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P2 Sample Questions Answers

Questions 4

Which of the following is a key objective when agreeing a basis for setting transfer prices?

Options:

A.

Promoting goal congruence

B.

Increasing market share

C.

Rewarding profit centre managers

D.

Allocating overhead costs effectively

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Questions 5

A company has invested $500,000 in developing a new product and requires a return of 12% on this investment.

The company has researched the market and has set the selling price for the new product at $300 per unit. At this price, sales volume for next year is forecast to be 500 units. The forecast unit cost is $210.

What is the target cost gap per unit for the coming year?

Give your answer to the nearest whole $.

Options:

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Questions 6

Which TWO of the following are reasons why cost-based approaches to transfer pricing are often used in practice?

Options:

A.

The buying division will want to maximize its profits.

B.

The transferring division will want to maximize its profits.

C.

Because the external market is imperfect.

D.

Because there is often no external market for the product that is being transferred.

E.

The approach allows the organization to cover all the costs.

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Questions 7

Which of the following is a valid objective of a transfer pricing system?

Options:

A.

To achieve divisional autonomy

B.

To maintain head office control

C.

To establish centralised decision making

D.

To develop a top-down culture

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Questions 8

A project is viable because it has a positive net present value (NPV).

Details of four of the input variables, together with the sensitivity of the viability of the project to a change in each one in isolation, are given below.

Which of the following statements is correct?

Options:

A.

A 1% change in the initial investment will result in a change of 3% in the NPV.

B.

The resale value at the end of the project is the most sensitive of the four variables.

C.

If the incremental annual cash contributions reduce by more than 8% then the project will no longer be viable.

D.

If the rate of taxation on profits increases to 40% then the project will no longer be viable.

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Questions 9

A Balanced Scorecard is being prepared for a coach passenger transport company. Place the correct perspective of the Balanced Scorecard against each performance measure.

Options:

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Questions 10

GHY has two subsidiaries. GHY-Motor manufactures car engines and GHY-Build designs and assembles cars. In the car industry it is common for manufacturers to buy parts, including engines, from other manufacturers.

GHY has granted GHY-Motor and GHY-Build full autonomy. GHY-Build is considering using an engine from another company for a new model that it is designing. GYY-Motor has a suitable engine, but it charges more than GHY-Build's preferred supplier.

Which of the following statements is correct? Select ALL that apply.

Options:

A.

GHY should consider permitting GHY-Motor to charge part of the selling price on engines sold to GHY-Build to head office.

B.

Forcing GHY-Motor to grant a discount to GHY-Build could lead to dysfunctional behavior.

C.

There could be significant non-financial issues associated with GHY-Build's decision to buy another engine.

D.

Parent companies should never grant subsidiaries full autonomy on matters such as intra-group sales.

E.

The threat of dysfunctional behavior is largely theoretical and managers can be trusted to maximise shareholder wealth.

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Questions 11

An organization's transfer pricing system involves:

• The transferring division receiving $20 per unit; an amount equal to its variable costs.

• The receiving division paying an additional $30,000 every month to the transferring division.

Which transfer pricing system is the organization using?

Options:

A.

Dual transfer prices

B.

Two part tariff

C.

Cost-plus

D.

Variable cost plus opportunity cost

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Questions 12

Which of the following statements about learning curves is correct?

Options:

A.

The learning index for an 80% learning curve is calculated as log 2 divided by log 0.8.

B.

The learning index for an 80% learning curve is calculated as log 0.8 divided by log 2.

C.

A 90% learning curve indicates a faster rate of learning than an 80% learning curve.

D.

The learning index will always have a positive value.

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Questions 13

A company has just received the latest in a series of annual payments; this payment was $620. The annual payments are expected to continue for three more years with each payment being increased by the expected rate of inflation. The real cost of capital is 8% per year and the expected rate of inflation is 6% per year.

What is the present value of the future payments the company expects to receive?

Give your answer to the nearest $.

Options:

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Questions 14

Which basis of transfer pricing retains the full autonomy of divisional managers?

Options:

A.

