P1 Management Accounting Exam Questions and Answers

QUESTION: 31

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

The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.

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

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

budget.
Under an activity based budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under a traditional budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.
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.
ABB systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred.
The approach under an activity based system is to make arbitrary cuts in order to meet overall financial targets.
Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization.

Answer(s): A,C,D,F

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QUESTION: 32

DRAG DROP (Drag & Drop is not supported)

For a company that does not have any production resource limitations, what would be the correct sequence for budget preparation?

See Explanation section for answer.

Answer(s): A

Explanation:

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QUESTION: 33

Company NBO is providing a quote to manufacture 500 passenger seats for a bus

company.

Relevant cost is being used as the basis for the quote.

Which THREE of the following should be included as relevant costs or savings in the production of the 500 passenger seats?

Equipment depreciation of $2,000 for the time the passenger seats are in production.
Electricity charges of $1,500 for the completion of the order.
Administration overheads of $3,200 apportioned on the basis of labour hours in production.
Seat cover material, to be bought for $6,000, which cannot be used on other products.
Idle time pay of $1,000 which would be paid to workers if the quote is not accepted
$750 paid for a consultant's advice on quoting for the order.

Answer(s): B,D,E

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QUESTION: 34

A company is preparing its annual budget and is estimating the number of units of Product W that it will sell in each quarter of year 2. Past experience has shown that the trend for sales of the product is represented by the following relationship:

Calculate the expected unit sales of Product W for each quarter of year 2, after adjusting for seasonal variations using the multiplicative model.