CIMA P2 Questions Answers

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CIMA P2 Sample Questions

Question # 1

A company currently absorbs production overheads based on labor hours. The overheads absorbed by the two products that are made, L and M, are $4 per unit and $10 per unit respectively. These were based on the budgeted overheads of $7,000 and budgeted labor hours of 1,750. The budgeted output was 500 units of each product.The company is investigating the use of activity based costing (ABC). Analysis has shown that the total production overheads of $7,000 are made up of $4,000 for set up costs and $3,000 for inspection costs. The cost driver for set up costs is the number of set ups and for inspection costs it is the number of inspections. The cost driver rate for set ups is $160 per set up. Product L would need 5 production runs. Both types of product would need 1 set up for each production run. Product L would need 2 inspections for each production run. Product M would need 1 inspection per production run. The products are made in the same department and use the same equipment and staff but they are produced separately. Which of the following statements are correct? Select ALL that apply.  

A. The current production overhead absorption rate is $4.00 per hour. 
B. The current production overhead absorption rate is $500 per hour. 
C. If ABC was used, set up costs per unit of Product L would be $1.60. 
D. If ABC was used, set up costs per unit of Product M would be $4.00. 
E. If ABC was used, inspection costs per unit of Product L would be $4.00. 
F. If ABC was used, inspection costs per unit of Product M would be $4.00. 

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Question # 2

If transfer prices are set at variable costs, the supplying division does not cover its fixed costs. Which of the following does NOT resolve this problem? 

A. Each division can be given a share of the overall contribution earned by the organization. 
B. A system of dual pricing can be adopted. 
C. Reduce the level of fixed costs. 
D. Central management can impose a range within which the transfer price should fall. 

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Question # 3

Which TWO of the following are reasons why cost-based approaches to transfer pricing are often used in practice? 

A. The buying division will want to maximize its profits. 
B. The transferring division will want to maximize its profits. 
C. Because the external market is imperfect. 
D. Because there is often no external market for the product that is being transferred. 
E. The approach allows the organization to cover all the costs. 

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Question # 4

Which TWO of the following expressions are correct? 

A. 1 + money rate = (1 + real rate) x (1 + inflation rate) 
B. 1 + real rate = (1 + money rate) / (1 + inflation rate) 
C. 1 + real rate = (1 + inflation rate) / (1 + money rate) 
D. 1 + money rate = (1 + inflation rate) / (1 + real rate) 
E. 1 + inflation rate = (1 + money rate) x (1 + real rate) 

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Question # 5

A company has a 31 December year end and pays corporation tax at a rate of 30%. Corporation tax is payable 12 months after the end of the year to which the cash flows relate. The company can claim tax allowable depreciation at a rate of 25% reducing balance. It pays $1 million for a machine on 31 December 20X4. The company's cost of capital is 10%. What is the present value of the benefit of the first portion of tax allowable depreciation? 

A. $250,000 
B. $227,500 
C. $75,000 
D. $68,175 

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Question # 6

The net present value of the cost of operating a machine for the next 4 years is £6,340. The discount rate used is 10%.What is the equivalent annual cost and the present value of the cost in perpetuity of operating this machine? Use discount factors to 3 decimal places.  

A. Equivalent annual cost = £92,825 Present value of cost in perpetuity = £9,283 
B. Equivalent annual cost = 9,283 Present value of cost in perpetuity = £92,825 
C. Equivalent annual cost = £2,000 Present value of cost in perpetuity = £20,000 
D. Equivalent annual cost = £20,000 Present value of cost in perpetuity = £2,000 

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Question # 7

A company has recently developed a new lawnmower with an estimated market life of 5 years. Production and sale of the lawnmower will require investment in new production equipment costing $750,000. It is expected that this equipment could be sold back to the original vendor for $50,000 at the end of five years. Purchase of the equipment would be financed by a 5 year fixed rate bank loan at an interest rate of 6%. A manager already employed by the company would be moved from their current position to manage production of the new lawnmower. Their original position would be filled by a new recruit on a fixed annual salary of $35,000. Which of the following statements is NOT correct?  

A. If the lawnmower is a failure then management can terminate the project early and sell the equipment, giving them an abandonment option. 
B. The salary of the replacement manager is a relevant cash flow in the decision. 
C. The interest costs on the bank loan are a relevant cash flow in the decision. 
D. Launching a new lawnmower gives an opportunity to launch more new versions and provides a follow-on option. 

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Question # 8

Which of the following statements are fundamental concepts that underlie the Beyond Budgeting approach? 1. Use traditional budgeting in conjunction with other techniques. 2. Use adaptive management processes rather than the more rigid annual budget. 3. Move towards devolved networks rather than centralized hierarchies. 4. Move towards centralized hierarchies rather than devolved networks. 