Full cost-plus pricing

B.

Variable cost-plus pricing

C.

Negotiated pricing

D.

Market based pricing

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Questions 15

A large manufacturing company sells a range of products. Details of one of these products are as follows.

Each completed batch is delivered immediately in full to the one customer that purchases this product. The delivery vehicle is currently only 50% full when it makes these deliveries. The customer will accept deliveries of any size.

Managers are considering changing the production batch size to 150 units.

Increased material storage would be needed; this can be rented nearby at a cost of $1,500 per month.

The additional storage facility would enable an increase in the reorder quantity for the materials. As a result a 5% discount would be received on all materials purchased.

Using direct product profitability (DPP), what will be the monthly profit attributable to the product if the production batch size is changed to 150 units?

Give your answer to the nearest whole $.

Options:

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Questions 16

You have just assessed an investment proposal, involving an immediate cash outflow followed by a series of cash inflows over the next 7years, by deducing the NPV and the IRR. You have now discovered that you have

underestimated the discount rate.

Correcting the underestimation will have the following effect, relative to your original deductions:

Options:

A.

NPV will reduce, IRR will not change

B.

NPV and IRR will not change

C.

NPV will increase, IRR will reduce

D.

NPV and IRR will both increase

E.

Not enough information given for an answer

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Questions 17

A company produces a single product which is sold to one customer.

Components for the product are stored in a warehouse and when required for production they are inspected. Those passing the quality check are moved to the initial production line. Part-completed items are then inspected and those passing this second quality check are moved to the warehouse until required in the finishing process. After the finishing process the products are inspected, packaged and returned to the warehouse until required by the customer.

The company is considering implementing a full just-in-time (JIT) system for both purchasing and production and has asked your advice about the activities that will be necessary if this system is implemented.

Which THREE of the following activities will definitely be required in the proposed JIT system?

Options:

A.

Components received

B.

Components inspected

C.

Product manufactured

D.

Part finished product inspected

E.

Finished product stored

F.

Finished product despatched to customer

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Questions 18

The Chief Executive of a large manufacturing company has made the following comment.

"All of our competitors are using both just-in-time(JIT) and Total Quality Management (TQM) whereas we have never used either. Consequently we are lagging behind our competitors because their levels of inventory and quality costs are significantly below ours. I want to see JIT fully implemented, both for purchasing and for production, in 4 weeks' time and TQM fully implemented 4 weeks after that."

Which of the following provide appropriate advice to the Chief Executive?

Select ALL that apply.

Options:

A.

Full implementation of JIT is unlikely to be successful unless a TQM environment has first been established.

B.

Implementing TQM from scratch within 8 weeks should be feasible for a large manufacturing company, but implementing JIT within 4 weeks is unlikely to be feasible.

C.

Total quality costs are likely to begin declining immediately once the process of implementing TQM has commenced.

D.

JIT offers the long run prospect of significantly reducing inventory.

E.

It would be possible to implement TQM without implementing JIT.

F.

It is not possible to implement JIT for production without first implementing JIT for purchasing.

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Questions 19

LL produces an item, the Z, for which the demand curve is estimated to be:

P = 10 - 0.0001Q

where, P is the unit price in $ and Q is the annual sales volume in units;

Marginal revenue (MR) = 10 - 0.0002Q

The variable cost of producing the Z is $2 per unit. The annual fixed costs of production are $110,000.

What is the profit maximizing output level?

Options:

A.

50,000 units

B.

45,000 units

C.

40,000 units

D.

35,000 units

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Questions 20

Which of the following factors would prevent a learning curve being observed for a task?

Options:

A.

The task has a significant automated element.

B.

The task is repetitive.

C.

The task has a significant manual element.

D.

There is a low rate of labor turnover of the staff carrying out the task.

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Questions 21

A company is investing $200,000 in a project which will generate a cash flow of $60,000 each year for five years starting immediately. The company's cost of capital is 7%.

The net present value of the investment to the nearest $100 is $

Options:

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Questions 22

The net present value of the cost of operating a machine for the next 4 years is £6,340. The discount rate used is 10%.

