Free Access CIMA.P1.v2022-02-11.q93 Practice Test (Page 13)

Question 56

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

A.Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.

B.The approach under an Activity based Budgeting System is to make arbitrary cuts in order to meet overall financial targets.

C.Activity Based Budgeting Systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness if this approach is that it gives little indication of the link between the level of activity and the cost incurred.

D.Under an activity based budgeting system, resource allocation is linked to the strategic plan and is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget.

E.Under a traditional incremental budgeting system the focus is on existing resources and operations.
Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under an activity based budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.

Question 57

GH manufactures a product using skilled labour and high quality materials. The company operates a standard costing system and a just-in-time (JIT) purchasing and production system. The standard selling price and variable costs for one unit of the product are as follows:

Calculate the following variances for October, taking account of the more detailed information regarding the labour mix:
(i) The total labour efficiency variance
(ii) The total labour mix variance
(iii) The total labour yield variance
Select the correct statements.

A.Labour mix variance: $ 63 000 A

B.Labour efficiency variance: $ 78 000 F

C.Labour yield variance: $ 144 000 A

D.Labour mix variance: $ 75 000 F

E.Labour mix variance: $ 66 000 F

F.Labour efficiency variance: $ 88 000 F

G.Labour efficiency variance: $ 98 000 A

H.Labour efficiency variance: $ 78 000 A

Question 58

Select the benefits to a company of using sensitivity analysis in investment appraisal.
(Select all the true statements.)

A.Sensitivity analysis enables identification of fixed costs that are of special significance.

B.Sensitivity analysis enables risk management strategies to be put in place to focus on those variables of special significance.

C.Sensitivity analysis enables a company to assess the risk associated with a project.

D.Sensitivity analysis enables a company to determine the effect of changes to variables on the planned outcome.

Question 59

A company is bidding to win a special contract.
Which of the following is NOT a relevant cost to the company of undertaking the contract?

A.The cost of hiring a machine which will be hired if the contract is won.

B.The purchase cost of direct materials not currently in inventory.

C.The depreciation charge on the tools which will be used during the contract.

D.The cost of a training course for staff which will be undertaken if the contract is won.

Question 60

A small manufacturing company makes a single product. Direct labour costs and factory rent account for
80% and 15% of total cost respectively. Activity levels have not varied by more than 5% for a number of years and there is no evidence of operational inefficiency.
Which of the following is the most appropriate approach to budgeting for this company?

A.Rolling budgeting

B.Zero based budgeting (ZBB)

C.Activity based budgeting (ABB)

D.Incremental budgeting

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