BA2: Fundamentals of Management Accounting

• Topic 01

  Context of Management Accounting

  54 questions
• Topic 02

  Costing

  63 questions
• Topic 03

  Decision-Making

  74 questions
• Topic 04

  Planning and Control

  72 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A manufacturing company implemented zero-based budgeting three years ago. Senior management is reviewing the approach after observing that departmental managers have become resistant and budget preparation now takes 4 months instead of 6 weeks. Which of the following BEST explains the underlying disadvantage being experienced?

   • A
     ZBB's fresh perspective approach has become too disruptive and should be replaced with rolling budgets
   • B
     Manager resistance indicates the need for more frequent ZBB cycles to maintain discipline
   • C
     The cost-benefit trade-off has shifted unfavorably as the time and effort required for ZBB outweighs the benefits of identifying incremental savings
     Correct answer
   • D
     The company should switch to incremental budgeting to ensure all historical inefficiencies are preserved
   Explanation

   This scenario illustrates a critical disadvantage of zero-based budgeting: the time and resource burden can exceed the benefits, especially after initial inefficiencies have been eliminated. After 3 years, most major savings have been identified, but the company still invests 4 months annually in detailed justification. The unfavorable cost-benefit trade-off—combined with manager resistance and opportunity cost of management time—suggests ZBB may no longer be appropriate. This demonstrates the practical reality that ZBB is often most valuable as a periodic exercise rather than an annual requirement, particularly once major inefficiencies have been addressed.

2. A manufacturing company's management accountant identifies that material costs are consistently 12% above standard, while labour efficiency has improved by 15%. Market prices for raw materials have increased by 10% industry-wide. Which control action would be most appropriate?

   • A
     Investigate the labour efficiency improvement as it may indicate quality control issues
   • B
     Revise the material cost standards to reflect current market conditions and continue monitoring labour efficiency gains
     Correct answer
   • C
     Take corrective action to reduce material costs back to the original standard immediately
   • D
     Report the net favourable variance to management and take no further action
   Explanation

   When variances are caused by external factors beyond management control (such as industry-wide price increases), the appropriate response is to update standards to reflect the new reality rather than attempting to reverse unavoidable changes. The 10% market increase explains most of the 12% variance, suggesting the standard is outdated. The labour efficiency gains should be recognized as a positive performance indicator, not investigated as a problem.

3. What is a semi-variable cost?

   • A
     A cost that varies inversely with production volume
   • B
     A cost that changes proportionally with output
   • C
     A cost that has both fixed and variable components
     Correct answer
   • D
     A cost that remains constant regardless of output level
   Explanation

   A semi-variable cost (also called a mixed cost) contains both a fixed element that does not change with activity level and a variable element that changes proportionally with output. Examples include electricity bills with a standing charge plus usage costs, or telephone bills with a fixed rental plus call charges.

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