What is the equivalent annual cost and the present value of the cost in perpetuity of operating this machine?

Use discount factors to 3 decimal places.

Options:

A.

Equivalent annual cost = £92,825

Present value of cost in perpetuity = £9,283

B.

Equivalent annual cost = 9,283

Present value of cost in perpetuity = £92,825

C.

Equivalent annual cost = £2,000

Present value of cost in perpetuity = £20,000

D.

Equivalent annual cost = £20,000

Present value of cost in perpetuity = £2,000

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Questions 23

A company is comprised of two divisions, each of which manufactures a single product. Division A manufactures a product which can be sold in a perfect external market or transferred as an intermediate product to division B. Division B finishes the intermediate product and sells this in a perfect external market.

Due to company policy, internal transfers are recorded at the external market price. At this transfer price both divisions make a profit from their activities.

Which of the following will NOT be achieved by the company's transfer pricing policy?

Options:

A.

Divisional autonomy

B.

A fair basis for divisional performance evaluation

C.

Motivation of divisional managers to produce and sell as much as possible

D.

Goal congruence

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Questions 24

A company has just completed the production of the first 16 batches of a product. A learning curve has been observed throughout. The following table gives further details.

To the nearest whole percentage, what rate of learning is implied?

Options:

A.

87%

B.

8%

C.

84%

D.

93%

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Questions 25

Which of the following would change if the cost of capital of a proposed project was increased?

Options:

A.

Internal rate of return

B.

Payback period

C.

Accounting rate of return

D.

Net present value

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Questions 26

A public sector service organization is considering whether to use a balanced scorecard or a value for money approach based on the three Es to assess its performance.

Which of the following are correct comparisons of the balanced scorecard and value for money based on the three Es as performance measurement frameworks?

Select ALL that apply.

Options:

A.

Efficiency is measured as one of the three Es but the balanced scorecard does not measure efficiency.

B.

If the organization wishes to consider both financial and non-financial performance then the balanced scorecard should be used rather than the three Es.

C.

The public's satisfaction with the organization's services can be measured by both the three Es and the balanced scorecard.

D.

The balanced scorecard is concerned with meeting the organization's objectives whereas the three Es approach is concerned only with reducing costs.

E.

The three Es approach was designed for public sector service organizations, but the balanced scorecard approach can also be used in the public sector.

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Questions 27

Which TWO of the following statements are correct?

Options:

A.

It is worthwhile for a company to sell further units when the marginal revenue is greater than the marginal cost.

B.

Price is the only factor affecting the demand for products and services.

C.

Premium pricing is possible when there is a measure of product or service differentiation.

D.

Loss leadership pricing is appropriate for a new product which is not part of a range of products.

E.

Demand functions can be predicted accurately and the relationship between price and quantity demanded is always constant.

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Questions 28

An organization wishes to achieve cost reductions for a product it already has in production without affecting the customer's perception of the product.

It has decided to carry out a systematic examination of the factors affecting the cost of the product in order to identify ways of achieving the specified purpose at lower cost while maintaining the required standard and quality.

Which of the following correctly identifies the activity that the organization is undertaking?

Options:

A.

Value analysis

B.

Kaizen costing

C.

Standard costing

D.

Process innovation

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Questions 29

Which of the following statements is correct?

Options:

A.

Risk can be quantified and probabilities can be assigned reliably to the possible outcomes.

B.

Uncertainty cannot be quantified and probabilities can be assigned reliably to the possible outcomes.

C.

Risk cannot be quantified and probabilities cannot be assigned reliably to the possible outcomes.

D.

Uncertainty can be quantified and probabilities can be assigned reliably to the possible outcomes.

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Questions 30

A company is considering investing $150,000 in a project which will generate the following contributions during the first three years.

Tax depreciation allowance is 25% each year of the reducing balance.

The taxation rate is 30% of taxable profits and tax is payable in the year after that in which it arises.

To the nearest $10, what is the forecast total project cash flow in year 3?

Options:

A.

$82,840

B.

$74,400

C.

$85,650

D.

