CIMA Performance Management and Control 2 — Questions and Answers
Question 1: What is the 'contribution margin' in management accounting?
- Total revenue minus total costs
- Revenue minus variable costs, representing the amount available to cover fixed costs and profit (Correct answer)
- Gross profit minus selling and administrative expenses
- Net profit as a percentage of revenue
Correct answer: Revenue minus variable costs, representing the amount available to cover fixed costs and profit
Contribution margin is revenue minus variable costs; it represents the amount available to cover fixed costs, with any remainder being profit.
Question 2: Activity-based costing (ABC) differs from traditional absorption costing in that it:
- Allocates overhead using a single plant-wide rate
- Traces overhead costs to products via cost drivers and multiple cost pools (Correct answer)
- Ignores fixed overhead in product costing
- Uses only direct costs to determine product cost
Correct answer: Traces overhead costs to products via cost drivers and multiple cost pools
ABC uses multiple cost pools and cost drivers to more accurately trace overhead costs to the products or services that consume them.
Question 3: In transfer pricing, what is the general rule for setting a minimum transfer price?
- Transfer price should equal market price in all circumstances
- Minimum transfer price = marginal cost + opportunity cost of the transferring division (Correct answer)
- Transfer price should be set by head office
- Transfer price = full cost plus a standard profit margin
Correct answer: Minimum transfer price = marginal cost + opportunity cost of the transferring division
The minimum transfer price should cover the marginal cost plus any opportunity cost (lost contribution) of the transferring division.
Question 4: What does 'return on investment' (ROI) measure for an investment center?
- The total profit generated by the division
- Profit as a percentage of the capital invested in the division (Correct answer)
- Revenue growth compared to the prior year
- The cost per unit of output produced
Correct answer: Profit as a percentage of the capital invested in the division
ROI measures the profit generated as a percentage of the capital invested in a division, assessing how efficiently capital is being deployed.
Question 5: Which costing method is most appropriate for pricing decisions in the short run, where fixed costs are already committed?
- Absorption costing
- Marginal costing (Correct answer)
- Activity-based costing
- Life cycle costing
Correct answer: Marginal costing
Marginal costing is most relevant for short-run pricing decisions because fixed costs are already committed and only variable (marginal) costs are avoidable.
Question 6: What is 'residual income' as a performance measure for investment centers?
- Net profit after deducting taxes
- Operating profit less a charge for the cost of capital employed (Correct answer)
- Total revenue minus all costs
- Profit attributable to equity shareholders
Correct answer: Operating profit less a charge for the cost of capital employed
Residual income is operating profit minus a notional charge for the capital employed, rewarding managers who earn above the required rate of return.
CIMA Performance Management and Control 2
What is the 'contribution margin' in management accounting?