ADVANCED MANAGEMENT ACCOUNTING (MCQs SET 36)

Q1: Cost-volume-profit analysis includes some inherent, simplifying assumptions. Which of the
following is not one of the assumptions?

a) changes in beginning and ending inventory levels are insignificant in amount.

b) variable costs fluctuate proportionately with volume.

c) cost and revenues are predictable and are linear over the relevant range.

d) sales mix will change as fixed cost increase beyond the relevant range.

Q2: Falak limited budgets June sales at Rs. 265,000. The variable expenses is expected to be 56% of
sales and profit is expected to be Rs. 31,768. June sales if the company made a profit of Rs. 10,560 will
be .

a) Rs. 217,900.

b) Rs. 212,350.

c) Rs. 216,800.

d) Rs. 220,600.

Answer: CM ratio = 107600/265000 = 40.6%

Current New

Sales............................................................................................ Rs. 265,000. Rs. 212350

Less: variable cost....................................................................... Rs. (148,400).

Contribution margin: Rs. 107600 Rs. 86,392

Less: fixed cost (Rs. 75832) Rs. (75832)

Profit Rs. 31,768 Rs. 10560

Q3: The accounting firm of Smith and Thompson has been studying the sales requirements of the
Frisco. Bottling company. In the course of study, the managing partner submits the following
estimated data:

Sales 900,000 Fixed marketing expenses 71,000

Direct materials 206,200 Variable marketing expenses 80,000

Fixed factory overheads 171,896 Variable administrative expenses 4000

Variable factory overheads 102,600

The break-even point is Rs. .

a) 664,200.

b) 666,800.

c) 669,500.

d) 662,700.

Answer:

Breakeven (Rs.) = fixed cost / cm ratio

Cm ratio = (Sales – variable cost)/sales

= (900,000 – 206,200 – 165,000 – 102600- 80000 - 4000)/900,000

= 38 %

Break even (Rs.) = (171,896 + 71000 + 9500)/0.38

= 664200

Q4: Marginal cost is equal to:

a) Prime cost plus variable overheads.

b) Total cost – all fixed costs.

c) Prime cost minus all variable overheads.

d) variable overheads.

Q5: CG electronics makes air conditioners. It purchases 12,000 units of a particular type of compressor
part, LG29, each year at a cost of Rs. 500 per unit. CG electronics requires a 12% rate of return on
investments. In addition, relevant carrying cost (for insurance, materials handling, breakage and so
on) are Rs. 20 per unit per year. Relevant costs per purchase order are Rs. 1200. CG electronics total
relevant ordering and carrying costs.

a) Rs. 24,000.

b) Rs. 28,000.

c) Rs. 48,000.
d) Rs. 44,000.

EOQ =
√ 2 x 12000 x 1200 = 1200
20
Total relevant ordering cost = number of orders x cost per order

= Annual/ EOQ x cost per order

= 12000/1200 x 1200

= Rs. 12000.

Total relevant holding cost = Average inventory x holding cost per unit

= EOQ/2 x holding cost per unit.

= 1200/2 x 20

= Rs. 12000.

Total cost = Total carrying cost + Total ordering cost.

= 12000 + 12000.

= Rs. 24,000.

Q6: A structured approach to determining the cost at which a proposed product with specific
functionality and quality must be produced in order to generate the desired level of profitability at the
product’s anticipated selling price’s best defines:

a) Target costing.

b) Life cycle costing.

c) Benchmarking.

d) Manufacturing resource planning.

Q7: In the absence of any production resource limitations, budgets would be prepared in the following
order:

a) Finished goods inventory budget, Production budget, material usage budget, sales budget.

b) Production budget, sales budget, finished goods inventory budget, material usage budget.

c) sales budget, finished goods inventory budget, material usage budget, production budget.

d) sales budget, finished goods inventory budget, production budget, material usage budget.
Q8: The following data apply to Farrukh limited for a given period:

Total variable cost per unit Rs. 3.5

Contribution margin / sales 30%

Break-even sales (present volume) Rs. 1000,000

Farrukh limited wants to sell an additional 50,000 units at the same sales price and contribution
margin. The amount that fixed costs can change to generate a profit equal to 10% of the sales value
on the additional 50,000 units to be sold is .

a) Rs. 30,000.

b) Rs. 67,500.

c) Rs. 125,000.

d) Rs. 57,500.

