ACA Management Information 4 — Questions and Answers
Question 1: Return on investment (ROI) for a division is calculated as:
- Profit / Revenue
- Profit / Net assets (capital employed) × 100% (Correct answer)
- Revenue / Total assets
- Net profit / Sales
Correct answer: Profit / Net assets (capital employed) × 100%
ROI = Divisional profit / Divisional net assets × 100%. It measures how effectively the division uses its assets to generate profit, and is the primary financial metric for investment centres.
Question 2: Residual income (RI) is calculated as:
- Divisional profit minus a notional capital charge (required return × capital employed) (Correct answer)
- Divisional revenue minus variable costs
- Net profit after tax divided by shares outstanding
- Operating profit divided by sales revenue
Correct answer: Divisional profit minus a notional capital charge (required return × capital employed)
RI = Divisional profit − (Required return × Capital employed). Unlike ROI, RI encourages divisions to accept projects that earn above the required return, avoiding the underinvestment problem.
Question 3: A cost driver in ABC is:
- The total overhead cost of an activity
- The factor that causes the cost of an activity to change (Correct answer)
- The manager responsible for a cost centre
- The budgeted overhead absorption rate
Correct answer: The factor that causes the cost of an activity to change
A cost driver is the factor that causes costs to be incurred; for example, the number of machine setups drives setup costs. Identifying cost drivers enables more accurate allocation of overheads.
Question 4: Kaizen costing focuses on:
- Setting standard costs at the design stage
- Continuous incremental cost reduction during the production phase (Correct answer)
- Eliminating non-value-added activities through business process redesign
- Setting a target cost based on market price
Correct answer: Continuous incremental cost reduction during the production phase
Kaizen costing (from the Japanese concept of continuous improvement) aims to achieve small, ongoing cost reductions during manufacturing through employee suggestions and process improvements.
Question 5: Variance analysis is most useful for management when it is:
- Performed annually
- Reported promptly and broken down into controllable components (Correct answer)
- Calculated using historical costs only
- Based on the previous year's actual results
Correct answer: Reported promptly and broken down into controllable components
Variance analysis is most useful when reported on a timely basis (so corrective action can be taken) and when variances are analysed into controllable and uncontrollable elements, clearly attributing responsibility.
Question 6: In decision making, a sunk cost should be:
- Included in all future cost comparisons
- Excluded from decision making as it has already been incurred and cannot be recovered (Correct answer)
- Treated as a variable cost
- Treated as an opportunity cost
Correct answer: Excluded from decision making as it has already been incurred and cannot be recovered
Sunk costs have already been incurred and cannot be recovered regardless of the decision made; they are therefore irrelevant to future decisions and should be excluded from analysis.
ACA Management Information 4
Return on investment (ROI) for a division is calculated as: