F2 - Management Accounting ACCA – 117 FAQ Theory Questions

24 Pages·2014·0.25 MB·English

2014

117 FAQ

F2 - Management Accounting
ACCA – 117 FAQ
Theory Questions

1 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

1. Define the labour idle time ratio? 117 FAQ
Idle time ratio = idle hours / total hours x 100%
2. What is the definition of the Internal Rate of Return (IRR)?
The IRR is the rate of interest at which the Net Present Value of the project is zero.
3. In process costing, how are abnormal losses or gains valued?
Abnormal gains and losses are valued at full cost per unit.
4. How is the Residual Income (RI) calculated? Outline advantages and disadvantages.
RI = profit less notional interest on the capital invested
Advantages:
 As an absolute measure, RI does not lead to dysfunctional decision making that relative
measures may do. Projects with a positive contribution to profit would not be rejected if
they have a lower percentage return than existing ones.
 By attributing an imputed interest charge to the capital used, managers are made aware of
the funding cost of their division.
 RI is consistent in the long run with the NPV approach criteria that maximized NPV in
the long run are normally likely to be consistent with RI maximization.
Disadvantages
 Defining the appropriate parameters such as controllable profits and the attributable
interest charge (or cost of capital) may be difficult.
 Comparison between divisions of different sizes may present problems where economies
of scale offer advantages.
 When organization value assets at net book value, ROI & RI generally increase as assets
get older. Consequently, management may hold on to out of date plant and machinery.

2 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

5. What does the sales volume variance measure? 117 FAQ
The sales volume variance measures the effect on the budgeted profit of the difference between
the actual sales volume and the budgeted sales volume.
6. What is top-down budgeting?
Top-down budgeting is where the budgets are prepared by high-level management and then
communicated to lower levels. Lower level management do not participate in the budget process.
7. A Paasche price index number uses base year or current year quantities. Which?
A Paasche index number uses current year quantities.
8. In process costing, what is meant by an abnormal gain?
An abnormal gain is the amount by which the actual loss is less than the normal (or expected)
loss.
9. Define the labour production volume ratio (activity ratio)?
The labour production volume ratio = expected hours to produce actual output / total hours
available (budgeted) x 100%
10. If the linear equation y = a + bx, were to be drawn on a graph, what would be the
gradient of the line?
The gradient of the line would be ‘b’.
11. In the linear equation y = a + bx, where y is the total cost and x is the total production,
what is the variable cost per unit?
The variable cost per unit is ‘b’ in the equation
12. In the linear equation y = a + bx, which is the dependent variable?
The dependent variable is y

3 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

13. If we have an equation relating the total sales revenue to the 1to1ta7l aFdAveQrti sing spend,
which would be the dependent variable?
The dependent variable would be the sales revenue (it depends on the amount of advertising
expenditure.)
14. When sampling, what is meant by a ‘sampling frame’?
A sampling frame is a numbered list of all items in a population
15. What is a ‘semi-variable cost’?
A semi-variable cost is a combination of variable and fixed costs.
16. Describe a ‘pie chart’?
A pie chart is a circle that is divided into segments representing each type of observation. The
size of each segment is proportional to the proportion of the total that are within each type of
observation.
17. In the linear equation y = a + bx, where y is the total cost and x is the total production,
what is the fixed cost?
The fixed cost is ‘a’ in the equation
18. What is meant by ‘indirect costs (or overheads)’?
Indirect costs are those costs which cannot be specifically identified with a specific cost unit or
cost centre.
19. What is meant by a ‘line of best fit’?
The line that most nearly goes through all the points when the data is plotted on a graph.
20. What is meant by ‘quota sampling’?
The population is stratified and a sample of each strata is restricted to a fixed number.

4 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

21. What are the purposes of costing (i.e. calculating the cost of 1pr1od7u cFinAgQ a product or
service)?
 To enable a selling price to be set
 To calculate a profit per unit.
 To value inventory
22. What is the purpose of management accounting?
To help management run the business in a way that achieves the objectives of the business.
23. What is meant by an ‘incremental cost’?
An incremental cost is an extra cost (and is relevant for investment decisions).
24. What is the Current Ratio?
The current ratio = current assets / current liabilities
25. What are the four main elements & the role that one would expect to appear in a
Mission Statement?
The four main elements are:
Purpose
Strategy
Culture
Values
Role
Many organization have clearly stated definitions of what they exist for and are trying to achieve,
but equally, many do not and rely on an implied or cultural awareness of their objectives. Several
groups of stakeholders may have a valid interest in the definition of mission. Where an explicit
statement of the organization’s purpose exists, it may be used as a slogan for marketing
purposes, as an important input into the management and motivation of staff at all levels and,
specifically, here, as the apex of system of performance management.
Performance implies purpose and directed rather than random action. Individual performance
should contribute to group performance, group to department and so on all the way up to overall
5 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

organizational performance. In the same way as performance at each l1ev1el7 s uFppAorQts that at each
higher level, so the targets at each level flow downwards from higher levels, driving ultimately
from the organizational mission.
26. Give possible reasons for an adverse material expenditure variance.
Possible reasons for an adverse material expenditure variance include:
 Paying more than the budgeted price per unit of materials due to errors in purchasing.
 a price increase in materials
 purchasing better quality materials
 incorrect budgeting of the standard cost of materials
27. What is meant by the ‘payback period’?
The payback period is the number of years it takes to get back the original investment, in cash
terms.
28. What is a ‘sunk cost’?
A sunk cost is a cost already incurred (and is not relevant for investment decisions)
29. What are the purposes of budgeting?
 Planning
 Control
 Co-ordination
 Authorisation
 Communication
 Motivation
 Evaluation
30. How is the coefficient of determination calculated?
The coefficient of determination is the square of the coefficient of correlation.
31. What is a ‘variable cost’?
A variable cost is one which varies in total with the level of activity.
6 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

