CIMA Management Accounting 4 — Questions and Answers
Question 1: A company has a margin of safety of 25%. This means:
- Fixed costs are 25% of total costs
- Actual sales can fall 25% before the company makes a loss (Correct answer)
- Variable costs are 25% below standard
- Contribution covers 25% of fixed costs
Correct answer: Actual sales can fall 25% before the company makes a loss
A margin of safety of 25% indicates actual sales exceed breakeven by 25%, so sales could drop by that amount before a loss occurs.
Question 2: Process costing is most appropriate for which type of production?
- Bespoke furniture manufacturing
- Oil refining producing homogeneous outputs (Correct answer)
- Aircraft assembly
- Custom software development
Correct answer: Oil refining producing homogeneous outputs
Process costing suits continuous, mass production of identical or near-identical units such as oil refining, chemicals, or food processing.
Question 3: Normal loss in a process account is valued at:
- Standard cost per unit
- Net realizable value (scrap value) (Correct answer)
- Total process cost divided by expected output
- Zero, since it is expected
Correct answer: Net realizable value (scrap value)
Normal loss is valued at its scrap/net realizable value; its cost is absorbed into the remaining good output.
Question 4: Which of the following best describes a 'relevant cost' in decision-making?
- A cost that has already been incurred and cannot be recovered
- A future incremental cash cost that differs between alternatives (Correct answer)
- The average cost allocated to each unit of production
- A fixed overhead cost absorbed into product cost
Correct answer: A future incremental cash cost that differs between alternatives
Relevant costs are future, incremental cash flows that differ between the decision alternatives being evaluated.
Question 5: A company is considering dropping a product line. Which of the following would NOT be relevant to the decision?
- Lost contribution from the product
- Avoidable fixed costs of the product line
- Historical development costs already spent (Correct answer)
- Redeployment costs of freed resources
Correct answer: Historical development costs already spent
Historical development costs are sunk costs — they have already been incurred and cannot be recovered, making them irrelevant to the decision.
Question 6: If a company operates at full capacity and receives a special order, the minimum price it should charge per unit is:
- Variable cost per unit only
- Full absorption cost per unit
- Variable cost plus opportunity cost per unit (Correct answer)
- Selling price to existing customers
Correct answer: Variable cost plus opportunity cost per unit
At full capacity, accepting a special order means sacrificing existing contribution (opportunity cost), so the minimum price must cover variable cost plus that lost contribution.
Question 7: The internal rate of return (IRR) of a project is best described as:
- The average annual accounting profit divided by average investment
- The discount rate at which the NPV of the project equals zero (Correct answer)
- The payback period expressed as a percentage
- The cost of capital adjusted for project risk
Correct answer: The discount rate at which the NPV of the project equals zero
The IRR is the discount rate that makes the NPV of all cash flows from a project equal to zero.
CIMA Management Accounting 4
A company has a margin of safety of 25%.
This means: