAME rate (which normally means you can use the real cost of capital),
actually in the case the tax saved from capital allowances will not inflate. This means that
inflation does have an impact, ie it reduces the value of the tax savings from capital
allowances. And this means that it is more accurate to adopt this approach.
39 The correct answer is: 2.8
Depreciation is 100,000 / 4 operating years = 25,000 per year.
Cash flows are therefore estimated to be 25 ($'000) higher than the cash flows given in the
question.

Time 0 1 2 3 4 5

cash flow ($'000) -100 45 65 70 85

cumulative cash flow ($'000) -55 10

payback after 2 years -55

cash flow during year 3 65

payback (2 + 55/65) 2.8 years

VL2020

146 Advanced Management Accounting

These materials are provided by BPP
 40 The correct answers are:
 Payback should be emphasised much more strongly given our circumstances.
 We should change our simple payback period target of two years to a discounted
(adjusted) payback period of two years.
Payback does emphasise short-term liquidity and it is important for all companies, but
small companies especially, to manage their cash flow carefully. Discounted payback
periods take into account the time value of money – because a project will take longer to
payback in discounted terms then changing to a discounted payback period will place
even stronger emphasis on liquidity issues (which seems appropriate for VFD Co).
Notes on incorrect answers:
 Project investment should be suspended during periods of cash shortages.
– This may be needed in a crisis but as a general statement it is not true and will
almost certainly damage the value of a company. We are told that VFD Co is
experiencing cash flow pressures but not that it is in a crisis.
 We need to focus on short-term profitability so we should primarily use ARR as our
main project appraisal technique.
– Unlikely to be true, the focus should be on short-term cash flow, not short-
term profit.
41 The correct answer is: 14.6%

Time 1 2

750,000 750,000

Compound at 10% 1.1 1

Terminal value 825,000 750,000

Total terminal value 1,575,000

Tnvestment 1,200,000

Return over 2 years (1,575/1,200) = 1.3125

Return pa = 1.3125 = 1.146 ie 14.6%

Notes on incorrect answers:

18.3% is the standard IRR (calculated using the formula).
19.8% is also possible to calculate using the IRR formula if you have input the data
incorrectly.
16.5% is obtained if you have incorrectly compounded the cash flows at 17%.
42 The correct answer is: 148,109
The present value of the buying option is as follows:

Time 0 5
Outlay -1,000,000
Disposal proceeds 600,000
df 8% 1 0.681
PV -1,000,000 408,600
Total NPV -591,400

VL2020

Practice Mock – Answers 147

These materials are provided by BPP
 To match this the annual rental payments would need to have a present value of $591,400.
This is the equivalent of an annual cost of $148,109 as shown below:

Time 1 to 5
Rent -148,109
df 8% 3.993
PV -591,400
The rent is calculated as -591,400 / 3.993

43 The correct answers are:

 The MIRR will be lower than the IRR
 The MIRR will be above the cost of capital
MIRR will be consistent with NPV, so if there is a positive NPV at 10% then the MIRR will be
above 10%. However, one of the features of IRR is that it assumes that cash inflows from
the project are re-invested at the IRR (here 20%), whereas MIRR assumes that the returns
are reinvested to earn a 10% return (ie the cost of capital). As a result MIRR will be below IRR
here.
44 The correct answer is: 99
The fact that the projects are indivisible means that the profitability index (PI) is not
relevant. Using the profitability index generates the solution of 114.
We need to identify the affordable combinations of projects, these are:
Combination Total cost Total NPV
of projects ($'000s) ($'000s)
1, 3, 4 200 96

2, 3 190 99

2, 4 140 83

Note that it is not correct to add the cash that is not spent (eg there is 60k unspent if
projects 2 and 3 are funded) to the NPV (this is where the other incorrect answers come
from) because the NPV is measuring the extra value that is created and the unspent money
is not extra value.
45 The correct answers are:
 Rank the projects using MIRR
 Rank the projects using the profitability index
MIRR shows the return on any funds invested, where MIRR is high the profitability index will
also be high. So either method can be used to rank competing projects.
Notes on incorrect answers:
 Rank the projects using NPV
– This would be appropriate only if projects are not divisible.
 Use external sources of finance, eg borrowing
– Soft capital rationing is where management have decided not to raise finance
(possibly due to concerns over gearing) so this would not be a practical
suggestion.