$71,430

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Questions 31

An organization uses a balanced scorecard approach to performance measurement, both at the corporate level and to assess the performance of each of its responsibility centre managers.

Which THREE of the following statements are valid in respect of the effect of this approach on the behavior of the responsibility centre managers?

Options:

A.

It encourages them to focus mainly on short-term financial measures.

B.

It provides them with a range of performance measures to discourage a tendency to focus on only one measure.

C.

It provides them with clear guidance as to how customer satisfaction problems should be solved.

D.

It encourages them to make decisions that are in line with corporate objectives.

E.

It encourages them to identify, and deal with, problems at an earlier stage.

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Questions 32

The following data are available for four projects with unequal lives.

A 10% discount rate is appropriate for all four projects.

Which project has the highest equivalent annual benefit?

Options:

A.

Project A

B.

Project B

C.

Project C

D.

Project D

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Questions 33

A company is deciding whether to invest in project A or project B. A decision tree has been prepared to illustrate the investment decision and its associated possible net present values (NPVs).

Which of the following statements is correct?

Options:

A.

A risk neutral decision maker would select project B because it shows less variation of outcomes.

B.

Project A is more likely to reduce shareholder wealth than to increase it.

C.

Project A will generate a positive net present value of $1.3m.

D.

decision maker who is risk seeking would select project A.

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Questions 34

Which of the following activities are included within activity based management (ABM)?

1. Cost reduction

2. Product design decisions

3. Variance analysis

4. Operational control

5. Performance evaluation

Options:

A.

3, 4 and 5 only.

B.

1, 2 , 4 and 5 only.

C.

1, 3, 4 and 5 only

D.

All of them.

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Questions 35

Which of the following correctly defines the expected value of a project?

Options:

A.

The weighted average of the possible outcomes of the project.

B.

The actual amount of incremental wealth that the project will generate.

C.

The most likely amount of incremental wealth that the project will generate.

D.

The present value of the positive cash flows that the project will generate.

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Questions 36

If transfer prices are set at variable costs, the supplying division does not cover its fixed costs.

Which of the following does NOT resolve this problem?

Options:

A.

Each division can be given a share of the overall contribution earned by the organization.

B.

A system of dual pricing can be adopted.

C.

Reduce the level of fixed costs.

D.

Central management can impose a range within which the transfer price should fall.

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Questions 37

Which of the following investment appraisal methods provides an absolute monetary value on which to base decisions?

Options:

A.

Accounting rate of return

B.

Net present value

C.

Internal rate of return

D.

Profitability index

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Questions 38

A company classifies its main factory as an investment centre. Categorise each of the following costs as either controllable or uncontrollable by the investment centre manager.

Options:

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Questions 39

An investment centre manager is considering the purchase of a new machine. If purchased, the new machine would replace an existing one that is used to manufacture one of the investment centre's existing products.

The new machine would incur $800 per month additional running costs; this includes $300 per month of additional depreciation.

The new machine would save on direct labor time. This means that the fixed production overhead absorbed by the product on the basis of direct labor hours would reduce by $100 per month.

What is the total cost of the above that is relevant to the decision to purchase the machine?

Options:

A.

$500; only the additional running costs, excluding depreciation, are relevant.

B.

$700; all of the additional running costs and the reduction in absorbed overhead are relevant.

C.

$400; only the reduction in absorbed overhead and the additional running costs, excluding depreciation, are relevant.

D.

$800; all of the additional running costs are relevant, but the reduction in absorbed overhead is not relevant.

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Questions 40

A not-for-profit organization measures performance using the three Es. If the organization has made optimum utilization of available resources then it should be described as:

Options:

A.

Efficient

B.

Effective

C.

Economic

D.

Enterprising

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Questions 41

In order to support decision making, management accounting information categorizes costs in a variety of ways.

