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CIMA P1 - Management Accounting Question Tutorial Sample Questions:

1. 'Public sector organizations are often judged by their economy, efficiency and effectiveness. Consequently, they should use an approach to budgeting other than incremental budgeting.' Required:
Explain ONE advantage and TWO disadvantages of public sector organizations using incremental budgeting.
Select all true statements.

A) Public sector organizations tend to be fairly complex and in many cases outputs cannot be measured in monetary terms therefore the link between inputs and outputs is difficult to establish. An incremental approach can therefore provide a cost effective approach to budgeting.
B) An incremental; approach is not as easy and fast to implement than other forms of budgeting approaches e.g. zero based budgeting.
C) The incremental approach encourages managers in public sector organizations to look at the efficiency and effectiveness of activities undertaken.
D) The main advantage of incremental budgeting is that the cost of past activities becomes fixed and any inefficiencies or wastage is perpetuated.
E) Under an incremental approach to budgeting, existing operations and the current budgeted allowance for these existing activities are taken as the base level for preparing the budget.
F) The incremental approach means that budget holders in public sector organizations will be encouraged to use up this year's budget will be as high as possible.

2. The term 'budgetary slack' refers to the:

A) Intentional over estimation of costs and/or under estimation of revenue in a budget
B) Difference between the budgeted output and the actual output
C) Lead time between the preparation of the functional budgets and the approval of the master budget by senior management
D) Difference between budgeted capacity utilization and full capacity

3. 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 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.
B) 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.
C) The approach under an Activity based Budgeting System is to make arbitrary cuts in order to meet overall financial targets.
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) 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.

4. Assume that you have made profit calculations based on standard profit calculation methods and activity based costing methods.
In which ways will this information be beneficial to the management team?
Select all the true statements.

A) The identification of cost drivers provides information to management to enable them to take actions to improve the overall profitability of the company.
B) Under an activity based costing system the various support activities that are involved in the process of making products or providing services are identified.
C) Through the tracing of costs to product in this way ABC establishes less accurate costs for the product or service.
D) The cost drivers that cause a change to the cost of activities are also identified and used as the basis to attach activity costs to a particular product or service.
E) Operational analysis will provide information to management on how costs can be incurred and managed.

5. EF manufactures and sells three products, X, Y and Z. The following production overhead costs are budgeted for next year:

Required:
Calculate the total budgeted production overhead cost for each product using activity based budgeting.

A) The total budgeted production overhead cost was $ 1 305 000
B) The total budgeted production overhead cost was $ 1 285 000
C) The total budgeted production overhead cost was $ 2 195 000
D) The total budgeted production overhead cost was $ 1 258 000
E) The total budgeted production overhead cost was $ 1 188 000

Solutions: