CIMA Management Accounting 5 — Questions and Answers
Question 1: Which performance measure is calculated as Net Profit Before Interest and Tax ÷ Capital Employed?
- Return on equity (ROE)
- Return on capital employed (ROCE) (Correct answer)
- Asset turnover ratio
- Residual income
Correct answer: Return on capital employed (ROCE)
ROCE = PBIT ÷ Capital Employed and measures how efficiently a business uses its capital to generate profit.
Question 2: Residual income (RI) is superior to return on investment (ROI) as a divisional performance measure because:
- RI is always a higher number than ROI
- RI encourages managers to accept projects that exceed the cost of capital even if they lower ROI (Correct answer)
- RI is not affected by the size of the division
- RI eliminates the need for a cost of capital
Correct answer: RI encourages managers to accept projects that exceed the cost of capital even if they lower ROI
RI deducts a capital charge from profit, so managers are incentivized to accept any project earning above the cost of capital, avoiding the ROI sub-optimization problem.
Question 3: A company uses a balanced scorecard. Which perspective evaluates metrics such as employee training hours and innovation rates?
- Financial perspective
- Customer perspective
- Internal business process perspective
- Learning and growth perspective (Correct answer)
Correct answer: Learning and growth perspective
The learning and growth perspective of the balanced scorecard focuses on employee capabilities, information systems, and organizational culture that enable future performance.
Question 4: In a make-or-buy decision, a company should buy externally if:
- The external price is lower than the full absorption cost of making
- The external price is lower than the relevant (incremental) cost of making (Correct answer)
- The supplier can deliver faster than internal production
- The product is non-core to the business strategy
Correct answer: The external price is lower than the relevant (incremental) cost of making
The financial decision hinges on comparing the external buy price to the relevant (avoidable) cost of making, not the full absorbed cost.
Question 5: Which inventory valuation method results in the highest closing inventory value during a period of rising prices?
- FIFO (First In, First Out) (Correct answer)
- LIFO (Last In, First Out)
- Weighted average cost
- Standard cost
Correct answer: FIFO (First In, First Out)
Under FIFO, older (cheaper) costs are charged to cost of goods sold first, leaving newer (more expensive) units in closing inventory — giving the highest closing inventory value when prices rise.
Question 6: An under-absorbed overhead situation arises when:
- Actual overhead exceeds overhead absorbed into production (Correct answer)
- Overhead absorbed exceeds actual overhead incurred
- Standard hours exceed actual hours worked
- Budgeted production exceeds actual production
Correct answer: Actual overhead exceeds overhead absorbed into production
Under-absorption occurs when the overhead charged to production (absorbed) is less than the overhead actually incurred, leaving a debit balance to write off.
Question 7: Which of the following best describes 'kaizen costing'?
- Setting cost targets based on competitor prices
- Continuous incremental cost reduction during the production phase (Correct answer)
- Designing costs out of a product before production begins
- Allocating costs to activities that drive them
Correct answer: Continuous incremental cost reduction during the production phase
Kaizen costing focuses on continuous small improvements to reduce costs incrementally during the manufacturing phase of a product's life.
CIMA Management Accounting 5
Which performance measure is calculated as Net Profit Before Interest and Tax ÷ Capital Employed?