ACCA AS Performance Management (PM) 2 — Questions and Answers
Question 1: Which of the following best describes throughput accounting's definition of 'throughput contribution'?
- Sales revenue minus all variable costs
- Sales revenue minus direct material costs only (Correct answer)
- Sales revenue minus all manufacturing costs
- Sales revenue minus direct labour and material costs
Correct answer: Sales revenue minus direct material costs only
In throughput accounting (Theory of Constraints), throughput contribution is defined as sales revenue minus totally variable costs, which in practice is usually only direct material costs. Labour and overheads are treated as fixed 'operating expenses' because they cannot be varied in the short term.
Question 2: A learning curve of 80% means that each time cumulative output doubles, the cumulative average time per unit:
- Decreases to 80% of the previous cumulative average (Correct answer)
- Increases by 80%
- Decreases by 80%
- Remains at 80% of the original time for the first unit
Correct answer: Decreases to 80% of the previous cumulative average
An 80% learning curve means that each time cumulative production doubles, the cumulative average time per unit falls to 80% of its previous level. For example, if the first unit takes 100 hours, the cumulative average after 2 units is 80 hours, after 4 units is 64 hours (80% × 80), and so on.
Question 3: Which of the following variances would be the responsibility of the purchasing manager?
- Material usage variance
- Labour efficiency variance
- Material price variance (Correct answer)
- Sales volume variance
Correct answer: Material price variance
The material price variance (Standard price − Actual price) × Actual quantity is typically the responsibility of the purchasing manager, as they negotiate prices and select suppliers. The usage variance is usually the production manager's responsibility, as it relates to how efficiently materials are used in production.
Question 4: What is the main limitation of Return on Investment (ROI) as a divisional performance measure?
- It cannot be compared across divisions of different sizes
- It may lead managers to reject projects that exceed the company's cost of capital but reduce divisional ROI (Correct answer)
- It ignores revenue and focuses only on costs
- It requires the use of replacement cost for asset valuation
Correct answer: It may lead managers to reject projects that exceed the company's cost of capital but reduce divisional ROI
ROI can lead to dysfunctional decision-making. A division with a current ROI of 25% would reject a project earning 18% ROI even if the company's cost of capital is only 12%. This is because accepting the project would reduce the division's overall ROI, even though it creates value for the company. Residual income (RI) overcomes this problem.
Question 5: In activity-based costing (ABC), what is a cost driver?
- The total cost allocated to a product
- A factor that causes the cost of an activity to change (Correct answer)
- The overhead absorption rate for a department
- The budget holder responsible for controlling costs
Correct answer: A factor that causes the cost of an activity to change
A cost driver is the factor that most directly causes or influences the level of cost for a particular activity. For example, the number of purchase orders drives purchasing activity costs, and the number of machine set-ups drives set-up costs. ABC uses cost drivers to allocate overhead costs more accurately than traditional volume-based methods.
Question 6: A company uses target costing. The target selling price is £50, and the required profit margin is 20% of selling price. What is the target cost?
- £10
- £30
- £40 (Correct answer)
- £45
Correct answer: £40
Target cost = Target selling price − Required profit. Required profit = 20% × £50 = £10. Target cost = £50 − £10 = £40. Target costing works backwards from the market price, unlike cost-plus pricing which adds a margin to cost. If current estimated costs exceed £40, cost reduction techniques (value engineering) must be applied.
ACCA AS Performance Management (PM) 2
Which of the following best describes throughput accounting's definition of 'throughput contribution'?