F2 - Management Accounting ACCA – 117 FAQ Theory

117 FAQ 2014F2 - Management AccountingACCA – 117 FAQTheory Questions1Ibrahim SameerACCA (FMA – MAPS College)

1. Define the labour idle time ratio?117 FAQ 2014Idle 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 investedAdvantages: As an absolute measure, RI does not lead to dysfunctional decision making that relativemeasures may do. Projects with a positive contribution to profit would not be rejected ifthey have a lower percentage return than existing ones. By attributing an imputed interest charge to the capital used, managers are made aware ofthe funding cost of their division. RI is consistent in the long run with the NPV approach criteria that maximized NPV inthe long run are normally likely to be consistent with RI maximization.Disadvantages Defining the appropriate parameters such as controllable profits and the attributableinterest charge (or cost of capital) may be difficult. Comparison between divisions of different sizes may present problems where economiesof scale offer advantages. When organization value assets at net book value, ROI & RI generally increase as assetsget older. Consequently, management may hold on to out of date plant and machinery.2Ibrahim SameerACCA (FMA – MAPS College)

5. What does the sales volume variance measure?117 FAQ 2014The sales volume variance measures the effect on the budgeted profit of the difference betweenthe 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 thencommunicated 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 hoursavailable (budgeted) x 100%10. If the linear equation y a bx, were to be drawn on a graph, what would be thegradient 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 equation12. In the linear equation y a bx, which is the dependent variable?The dependent variable is y3Ibrahim SameerACCA (FMA – MAPS College)

117 FAQ 201413. If we have an equation relating the total sales revenue to the total advertising spend,which would be the dependent variable?The dependent variable would be the sales revenue (it depends on the amount of advertisingexpenditure.)14. When sampling, what is meant by a ‘sampling frame’?A sampling frame is a numbered list of all items in a population15. 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. Thesize of each segment is proportional to the proportion of the total that are within each type ofobservation.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 equation18. What is meant by ‘indirect costs (or overheads)’?Indirect costs are those costs which cannot be specifically identified with a specific cost unit orcost 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.4Ibrahim SameerACCA (FMA – MAPS College)

117 FAQ 201421. What are the purposes of costing (i.e. calculating the cost of producing a product orservice)? To enable a selling price to be set To calculate a profit per unit. To value inventory22. 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 liabilities25. What are the four main elements & the role that one would expect to appear in aMission Statement?The four main elements are:PurposeStrategyCultureValuesRoleMany 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. Severalgroups of stakeholders may have a valid interest in the definition of mission. Where an explicitstatement of the organization’s purpose exists, it may be used as a slogan for marketingpurposes, 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 performanceshould contribute to group performance, group to department and so on all the way up to overall5Ibrahim SameerACCA (FMA – MAPS College)

117 FAQ 2014organizational performance. In the same way as performance at each level supports that at eachhigher level, so the targets at each level flow downwards from higher levels, driving ultimatelyfrom 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 materials27. What is meant by the ‘payback period’?The payback period is the number of years it takes to get back the original investment, in cashterms.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 Evaluation30. 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.6Ibrahim SameerACCA (FMA – MAPS College)

32. What is a ‘delivery note’?117 FAQ 2014A delivery note is included by the supplier with the goods, and lists the quantity of goods that arebeing delivered.33. In the formula on the formula sheet for the Economic Order Quantity, what does thesymbol 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 correlation37. 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 manufacturingbusinesses? 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 – itcannot 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.7Ibrahim SameerACCA (FMA – MAPS College)

117 FAQ 201440. What is the difference between a profit mark-up and a profit margin?A mark-up is when the profit is calculated as a percentage of cost; a margin is when the profit iscalculated as a percentage of selling price.41. Under what circumstances will the profit using marginal costing and the profit usingabsorption 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 marginalcosting principles and the profit calculated under absorption costing principles?The difference is because of the difference in the way opening and closing inventories arevalued. 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 ofoverheads? Allocation – whole cost items are charged to the relevant cost centre Apportionment – cost items are shared/divided between several cost centres45. In assessing ‘Value for Money’, what are the three ‘E’s’?The three ‘E’s’ are: Economy Efficiency Effectiveness46. How is the Return on Investment (ROI) calculated?ROI profit / capital invested8Ibrahim SameerACCA (FMA – MAPS College)

47. How is the Interest Cover calculated?117 FAQ 2014The interest cover profit before interest and tax / interest48. 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 – theyprepare budgets for their departments which are then checked and co-ordinated by higher levelmanagement.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 ofFinancial Position).Revenue expenditure is the payment of running expenses (which appear on the IncomeStatement).51. If there is perfect negative correlation between two variables, what will be the value ofthe coefficient of correlation?If there is perfect negative correlation, then r will equal -152. 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:AccurateCompleteCost-effective9Ibrahim SameerACCA (FMA – MAPS College)