CIMA P1 - Management Accounting Question Tutorial - CIMAPRO15-P01-X1-ENG

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning.
The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.
Select ALL the benefits for the company that could occur following the introduction of an activity based budgeting system.

• A. Under an activity based budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated.
  Under a traditional budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.
• B. Under an activity based budgeting system, resource allocation is linked to the strategic plan is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget.
• C. ABB systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred.
• D. Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.
• E. The approach under an activity based system is to make arbitrary cuts in order to meet overall financial targets.
• F. Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization.

EF manufactures and sells three products, X, Y and Z. The following production overhead costs are budgeted for next year:

Required:
Calculate the total budgeted production overhead cost for each product using activity based budgeting.

• A. The total budgeted production overhead cost was $ 1 188 000
• B. The total budgeted production overhead cost was $ 1 258 000
• C. The total budgeted production overhead cost was $ 1 285 000
• D. The total budgeted production overhead cost was $ 1 305 000
• E. The total budgeted production overhead cost was $ 2 195 000

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning. The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.
What are the benefits for the company that could occur following the introduction of an activity based budgeting system?
Select ALL the correct answers.

• A. Under an activity based budgeting system, resource allocation is linked to the strategic plan and is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company's strategic objectives are included in the budget.
• B. The approach under an Activity based Budgeting System is to make arbitrary cuts in order to meet overall financial targets.
• C. Activity Based Budgeting Systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness if this approach is that it gives little indication of the link between the level of activity and the cost incurred.
• D. Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.
• E. Under a traditional incremental budgeting system the focus is on existing resources and operations.
  Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under an activity based budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.

'Public sector organizations are often judged by their economy, efficiency and effectiveness. Consequently, they should use an approach to budgeting other than incremental budgeting.' Required:
Explain ONE advantage and TWO disadvantages of public sector organizations using incremental budgeting.
Select all true statements.

• A. The main advantage of incremental budgeting is that the cost of past activities becomes fixed and any inefficiencies or wastage is perpetuated.
• B. An incremental; approach is not as easy and fast to implement than other forms of budgeting approaches e.g. zero based budgeting.
• C. Under an incremental approach to budgeting, existing operations and the current budgeted allowance for these existing activities are taken as the base level for preparing the budget.
• D. Public sector organizations tend to be fairly complex and in many cases outputs cannot be measured in monetary terms therefore the link between inputs and outputs is difficult to establish. An incremental approach can therefore provide a cost effective approach to budgeting.
• E. The incremental approach encourages managers in public sector organizations to look at the efficiency and effectiveness of activities undertaken.
• F. The incremental approach means that budget holders in public sector organizations will be encouraged to use up this year's budget will be as high as possible.

A company produces a product that requires two materials, Material A and Material B. Details of the material quantities and costs for August are given in the table below.

Budgeted and actual output of the product for August was 12,000 units.
The material yield variance for August is:

• A. $1,340 A
• B. $1,740 A
• C. $1,340 F
• D. $1,840 A
• E. $1,590 A