VL2020

148 Advanced Management Accounting

These materials are provided by BPP
 46 The correct answer is: $18,503 for a one-year replacement cycle
The equivalent annual cost for the one-year cycle is the NPV of $16,819 / discount factor for
one year (0.909) = $18,503.
For two years the calculations are:

Time 0 1 2
Purchase ($25,000)
Running cost ($2,000)
Net cash flows ($25,000) ($2,000) ($6,500)
Discount @ 10% 1 0.909 0.826
Present value -25,000 -1818 -5,369

Total present value -32,187

Cumulative discount factor for 1 year 1.736
Equivalent annual cost -18,541

This is worse than year 1 and given the nature of this business there would be no point in
using older cars if it does not save money (we are told that customers value having newer
vehicles) so the year 1 cycle is best.
If you calculated $12,743 you have forgotten that there is no disposal value in time 1.
The negative NPV arises because the revenue from leasing the cars has not been included
in the analysis. The analysis focuses only on costs.
47 The correct answer is: 300.
Payoff table

Order size 20 40 60
Demand
20 300 100 -100
40 300 600 400
60 300 600 900

A full payoff table is not required here but is shown to aid your understanding.
The worst outcome for each order size is as follows:

Order size 20 40 60
Worst outcome 300 100 -100

The best of these worst outcomes is associated with the lowest order size.
The probabilities provided here are not relevant to this analysis.
48 The correct answers are:

Based on subjective probabilities expected values

Complex and time-consuming simulation

Ignores the importance of later cash flows discounted payback period

Only considers the impact of changing one variable at a time sensitivity analysis

VL2020

Practice Mock – Answers 149

These materials are provided by BPP
 Discounted payback period fails to take into account the cash flows that occur after the
payback period.
Expected values are based on probabilities that are often highly subjective.
Simulations are based on a number of possible business scenarios which have to be
identified and modelled. This is time consuming.
Sensitivity analysis examines the change in a specific variable (and only that variable) that
is required for the project NPV to fall to zero.
49 The correct answer is: 1.9%

discount factor
Time 0 1 to 4 (10%) PV
Contribution (420k-160k) 260,000 3.17 824,200
Fixed costs -50,000 3.17 -158,500
Investment -650,000 -650,000
Total 15,700
Sensitivity = Project NPV = 15,700 = 1.9
PV of contribution = 824,200

50 The correct answer is: W

Regret vs best outcome: summary.

Scenario Best outcome W field X field Y field Z field

1 X = $100m $10m (100-90) 0 $80m (100-20) $40m (100-60)

2 X = $80m $10m (80-70) 0 $40m (80-40) $30m (80-50)

3 Y = $90m $25m (90-65) $30m (90-60) 0 $50m (90-40)

Maximum regret $25m $30m $80m $50m

The option with the lowest maximum regret is the W field.

51 The correct answer is: 40.6

The expected value of the project if it proceeds is (120  0.5) + (80  0.5) = $100m then
deducting $40m for the land = $60m.
Therefore the value of the land if planning permission is refused is $3m
The overall expected profit is therefore:
($120m  0.4) + ($80m  0.4) + ($3m  0.2) - $40m = $40.6m
52 The correct answers are:
 Business continuity insurance
 Diversify by building another smaller warehouse in another part of Europe
These are classic responses to managing risks that are unlikely but would be serious if they
did occur (using the TARA framework).
Taking no action would be exposing shareholders to excessively high levels of risk.
Controlling the performance of the warehouse would be more appropriate if this was a
LIKELY risk, and there is no indication that this is the case here.

VL2020

150 Advanced Management Accounting

These materials are provided by BPP
 53 The correct answer is: 300,000

Order size 50,000 300,000 1,000,000 10,000,000

Demand Probability

50,000 0.1 -1,150  0.1 -4,650  0.1 -49,650  0.1

300,000 0.4 1,100  0.9 -2,400  0.4 -47,400  0.4

1,000,000 0.3 3,900  0.5 41,100  0.3

10,000,000 0.2 39,900  0.2

Expected value ($'000) = 100 600 525 -28,275

There is no need to do all of these calculations – the choice is fairly clearly between an
order size of 300,000 and an order size of 1 million.
54 The correct answers are:
 It can be a source of competitive advantage.
 Information is targeted precisely to needs.
Primary data is commissioned to meet specific information needs. It is therefore targeted to
a specific need and can be a source of competitive advantage as it generates information
that competitors would not have access to.
However, primary data is more expensive and time-consuming to create.
55 The correct answers are:
 A wider variety of data becoming available
 The ability to process high volumes of data at a dramatically faster speed
Data analytics has been revolutionised by the emergence of big data, which is
characterised by an increased volume, variety and velocity (speed of processing) of data.
The increased awareness of individuals' rights to privacy have not facilitated data
analytics. If anything, this awareness is likely to restrict the analysis of data and therefore
the development of data analytics.
Renewable energy has no bearing on data analytics.
56 The correct answer is: Big data can be used to solve a wide variety of complex problems
Big data relies on volume, velocity, variety and veracity. However, the sources of the higher
volume of big data are not unchanging – in fact, they are changing all the time.
Big data allows data to be processed with increased velocity, but it does not impact on the
speed with which a final decision is implemented (only the speed with which the decision is
reached).
Big data is only as truthful as its source data. If the source data lacks veracity, its output
will also lack veracity.