Responsibility accounting primarily distinguishes between costs on the basis that they are either:

Options:

A.

sunk or opportunity costs

B.

fixed or variable costs

C.

controllable or uncontrollable costs

D.

relevant or non-relevant costs

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Questions 42

A company has a 31 December year end and pays corporation tax at a rate of 30%. Corporation tax is payable 12 months after the end of the year to which the cash flows relate. The company can claim tax allowable depreciation at a rate of 25% reducing balance. It pays $1 million for a machine on 31 December 20X4. The company's cost of capital is 10%.

What is the present value of the benefit of the first portion of tax allowable depreciation?

Options:

A.

$250,000

B.

$227,500

C.

$75,000

D.

$68,175

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Questions 43

One aspect of life cycle costing is the recognition of the fact that during the design or development stage a large proportion of many products' life cycle costs are:

Options:

A.

determined

B.

wasted

C.

under absorbed

D.

amortised

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Questions 44

The performance of an investment centre manager is assessed by return on investment (ROI) alone. At present, his expected ROI for next year is 15%. The manager must now decide whether to invest in a new project that is expected to yield an ROI of 14%. The cost of capital is 12%.

Indicate whether each of the following statements is true or false.

Options:

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Questions 45

Which TWO of the following conditions are necessary for a learning curve to apply?

Options:

A.

The process must be simple.

B.

The process must be complex.

C.

There must be regular breaks in production.

D.

Production must be machine intensive.

E.

Production must be labor intensive.

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Questions 46

A large company that sells a single product has many customers. The contribution per unit of the product is $40. Data for the company as a whole are given below.

Using customer profitability analysis, what is the total annual profit for this customer?

Options:

A.

$1,660,000

B.

$1,780,000

C.

$1,460,000

D.

$2,340,000

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Questions 47

A division of company XYZ has reported an operating profit of $350,000 and its residual income (RI) has been calculated as $60,000. The company's cost of capital is 12%.

The division's return on investment (ROI) is:

Options:

A.

14.5%

B.

17.0%

C.

12.0%

D.

2.5%

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Questions 48

The following summarised financial statements have been prepared by JNM's North subsidiary for the year just ended:

Calculate the North subsidiary's Residual Income, assuming that JNM's cost of capital is 10%.

Give your answer to the nearest $ million.

Options:

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Questions 49

In order to remain competitive an organization wishes to achieve cost savings for one of its existing products.

Which of the following correctly describes methods which the organization can use to achieve these cost savings?

Select ALL that apply.

Options:

A.

Functional analysis is carried out only on existing products and is concerned only with minimizing the cost of the originally defined functions of a product.

B.

Value engineering is a fundamental rethinking and radical redesign of an organization's existing processes.

C.

Target costing is continuously setting new stretch targets while the product is in production.

D.

Value analysis is examining a product's costs in order to achieve its purpose at a reduced cost while maintaining its reliability and quality.

E.

Kaizen costing is seeking to make cost savings by continuously making small incremental cost reductions while the product is in production.

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Questions 50

A company must decide today whether to proceed with a proposed project. If the project proceeds, the initial investment of $150,000 would be made in one year's time. The benefit of the project would be a perpetuity of $22,000 per year commencing one year after the investment is made. The company's cost of capital is 14% per year.

To the nearest $100, what is the net present value of the project?

Options:

A.

$6,300

B.

$7,100

C.

-$12,200

D.

$25,600

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Questions 51

A company has three divisions, each of which is an investment centre. The divisional managers' performance is assessed using return on investment (ROI). A higher ROI will result in a higher bonus for the divisional manager.

The company's cost of capital is 15%.

For the forthcoming year each divisional manager has one investment opportunity available as follows:

The manager(s) of which division(s) will proceed with their respective investment opportunity?

Options:

A.

Division 1 and Division 3

B.

Division 2 and Division 3

C.

Division 3 only

D.

Division 1 only

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Questions 52

A not-for-profit organization measures performance using the three Es.

If the organization has been acquiring the resources it needs as cheaply as possible it should be described as having been:

Options:

A.

Efficient

B.

Effective

C.

Economic

D.

Enterprising

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Questions 53

A manager must decide which one of three projects should be implemented. For each project the possible outcomes and their associated probabilities can be estimated reliably. The manager has decided to make the decision based solely on which project has the highest expected value of profit.

