P2: Advanced Management Accounting

• Topic 01

  Cost Management

  69 questions
• Topic 02

  Performance Measurement

  69 questions
• Topic 03

  Risk Management

  69 questions
• Topic 04

  Quality and Capital Investment

  69 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 is developing a new product line. During which phase will the majority of lifecycle costs be committed, and why is this significant for cost management?

   • A
     The design phase, because approximately 80% of costs are locked in through design decisions before production begins
     Correct answer
   • B
     The marketing phase, because this determines the target market and pricing strategy
   • C
     The production phase, because this is when most cash expenditure occurs
   • D
     The operating phase, because maintenance and user costs accumulate over the product's life
   Explanation

   While actual cost incurrence happens during production and operation, cost commitment occurs during design. Design decisions about materials, manufacturing processes, and product features determine approximately 80% of lifecycle costs, making value engineering and target costing most effective at this early stage.

2. Which of the following is a primary risk source that exists within an organisation's value chain?

   • A
     Supply chain disruption from suppliers
     Correct answer
   • B
     Global political instability
   • C
     International trade agreements
   • D
     Central bank interest rate decisions
   Explanation

   Supply chain disruption from suppliers is a direct value chain risk source. The value chain includes suppliers, employees, customers, competitors, regulators, and technology partners. Other options represent external environmental risks rather than value chain-specific risks.

3. A multinational company operates two divisions: Manufacturing (supplier) and Sales (receiver). The Manufacturing division has spare capacity. Which transfer pricing method best balances goal congruence with simplicity?

   • A
     Cost-plus transfer pricing, using variable cost plus a markup
     Correct answer
   • B
     Negotiated transfer pricing within a specified range
   • C
     Market-based transfer pricing at full external market price
   • D
     Full cost transfer pricing without markup
   Explanation

   Cost-plus transfer pricing (variable cost plus markup) balances multiple objectives: it encourages internal trade (since supplier earns profit on transfers), motivates the supplier division (markup rewards the sale), keeps receiving division costs reasonable, and is relatively simple to implement. With spare capacity, marginal cost provides the economic minimum, and the markup ensures the supplier benefits from internal sales. This method promotes goal congruence by incentivizing both divisions appropriately.