ACA Management Information 4

Question 1

Return on investment (ROI) for a division is calculated as:

Accepted Answer

Profit / Net assets (capital employed) × 100%

Answer

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:

Accepted Answer

Divisional profit minus a notional capital charge (required return × capital employed)

Answer

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:

Accepted Answer

The factor that causes the cost of an activity to change

Answer

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:

Accepted Answer

Continuous incremental cost reduction during the production phase

Answer

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:

Accepted Answer

Reported promptly and broken down into controllable components

Answer

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.

ACA ICAEW Practice Test

ACA ICAEW Practice Test

ACA Management Information 4