ACCA PM Exam 1

✅ Correct answer: Draws on external market and competitor data; Lets users drill down from summaries to detail

📌 Explanation: An executive information system serves strategic planning, so it combines internal data with external data on markets and competitors, and it lets directors drill down from a summary dashboard to the underlying detail. These two features set it apart from an MIS, which summarises internal data for management control.

❌ Why the other options are wrong: Recording each sales transaction as it happens describes a transaction processing system; fixed-format periodic reports for routine control are what the existing management information system already produces; integrating purchasing, payroll and inventory modules is the role of an enterprise resource planning system, not an EIS.

📋 Objective: 1.1 (Management information systems)

✅ Correct answer: Encrypted files released only to named directors

📌 Explanation: Highly confidential information should be distributed on a strict need-to-know basis with strong security. Encrypting the files and releasing them only to the four named directors protects the content in transit and at rest and limits access to the people who must see it.

❌ Why the other options are wrong: Posting summary figures on the staff intranet exposes sensitive redundancy plans to the very employees affected; a password shared by the whole finance team gives access to people outside the need-to-know group and breaks accountability; emailing the full report to the senior managers widens distribution beyond the board members who need it.

📋 Objective: 1.2 (Uses and control of information)

✅ Correct answer: Prescriptive analytics

📌 Explanation: Prescriptive analytics goes beyond forecasting to recommend the action that best meets an objective. Here the software recommends the specific delivery day and order size for each retailer that minimises stock-outs and transport cost, so it answers the question of what the company should do.

❌ Why the other options are wrong: Predictive analytics forecasts what is likely to happen, such as next month's demand, but does not choose the best action; diagnostic analytics explains why something happened, such as the cause of past stock-outs; descriptive analytics only summarises what has already happened, for example last month's deliveries.

📋 Objective: 1.3 (Big data and data analytics)

✅ Correct answer: $96,900

📌 Explanation: The cost driver rates are $186,000 / 1,240 = $150 per delivery and $252,000 / 84,000 = $3 per order line. The client is charged 310 x $150 = $46,500 plus 16,800 x $3 = $50,400, a total of $96,900.

❌ Why the other options are wrong: $87,600 applies the client's 20% share of order lines to the total overheads of $438,000, so the receiving pool is spread on the wrong driver; $109,500 applies its 25% share of deliveries to both pools; $50,400 charges only the picking activity and omits receiving costs.

📋 Objective: 2.1 (Activity-based costing)

✅ Correct answer: $7,286

📌 Explanation: Material K in inventory is not in regular use, so its relevant cost is the higher of its resale value ($3.90) and the saving from its alternative use ($4.60): 900 x $4.60 = $4,140. The other 440 kg must be bought at $7.15: $3,146. The relevant cost is $4,140 + $3,146 = $7,286.

❌ Why the other options are wrong: $9,581 values all 1,340 kg at replacement cost, which applies only to materials in regular use; $8,906 values the inventory at its historic cost of $6.40, which is sunk; $6,656 uses the resale value of $3.90 and ignores the more valuable alternative use saving $4.60 per kg.

📋 Objective: 3.1 (Relevant cost analysis)

✅ Correct answer: $3,071,250

📌 Explanation: Per mix of 3 couscous and 2 flour packs, revenue is (3 x $4.80) + (2 x $3.20) = $20.80 and contribution is (3 x $1.92) + (2 x $0.96) = $7.68, a weighted C/S ratio of 36.92%. Break-even revenue = $1,134,000 / ($7.68 / $20.80) = $3,071,250.

❌ Why the other options are wrong: $3,150,000 weights the two C/S ratios (40% and 30%) by the 3:2 unit mix as if it were a revenue mix; $3,240,000 uses a simple average C/S ratio of 35%; $2,835,000 uses the couscous C/S ratio of 40% alone and ignores the lower-margin flour.

📋 Objective: 3.2 (Cost-volume-profit analysis)

✅ Correct answer: $7.00

📌 Explanation: Add one labour hour and re-solve the binding constraints: 2P1 + 4P2 = 3,561 and 3P1 + 2P2 = 3,180 give P1 = 699.75 and P2 = 540.375, so contribution rises from $40,820 to $40,827. The shadow price of labour is therefore $7.00 per hour (solving 2L + 3M = 29 and 4L + 2M = 38 gives the same result).