VL2020

Practice Mock – Answers 151

These materials are provided by BPP
 57 The correct answer is: $215.0m

$m
Revenue 285.0
Variable materials No local management control (head office contract)
Variable labour (45.0) Controlled locally (head office only administers payroll)
Variable overheads (25.0) Controlled locally in line with labour above
Fixed production costs Not controllable by managers in the short term
Fixed non-prod'n costs Not controllable by managers
Controllable profit 215.0

58 The correct answer is: By using algorithms to analyse forensic data to predict future
patterns of activity
BI systems use algorithms to analyse high volumes of complex data to predict outcomes
based on a wide range of variables.
Monthly variance analysis and spreadsheets are simpler tools that do not reflect the full
complexity of BI systems. Similarly, while cash flow forecasts may be informed by BI
systems, the outputs from a BI system would not be limited to one factor (ie cash flow).
59 The correct answers are:
 Taking out an insurance policy to provide compensation if the risk materialises
 Preparing a contingency plan to react promptly if the risk materialises
A low probability, high severity risk is classified as Transfer on the TARA risk map. This
means that the organisation should seek to reduce the impact if the risk materialises, either
through insurance or by implementing contingency plans.
The risk would only be accepted if it was not significant (ie low severity). As the risk is low
probability, there is no benefit in improving controls – this would be more appropriate for
high probability low severity risks.
60 The correct answer is: Big data predicts future possible scenarios
Although big data uses historic information, the focus is on understanding future
possibilities not historic events.
Big data reduces, but does not remove, problems associated with uncertainty.
Big data uses software technology but does not, in itself, create a robust hardware system.

VL2020

152 Advanced Management Accounting

These materials are provided by BPP
 Mathematical
tables and
exam formulae

VL2020

These materials are provided by BPP

 PRESENT VALUE TABLE
–n
Present value of $1, that is (1+r) where r = interest rate; n = number of periods until payment of
receipt.
Periods Interest rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0 429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

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 CUMULATIVE PRESENT VALUE TABLE
Cumulative present value of $1 per annum, receivable or payable at the end of each year for
1–(1+r)–n
n years
r
Periods Interest rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.888 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4 659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

VL2020

Mathematical tables 155

These materials are provided by BPP
 AREA UNDER THE NORMAL CURVE
This table gives the area under the normal curve between the mean and a point Z standard
deviations above the mean. The corresponding area for deviations below the mean can be found
by symmetry.

0 Z
(x – μ)
Z=
σ 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09

0.0 .0000 .0040 .0080 .0120 .0159 .0199 .0239 .0279 .0319 .0359
0.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636 .0675 .0714 .0753
0.2 .0793 .0832 .0871 .0910 .0948 .0987 .1026 .1064 .1103 .1141
0.3 .1179 .1217 .1255 .1293 .1331 .1368 .1406 .1443 .1480 .1517
0.4 .1554 .1591 .1628 .1664 .1700 .1736 .1772 .1808 .1844 .1879

0.5 .1915 .1950 .1985 .2019 .2054 .2088 .2123 .2157 .2190 .2224
0.6 .2257 .2291 .2324 .2357 .2389 .2422 .2454 .2486 .2518 .2549
0.7 .2580 .2611 .2642 .2673 .2704 .2734 .2764 .2794 .2823 .2852
0.8 .2881 .2910 .2939 .2967 .2995 .3023 .3051 .3078 .3106 .3133
0.9 .3159 .3186 .3212 .3238 .3264 .3289 .3315 .3340 .3365 .3389

1.0 .3413 .3438 .3461 .3485 .3508 .3531 .3554 .3577 .3599 .3621
1.1 .3643 .3665 .3686 .3708 .3729 .3749 .3770 .3790 .3810 .3830
1.2 .3849 .3869 .3888 .3907 .3925 .3944 .3962 .3980 .3997 .4015
1.3 .4032 .4049 .4066 .4082 .4099 .4115 .4131 .4147 .4162 .4177
1.4 .4192 .4207 .4222 .4236 .4251 .4265 .4279 .4292 .4306 .4319

