Management Accounting Questions and Answers

Section A

In this Section, you are required to answer ALL of the questions.

The internal rate of return is defined as the:

1. maximum rate of return a firm expects to earn on a project.
2. rate of return a project will generate if the project in financed solely with internal funds.
3. discount rate that equates the net cash inflows of a project to zero.
4. discount rate which causes the net present value of a project to equal zero.

Question A2

The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:

1. net present value period
2. internal return period
3. payback period
4. discounted payback period

Question A3

The focus of management accounting is on the past, since historical cost data are generally accurate and reliable.

1. True
2. False

Question A4

The controller of a corporation generally reports directly to the:

1. board of directors
2. chairman of the board
3. chief executive officer
4. president

Question A5

The process of planning and managing a firm's long-term investments is called:

1. working capital management
2. financial depreciation
3. capital budgeting
4. capital structure

Question A6

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

1. Income statement
2. Creditor's statement
3. Statement of financial position
4. Statement of cash flows

Question A7

Southampton Electronics manufactures a range of portable heaters. Most of the output is exported.

Sales	12,000 units
Selling price	£25 per unit
Contribution margin ratio	40%
Margin of safety percentage	30%

The break-even level in sales pounds is:

1. £210,000
2. £120,000
3. £180,000
4. £84,000

Question A8

The term ‘relevant range’ refers to the levels of activity within which the assumptions made about cost behaviour are valid.

1. True
2. False

Question A9

When the activity level is expected to decline within the relevant range, what effects would be anticipated with respect to each of the following?

1. Fixed cost per unit - increase; Variable cost per unit – no change
2. Fixed cost per unit - increase; Variable cost per unit - increase
3. Fixed cost per unit - no change; Variable cost per unit - no change
4. Fixed cost per unit - no change; Variable cost per unit - increase

Question A10

Contribution margin is defined as sales less discretionary fixed costs.

1. True
2. False

Total marks for Section A

Section B

In this Section, you are required to answer ALL of the questions

Question B1

Alpha Corporation is a small clothing company operating in the north of Bedfordshire. One particular garment has a standard material cost of £13.50, comprising 3 metres of cloth at £4.50 per metre.  The standard labour time allowed for making up the garment is 15 minutes, and employees are paid at a rate of £5 per hour.  For the month of August 2019, the company was able to produce 10,000 garments.  The budgeted output level was 9,000 garments.

The purchasing manager was very pleased as he had managed to buy 45,000 metres of cloth for £4.25 per metre.  However, the production manager was not so pleased because he claims the cloth was of poor quality which resulted in operational inefficiency.

Actual data for August is as follows:

Wages paid	£12,740
Hours worked	2,600 hours
Cloth issued	32,000 meters

Required:

1. Calculate for August 2019:

i material usage variance;

ii material price variance;

iii labour efficiency variance;

iv labour rate variance;

2. Comment on the points of view of both the Purchasing Manager and the Production Manager.  Do you think the Purchasing Manager was correct to buy the cloth at £4.25 per metre if it was responsible for operational problems?

3. What do you understand by the term "inter-relationship of variances"?

Total marks for question B1

Question B2

The profit statements for two different companies in the same industry are as follows:

	Company A (£000)	Company B (£000)
Sales	10,000	10,000
Less: Variable costs	8,000	4,000
Contribution margin	2,000	6,000
Less: Fixed Costs	1,000	5,000
Profit	1,000	1,000

(a) Calculate the degree of operating leverage for each company.                

(b) Calculate the break-even point in sales for each company. Explain why the break-even point for Company B is higher. 

(c) Assume both companies experience a 50 % increase in sales revenues. Calculate the percentage increase in profit for each company and explain why the percentage increase in Company B’s profits is significantly larger than that of Company A.                

(d) Explain the following terms:

(i) Operating Leverage;

(ii) Margin of safety;

(iii) Indirect cost   

Question B3

GBG Ltd is evaluating two mutually exclusive projects: the Project 1 and the Project 2. The company’s cost of capital is 8%. These projects have the following cash flows. GBG Ltd can only invest in one project.

Cash flows	Project 1	Project 2
Year	£	£
0	(25,000)	(16,000)
1	3,000	7,000
2	3,000	5,000
3	4,500	3,000
4	6,000	2,000
5	8,900	3,000
6	10,700	1,500

(a) Calculate for each project:

(i) Payback period

(ii) Net present value (NPV)

(b) Explain which project you would recommend for acceptance.

(c) List the four methods in capital budgeting decisions, and briefly discuss the advantages and disadvantages of each method.