Which of the following statements are correct?

Select ALL that apply.

Options:

A.

The manager will select the project with the lowest standard deviation.

B.

The range of possible outcomes for each project is not important to the manager.

C.

The decision is characterized by uncertainty and the manager is risk seeking.

D.

The manager will select the project with the highest of all of the possible outcomes.

E.

The decision is characterized by risk and the manager is risk neutral.

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Questions 54

Oliver owns a computer repair company. He is looking to close of of his departments as the demand for computer cleaning has dropped dramatically in the last 2 years and is no longer profitable.

The contribution margin of the department is £12,000, and the overheads are £23,000 (out of which £4,000 cannot be eliminated).

How would closing this department impact operating income?

Options:

A.

Increase operating income by £7,000

B.

Decrease operating income by £7,000

C.

Decrease operating income by £12,000

D.

Increase operating income by £12,000

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Questions 55

One of an investment centre's products is sold on an external market. Output is limited because the specialist machine that manufactures the product is operating at full capacity.

Current data for the product are as follows.

Investigations have identified that more rigorous maintenance of the machine at an annual cost of $5,000 would reduce the number of breakdowns and increase its capacity to 1,300 units per year.

There would be no change in the selling price if more units were sold. Any additional labor hours would be paid a premium of 25%. A discount of 2% of the cost of all materials purchased is available if the company increases its purchases to 3,700 kg or more per year.

What would be the increase in the investment centre's annual controllable profit if more rigorous maintenance is undertaken?

Options:

A.

$21,400

B.

$17,800

C.

$23,900

D.

$26,160

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Questions 56

A manufacturing company has just developed a new product and must now determine the most appropriate pricing strategy for its initial launch.

The product will initially be unique because it will include highly desirable features that no competitive product offers. Its development has involved substantial expenditure and the company wishes to recover this as soon as possible.

The product's uniqueness is expected to last for only six months before a competitor launches a similar product. It is expected that the competitor will avoid any significant development costs by reverse engineering the company's own product.

At that point, to remain competitive, the company must ensure that its selling price matches that of the competitor.

Which of the following pricing strategies would be most suitable for the initial launch of the company's product?

Options:

A.

Market skimming

B.

Penetration pricing

C.

Dual pricing

D.

Own label pricing

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Questions 57

Risk management can be represented as a four step process. The four steps, shown randomly, are:

1. Establish appropriate risk management policies.

2. Risks are identified by key stakeholders.

3. Risks are monitored on an ongoing basis.

4. Risks are evaluated according to the likelihood of occurrence and impact on the organization.

Which of the following is the correct order for the four steps?

Options:

A.

1, 2, 3, 4

B.

2, 1, 4, 3

C.

1, 2, 4, 3

D.

2, 4, 1, 3

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Questions 58

An organization is considering purchasing a new machine which will cost $600,000. The new machine will generate cost savings of $200,000 each year for five years. The cost of capital is 12%.

The profitability index (PI) for the investment in the new machine is:

Give your answer to one decimal place.

Options:

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Questions 59

An electronics company sells a range of tablet computers. Tablet computers come complete with an operating system that is regarded as the market leader. The company aims to launch a new version of its hardware every eighteen months and a major update to its software every three years. The latest version of the tablet computer is always sold at a higher price, but the older version that has been replaced is then sold for a time at a discounted price.

Which pricing model does this company appear to be using?

Options:

A.

Penetration and loss leader pricing

B.

Penetration and product bundling

C.

Skimming and loss leader pricing

D.

Skimming and product bundling

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Questions 60

A positive net present value (NPV) has been calculated for a project to launch a new product. An additional calculation is required to identify the sensitivity of the NPV to changes in the forecast total sales volume.

The present value of which of the following would be used in the calculation?

Options:

A.

Contribution

B.

Operating profit

C.

Fixed overheads

D.

Net profit

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Exam Code: P2
Exam Name: Advanced Management Accounting
Last Update: May 25, 2024
Questions: 202
$99.6  $249
$90  $225
$79.6  $199
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