A. Statements 1 and 2 apply. 
B. Statements 1, 2 and 3 apply. 
C. Statements 2 and 3 apply. 
D. Statements 2, 3 and 4 apply. 

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Question # 9

A company is determining the selling price for its new product.At a selling price of $16 per unit there will be zero demand but for every $1 reduction in the price, demand will increase by 100 units per period. Production must be in batches of 100 units. The variable cost per unit will be $8 if 400 units are produced in a period. For each additional batch produced in a period the variable cost per unit will increase by $1 per unit for the additional batch only. No inventories will be held. Which of the following sales and production volumes will generate the highest contribution per period?  

A. 400 units 
B. 500 units 
C. 600 units 
D. 700 units 

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Question # 10

Risk management can be represented as a four step process. The four steps, shown randomly, are:1. Establish appropriate risk management policies. 2. Risks are identified by key stakeholders. 3. Risks are monitored on an ongoing basis. 4. Risks are evaluated according to the likelihood of occurrence and impact on the organization. Which of the following is the correct order for the four steps?  

A. 1, 2, 3, 4 
B. 2, 1, 4, 3 
C. 1, 2, 4, 3 
D. 2, 4, 1, 3 

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Question # 11

Which of the following statements is NOT correct?Transfer prices between responsibility centers should be set at a level that:  

A. provides an artificial selling price that enables the transferring division to earn a return for its efforts and the receiving division to incur a cost for benefits received. 
B. enables profit centre performance to be measured 'commercially'. 
C. encourages a balance of goal congruence, managerial effort and centralized management. 
D. encourages profit centre managers to agree on the amount of goods and services to be transferred at a level that is consistent with organizational aims. 

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Question # 12

It is often claimed that a two-part transfer pricing system offers a number of advantages to organizations which use it.Which of the following statements is NOT an advantage of using a two-part transfer pricing system?  

A. Transfers are made at the marginal cost of the supplying division and both divisions should be able to report profits from inter-divisional trading. 
B. The receiving division is made aware of and charged for the full cost of obtaining intermediate products from other divisions. 
C. It stimulates planning, communication and coordination amongst divisions. 
D. The agreed fixed fee simply compensates the supplying division for incurring the fixed costs associated with the item transferred. 

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Question # 13

Company S has two divisions, X and Y. Division X transfers 50,000 component units to Division Y each quarter. The market price of the component is $20. Division X's variable cost is $10 per unit and its fixed cost is $150,000 each quarter. What price would be credited to Division X for each component that it transfers to Division Y under: two-part tariff pricing (where the two divisions have agreed that the fixed fee will be $100,000); and dual pricing (based on market price and marginal cost). 

A. Two-part tariff pricing = $10 Dual pricing = $22 
B. Two-part tariff pricing = $12 Dual pricing = $18 
C. Two-part tariff pricing = $10 Dual pricing = $20 
D. Two-part tariff pricing = $13 Dual pricing = $22 

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Question # 14

The Chief Executive of a large manufacturing company has made the following comment."All of our competitors are using both just-in-time(JIT) and Total Quality Management (TQM) whereas we have never used either. Consequently we are lagging behind our competitors because their levels of inventory and quality costs are significantly below ours. I want to see JIT fully implemented, both for purchasing and for production, in 4 weeks' time and TQM fully implemented 4 weeks after that." Which of the following provide appropriate advice to the Chief Executive? Select ALL that apply.  

A. Full implementation of JIT is unlikely to be successful unless a TQM environment has first been established. 
B. Implementing TQM from scratch within 8 weeks should be feasible for a large manufacturing company, but implementing JIT within 4 weeks is unlikely to be feasible. 
C. Total quality costs are likely to begin declining immediately once the process of implementing TQM has commenced. 
D. JIT offers the long run prospect of significantly reducing inventory. 
E. It would be possible to implement TQM without implementing JIT. 
F. It is not possible to implement JIT for production without first implementing JIT for purchasing. 

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Question # 15

The performance report for the production manager of a company for the last month included the following.1,000 direct labor hours were worked at a basic rate of pay of $10 per hour. 200 of these hours were worked during overtime for which a 30% overtime premium was paid. 80 of these overtime hours were to fulfill a customer order that had originally been planned for manufacture next month. The sales manager had agreed to bring forward the delivery of this order at the request of the customer. The remaining overtime hours were due to unexpected inefficiency of the workforce; this has been traced to poor supervision by a junior managerMaterial costs included the following: ? $5,300 of material A. Material A is a commodity and, due to changes on the global market, the actual unit cost of this material for last month was 6% higher than had been expected ? $5,250 of material B. The usage of material B last month was 5% higher than it should have been due to faulty workmanship on the production line. What is the total value of the above costs that was controllable by the production manager?  

A. $20,610 
B. $19,810 
C. $20,910 
D. $20,360 

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