32. What is a ‘delivery note’? 117 FAQ
A delivery note is included by the supplier with the goods, and lists the quantity of goods that are
being delivered.
33. In the formula on the formula sheet for the Economic Order Quantity, what does the
symbol D represent?
D represents the total demand per year.
34. What is meant by a piecework system of remuneration?
Employees are paid a fixed amount for each unit produced.
35. Define the labour capacity ratio.
Labour capacity ratio = Number of hours spent working / total hours available x 100%
36. What is the symbol for the coefficient of correlation on the formulae sheet?
r is the coefficient of correlation
37. What is meant by the ‘cost gap’ in the context of target costing?
The cost gap is the excess of the estimated actual cost over the target cost.
38. What are the four main differences between the output of service and manufacturing
businesses?
 Intangibility – the output of a service industry is performance rather than tangible goods.
 Perishability – a service cannot be stored
 Simultaneity – a service is received by the customer at the same time as it is delivered – it
cannot be checked first.
 Heterogeneity – every service is likely to be different.
39. What is meant by the term ‘by-product’?
A by-product is output from a process which has a low value relative to the main product(s)
being produced in the process.
7 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

40. What is the difference between a profit mark-up and a profit m1ar1gi7n? F AQ
A mark-up is when the profit is calculated as a percentage of cost; a margin is when the profit is
calculated as a percentage of selling price.
41. Under what circumstances will the profit using marginal costing and the profit using
absorption costing be the same?
The profits will be the same if there is no change in the level of inventory over the period (i.e.
when the closing inventory is the same level as the opening inventory).
42. What is the reason for a difference between the profit calculated under marginal
costing principles and the profit calculated under absorption costing principles?
The difference is because of the difference in the way opening and closing inventories are
valued. Under marginal costing they are valued at the marginal (variable) cost of production;
under absorption costing they are valued at the full cost of production (variable plus fixed).
43. What is meant by the word ‘contribution’?
The contribution is the profit before fixed costs (or the revenue less all variable costs).
44. What is the difference between the allocation of overheads and the apportionment of
overheads?
• Allocation – whole cost items are charged to the relevant cost centre
• Apportionment – cost items are shared/divided between several cost centres
45. In assessing ‘Value for Money’, what are the three ‘E’s’?
The three ‘E’s’ are:
 Economy
 Efficiency
 Effectiveness
46. How is the Return on Investment (ROI) calculated?
ROI = profit / capital invested

8 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

47. How is the Interest Cover calculated? 117 FAQ
The interest cover = profit before interest and tax / interest
48. What is the purpose of an operating statement (as part of variance analysis)?
The operating statement shows why the actual profit differs from the budgeted profit.
49. What is bottom-up budgeting?
Bottom-up budgeting is where lower level managers are involved in the budget process – they
prepare budgets for their departments which are then checked and co-ordinated by higher level
management.
50. What is the difference between capital expenditure and revenue expenditure?
Capital expenditure is the acquisition of non-current assets (which appear on the Statement of
Financial Position).
Revenue expenditure is the payment of running expenses (which appear on the Income
Statement).
51. If there is perfect negative correlation between two variables, what will be the value of
the coefficient of correlation?
If there is perfect negative correlation, then r will equal -1
52. What does a coefficient of determination of 0.75 mean?
It means that 75% of the changes in y are explained by changes in x.
53. In process costing, what is meant by an abnormal loss?
An abnormal loss is the excess of the actual loss over the normal (or expected) loss.
54. What are the attributes of good information?
Good information should be:
Accurate
Complete
Cost-effective
9 Ibrahim Sameer ACCA (FMA – MAPS College)
2014

Understandable 117 FAQ
Relevant
Accessible
Timely
Easy to use
55. What is meant by ‘random sampling’?
Each item in the population has an equal chance of being selected.
56. What is the ‘prime cost’ of a unit of production?
The prime cost is the total of the direct costs of a unit.
57. What is a ‘stepped fixed cost’?
A stepped fixed cost is one that is fixed in total within a certain level of activity, but where once
an upper limit of activity is reached then a new higher level of fixed cost occurs.
58. What is a ‘purchase requisition form’?
A purchase requisition form is prepared by the department that requires the material and is sent
to the purchasing department.
59. In the formula on the formula sheet for the Economic Order Quantity, what does the
symbol C represent?
o
C represents the cost of placing one order.
o
60. What is the difference between direct and indirect labour costs?
Direct labour costs are directly involved in the making of products – the basic pay plus overtime
premium on specific jobs
Indirect labour costs are all other labour costs – general overtime premiums, bonus payments,
and the cost of indirect workers (e.g. canteen, maintenance)
61. In the formulae for regression analysis on the formulae sheet, what does the symbol n
represent?
n is the number of pairs of observations
10 Ibrahim Sameer ACCA (FMA – MAPS College)