P1: Management Accounting

• Topic 01

  Cost Accounting for Decision and Control

  64 questions
• Topic 02

  Budgeting and Budgetary Control

  47 questions
• Topic 03

  Short-Term Commercial Decision-Making

  55 questions
• Topic 04

  Dealing with Uncertainty

  54 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 operates near full capacity. Management is considering automation that would increase fixed costs by 40% but reduce variable costs per unit by 30%. Current sales are 20% above break-even. Which statement best describes the CVP implications of this decision?

   • A
     Margin of safety will definitely worsen because fixed costs are rising
   • B
     Break-even point will decrease because variable costs are reduced
   • C
     Break-even point will increase in units but margin of safety will depend on whether the contribution per unit increase offsets the higher fixed cost impact
     Correct answer
   • D
     The decision should be rejected because fixed costs are increasing
   Explanation

   Higher fixed costs increase break-even point (more units needed to cover fixed costs). However, lower variable costs increase contribution per unit. The net effect on margin of safety depends on the relative magnitude of these changes and the impact on total contribution at current sales levels. This requires detailed CVP analysis considering both factors, not a simple rule. The 20% margin indicates sensitivity to break-even changes.

2. How is contribution per unit calculated?

   • A
     Selling price per unit minus variable cost per unit
     Correct answer
   • B
     Gross profit divided by number of units sold
   • C
     Selling price per unit minus fixed cost per unit
   • D
     Variable cost per unit divided by selling price per unit
   Explanation

   Contribution per unit is calculated as selling price per unit minus variable cost per unit. This represents the amount each unit contributes towards covering fixed costs and generating profit.

3. A manufacturing company is considering switching from imposed budgeting to participative budgeting. Which combination of outcomes would they most likely experience?

   • A
     Immediate cost savings and simplified budget monitoring with no trade-offs
   • B
     Lower staff motivation but more realistic targets and faster decision-making
   • C
     Faster budget preparation and lower costs, but reduced accuracy and staff resistance
   • D
     Improved budget accuracy and higher staff motivation, but a longer budget preparation process
     Correct answer
   Explanation

   Participative budgeting typically delivers better accuracy (as operational staff have detailed knowledge) and higher motivation (as staff feel ownership), but requires more time for consultation and discussion. The research shows participative processes take longer but deliver better buy-in and more realistic targets.

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