Old breakeven = fixed cost/ cm ratio

1000,000 = x / 0.30

Fixed cost = 300,000

Target sales = target profit + fixed cost / cm ratio

1000,000 = 100,000 + x / 0.30

New fixed cost = 270,000

Change in fixed cost = 300,000 – 270000 = 30,000.

Q9: is sometimes referred to as super variable costing.

a) Product life cycle costing.

b) Throughput accounting.

c) Direct costing.

d) Marginal costing.

Q10: CG electronics makes air conditioners. It purchases 12,000 units of a particular type of
compressor part, LG29, each year at a cost of Rs. 500 per unit. CG electronics requires a 12% rate of
return on investments. In addition, relevant carrying cost (for insurance, materials handling, breakage
and so on) are Rs. 20 per unit per year. Relevant costs per purchase order are Rs. 1200. Assume that
demand is uniform throughout the year and is known with certainty. The purchasing lead time is half
a month. Calculate CG electronics re-order point for LG 29. CG electronics’ average inventory based
on EOQ and reorder point for LG 29 are .
a) 600 units and 500 units respectively.

b) 600 units and 450 units respectively.

c) 650 units and 300 units respectively.

d) 400 units and 500 units respectively.

Answer:

EOQ =
√ 2 x 12000 x 1200 = 1200
20
Average inventory = EOQ/2 = 1200/2 = 600 units.

Reorder point = 12000/360 x 15 = 500 units

Q11: Exponential forecast formula is:

a) New forecast = old forecast + smoothing constant (old forecast – old observation)

b) New forecast = old forecast + smoothing constant (old forecast – latest observation)

c) New forecast = old forecast + smoothing constant (old observation – old forecast)

d) New forecast = old forecast + smoothing constant (latest observation – old forecast)

Q12: Which of the following is most unlikely to be a fixed cost?

a) Insurance.

b) Rent.

c) Raw materials.

d) Advertising.

Q13: You have five years of past sales data; however, there have been changes to products and target
market focus over the past few years when compared to the previous period. What forecasting
method would take this into account and still be simple to use?

a) Delphi method.

b) Moving averages.

c) Exponential smoothing.

d) Regression analysis.
Q14: Ahmad company plans to sell 48,000 units of product “A” next year. Opening inventory of “A” is
expected to be 4000 units and Ahmad company plans to increase inventory by 20 percent by the end
of the year. How many units of Product “A” should be produced next year?

a) 49,550.

b) 49,200.

c) 47,600.

d) 48,800.

Answer:

Opening inventory = 4000 units.

Ending inventory = 4000 x 1.20 = 4800.

sales units + ending inventory – opening inventory = production

48000 + 4800 - 4000 = 48800 units.

Q15: Inventory carried for the purpose of providing flexibility to each decision-making units to
manage its operations independently is known as:

a) decoupling inventory.

b) cycle inventory.

c) pipeline inventory.

d) safety inventory.

Answer:

Cycle inventory, or cycle stock inventory, is the portion of inventory that a seller cycles through to fulfill
regular sales orders. It represents a part of a business's standing inventory. Cycle inventory is used and
replaced by new items, or turned over.

Pipeline inventory refers to stock that is currently in transit between locations and has not yet been
purchased by the consumer. Pipeline inventory, also called Pipeline Stock, is important to consider as it
helps build a picture of how much of your assets are tied up in stock.

Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate
risk of stockouts caused by uncertainties in supply and demand. Adequate safety stock levels permit
business operations to proceed according to their plans.