❌ Why the other options are wrong: $5.00 is the shadow price of a machine hour, the other binding constraint; $9.50 is the P2 contribution per labour hour ($38 / 4), which ignores the machine constraint; $14.50 is the P1 contribution per labour hour ($29 / 2), a ranking figure rather than the value of one extra hour.

📋 Objective: 3.3 (Limiting factors)

✅ Correct answer: $6.65

📌 Explanation: b = $0.20 / 1,500 = 0.000133 and a = $6.40 + (0.000133 x 36,000) = $11.20, so P = 11.20 - 0.000133Q and MR = 11.20 - 0.000267Q. Setting MR = MC of $2.10 gives Q = 34,125 tubs and P = 11.20 - (0.000133 x 34,125) = $6.65.

❌ Why the other options are wrong: $7.10 sets MR equal to full cost of $3.00, wrongly including absorbed fixed overhead, which does not change with output; $5.60 is the price at which MR = 0, which maximises revenue rather than profit; $6.40 keeps the current price without applying MR = MC.

📋 Objective: 3.4 (Pricing decisions)

✅ Correct answer: Budgets reflect current estimates of fuel prices; Planning becomes a continuous forward-looking process

📌 Explanation: A rolling budget adds a new quarter as each quarter ends, so targets are revised using the latest fuel price estimates rather than figures set up to a year earlier. Managers therefore plan continuously and keep a full year's forward view, which suits a volatile cost environment.

❌ Why the other options are wrong: Justifying each cost from a zero base is the feature of zero-based budgeting, not rolling budgets; rolling budgets need more management time because budgeting happens every quarter, so less time is the reverse of the effect; linking overheads to the activities driving them describes activity-based budgeting.

📋 Objective: 4.1 (Budgetary systems and types of budget)

✅ Correct answer: $3,150 adverse

📌 Explanation: The standard feed cost is $86,400 / 48,000 = $1.80 per kg, so the flexed budget for 52,500 kg is $94,500. Actual cost of $97,650 exceeds this by $3,150, an adverse variance, because more was spent than the actual output justified.

❌ Why the other options are wrong: $3,150 favourable reverses the sign although actual cost exceeded the flexed budget; $11,250 adverse compares actual cost with the fixed budget of $86,400, mixing a volume effect into the cost variance; $2,880 adverse multiplies the $0.06 per kg overspend by budgeted rather than actual output.

📋 Objective: 4.3 (Standard costing)

✅ Correct answer: $1,500 adverse

📌 Explanation: Actual total sales of 10,500 units in the standard 60:40 mix would be 6,300 soaps and 4,200 lotions. Mix variance = (6,900 - 6,300) x $3.40 = $2,040 favourable plus (3,600 - 4,200) x $5.90 = $3,540 adverse, a net $1,500 adverse, because the mix shifted towards the lower-contribution soap.

❌ Why the other options are wrong: $1,500 favourable reverses the sign although the mix moved towards the lower-margin product; $2,200 favourable is the sales quantity variance, (10,500 - 10,000) x $4.40 weighted average contribution; $700 favourable is the total sales volume variance, which combines the mix and quantity effects.

📋 Objective: 4.5 (Sales mix and quantity variances)

✅ Correct answer: 52.0 days

📌 Explanation: Credit sales are 75% x $4,380,000 = $3,285,000. Receivables collection period = year-end receivables / credit sales x 365 = $468,000 / $3,285,000 x 365 = 52.0 days, which measures how long tour operators take to pay.

❌ Why the other options are wrong: 39.0 days divides by total revenue, including cash sales that never create receivables; 69.3 days adjusts for the credit proportion twice by dividing 52.0 days by 0.75 again; 48.0 days uses average receivables of $432,000, although the director asked for the year-end basis.

📋 Objective: 5.1 (Performance analysis in private, public and not-for-profit organisations)

✅ Correct answer: Share of Mombasa outpatient visits

📌 Explanation: Fitzgerald and Moon treat competitiveness and financial performance as results, the outcomes of success. Market share of outpatient visits measures competitiveness, so it is a result, whereas the other measures track determinants that drive those results.

❌ Why the other options are wrong: Complaints per 1,000 visits measures quality, a determinant; the percentage of consulting room hours used measures resource utilisation, also a determinant; the number of new treatments launched measures innovation, which is a determinant of future results rather than a result itself.