1.5 .4332 .4345 .4357 .4370 .4382 .4394 .4406 .4418 .4430 .4441
1.6 .4452 .4463 .4474 .4485 .4495 .4505 .4515 .4525 .4535 .4545
1.7 .4554 .4564 .4573 .4582 .4591 .4599 .4608 .4616 .4625 .4633
1.8 .4641 .4649 .4656 .4664 .4671 .4678 .4686 .4693 .4699 .4706
1.9 .4713 .4719 .4726 .4732 .4738 .4744 .4750 .4756 .4762 .4767

2.0 .4772 .4778 .4783 .4788 .4793 .4798 .4803 .4808 .4812 .4817
2.1 .4821 .4826 .4830 .4834 .4838 .4842 .4846 .4850 .4854 .4857
2.2 .4861 .4865 .4868 .4871 .4875 .4878 .4881 .4884 .4887 .4890
2.3 .4893 .4896 .4898 .4901 .4904 .4906 .4909 .4911 .4913 .4916
2.4 .4918 .4920 .4922 .4925 .4927 .4929 .4931 .4932 .4934 .4936

2.5 .4938 .4940 .4941 .4943 .4945 .4946 .4948 .4949 .4951 .4952
2.6 .4953 .4955 .4956 .4957 .4959 .4960 .4961 .4962 .4963 .4964
2.7 .4965 .4966 .4967 .4968 .4969 .4970 .4971 .4972 .4973 .4974
2.8 .4974 .4975 .4976 .4977 .4977 .4978 .4979 .4980 .4980 .4981
2.9 .4981 .4982 .4983 .4983 .4984 .4984 .4985 .4985 .4986 .4986

3.0 .49865 .4987 .4987 .4988 .4988 .4989 .4989 .4989 .4990 .4990
3.1 .49903 .4991 .4991 .4991 .4992 .4992 .4992 .4992 .4993 .4993
3.2 .49931 .4993 .4994 .4994 .4994 .4994 .4994 .4995 .4995 .4995
3.3 .49952 .4995 .4995 .4996 .4996 .4996 .4996 .4996 .4996 .4997
3.4 .49966 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4998
3.5 .49977

VL2020

156 Advanced Management Accounting

These materials are provided by BPP
 FORMULAE
PROBABILITY
A  B = A or B. A  B = A and B (overlap).
P (B | A) = probability of B, given A.
Rules of Addition
If A and B are mutually exclusive: P(A  B) = P(A) + P(B)
If A and B are not mutually exclusive: P(A  B) = P(A) + P(B) – P(A  B)
Rules of Multiplication
If A and B are independent: P(A  B) = P(A) * P(B)
If A and B are not independent: P(A  B) = P(A) * P(B | A)
E(X) =  (probability * payoff)
Quadratic Equations
If aX2 + bX + c = 0 is the general quadratic equation, the two solutions (roots) are given by:

–b  b2 – 4ac
X=
2a

DESCRIPTIVE STATISTICS
Arithmetic Mean
Σx Σfx
X= X= (Frequency distribution)
n n
Standard Deviation

Σ(x– X )2
SD =
n

Σfx2 2
SD = – X (Frequency distribution)
Σf

INDEX NUMBERS
Price relative = 100 * P1/P0
Quantity relative = 100 * Q1/Q0

P 
w *  1 
Price:  P0   100
w

Q 
w *  1 
Quantity:  Q0   100
w

VL2020

Mathematical tables 157

These materials are provided by BPP
 TIME SERIES
Additive Model
Series = Trend + Seasonal + Random
Multiplicative Model
Series = Trend * Seasonal * Random

LINEAR REGRESSION
The linear regression of y on x is given by:

Y = a + bX or Y – Y = b( X – X )
Where
Covariance (XY) nΣXY – ( Σx)( Σy)
b= =
Variance (X) nΣx2 – ( Σx)2

And a = Y – bX
Coefficient of correlation
Covariance (XY) nΣXY – ( Σx)( Σy)
r= =
Var (X). Var (Y) {nΣx2 – ( Σx)2 }{nΣy2 – ( Σy)2 }

6d2
R(rank) = 1 –
n(n2 – 1)

FINANCIAL MATHEMATICS
Compound Interest (Values and Sums)
Future Value of S, of a sum of X, invested for n periods, compounded at r% interest

S = X (1 + r )
n

Annuity
Present value of an annuity of $1 per annum receivable or payable for n years, commencing in
one year, discounted at r% per annum:

1 1
PV = 1–
r (1 + r)n
Perpetuity
Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year,
discounted at r% per annum:
1
PV =
r

VL2020

158 Advanced Management Accounting

These materials are provided by BPP