SOCPA Cost and Management Accounting 2

Question 1

What is the difference between job-order costing and process costing?

Accepted Answer

Job-order costing tracks costs per specific job/order; process costing averages costs across mass-produced identical units

Answer

Job-order costing accumulates costs for each unique job/batch (construction, custom manufacturing). Process costing averages costs over identical units produced continuously (oil refining, food processing). The choice depends on the production method. Both are used by Saudi companies.

Question 2

What is a balanced scorecard and how does it support management decision-making?

Accepted Answer

A strategic management tool measuring performance across four perspectives: financial, customer, internal processes, and learning/growth

Answer

The Balanced Scorecard translates strategy into measurable objectives across four perspectives: Financial (profitability, revenue growth), Customer (satisfaction, retention), Internal Processes (efficiency, quality), and Learning & Growth (innovation, employee development). It prevents over-reliance on financial metrics alone.

Question 3

What is relevant cost analysis in management decision-making?

Accepted Answer

Identifying costs that differ between decision alternatives and will be incurred in the future — sunk costs are excluded

Answer

Relevant costs are future costs that differ between alternatives. Sunk costs (already incurred, can't be changed) are irrelevant to decisions. This analysis applies to make-or-buy decisions, special order pricing, product line elimination, and resource allocation decisions.

Question 4

What is capital budgeting and what methods are used?

Accepted Answer

Evaluating long-term investment decisions using NPV, IRR, payback period, and profitability index

Answer

Capital budgeting evaluates major long-term investments. Methods: NPV (present value of future cash flows minus investment — positive is acceptable), IRR (discount rate making NPV=0 — must exceed cost of capital), Payback Period (time to recover investment), and Profitability Index (PV of cash flows/investment).

Question 5

What is transfer pricing in management accounting?

Accepted Answer

The price charged when one division of a company sells goods or services to another division, affecting divisional profitability measurement

Answer

Internal transfer pricing determines prices for intercompany transactions. Methods include: market-based (external market price), cost-based (cost plus markup), or negotiated prices. Transfer pricing affects divisional performance evaluation and can impact Zakat/tax obligations if not at arm's length.

SOCPA Practice Test

SOCPA Practice Test

SOCPA Cost and Management Accounting 2