📋 Objective: 5.1 (Performance analysis in private, public and not-for-profit organisations)

✅ Correct answer: Differences in corporate income tax rates; Restrictions on remitting profits abroad

📌 Explanation: In a multinational group the transfer price shifts profit between tax jurisdictions, so differing corporate income tax rates affect group tax paid and attract tax authority scrutiny. Exchange controls or restrictions on remitting profits abroad also influence where the group wants profit to arise.

❌ Why the other options are wrong: Whether the selling division has spare capacity affects the minimum transfer price in any group, domestic or international; choosing between ROI and residual income is a divisional performance measurement issue, not a cross-border one; apportioning head-office costs arises in every divisionalised company.

📋 Objective: 5.2 (Divisional performance and transfer pricing)

✅ Correct answer: Cost per megalitre of water treated

📌 Explanation: Efficiency relates outputs to the inputs used to produce them. Cost per megalitre of water treated measures how much output the council obtains for its spending, so it is the appropriate efficiency measure in a value for money review.

❌ Why the other options are wrong: The price paid per tonne of chlorine measures economy, the cost of acquiring inputs; the share of households with safe water measures effectiveness, the extent to which objectives are achieved; the total budget spent this year is an input figure that says nothing about output achieved.

📋 Objective: 5.3 (Performance analysis in not-for-profit organisations and the public sector)

✅ Correct answer: Increase of $6.75

📌 Explanation: The absorption rate is $288,600 / 15,600 hours = $18.50 per hour, so a bench absorbs 1.1 x $18.50 = $20.35. Under ABC the benches take 42 runs x $2,200 = $92,400 and 780 movements x $90 = $70,200, which is $162,600 / 6,000 = $27.10 per bench, an increase of $6.75.

❌ Why the other options are wrong: A decrease of $6.75 reverses the direction, although benches consume a large share of runs and movements relative to their labour hours; a decrease of $9.00 is the change for an office desk ($37.00 to $28.00); a decrease of $4.95 includes only the set-up cost of $15.40 per bench and omits material handling.

📋 Objective: 2.1 (Activity-based costing)

✅ Correct answer: $12.70

📌 Explanation: Target cost = target selling price less required profit = $265 - (22% x $265) = $206.70. The current estimated cost of $219.40 exceeds this by $12.70, so the team must remove $12.70 per desk through value engineering, cheaper materials or fewer components.

❌ Why the other options are wrong: $2.19 treats the 22% as a mark-up on cost ($265 / 1.22 = $217.21) rather than a margin on price; $45.60 is the profit the desk would earn at its current cost, not the gap; $58.30 is the required profit per desk rather than the shortfall in cost.

📋 Objective: 2.2 (Target costing)

✅ Correct answer: $205.50

📌 Explanation: Life-cycle cost includes every cost over the product's life: $412,000 + $268,000 + $186,000 + $54,000 + (16,000 x $148) = $3,288,000. Divided by 16,000 units this gives $205.50 per unit, which the board can compare with the expected selling price.

❌ Why the other options are wrong: $179.75 omits the $412,000 design cost, although design is incurred before production and is part of life-cycle cost; $211.50 adds the $96,000 rental income forgone, but life-cycle costing excludes opportunity costs; $202.13 omits the end-of-life take-back and recycling commitment.

📋 Objective: 2.3 (Life-cycle costing)

✅ Correct answer: 1.14

📌 Explanation: Throughput per bottleneck hour = ($152 - $61) / 0.35 = $260. Total factory cost per bottleneck hour = $1,687,200 / 7,400 = $228. TPAR = $260 / $228 = 1.14, so the desk generates more throughput per CNC hour than the factory costs per hour.

❌ Why the other options are wrong: 0.88 inverts the ratio, dividing factory cost per hour by throughput per hour; 1.90 uses the selling price of $152 instead of throughput after materials; 0.40 compares throughput per unit ($91) with factory cost per hour, without converting throughput to a per-hour figure.

📋 Objective: 2.4 (Throughput accounting)

✅ Correct answer: Internal failure cost

📌 Explanation: Environmental internal failure costs are incurred to remove contaminants and waste that have been produced but not yet released into the environment. The filtration plant removes sawdust and varnish particles after they are created and before the air leaves the factory, so its running cost is an internal failure cost.

❌ Why the other options are wrong: Prevention costs stop contaminants being produced in the first place, for example by changing to low-emission varnish; detection costs check whether activities comply with standards, such as air-quality testing; external failure costs arise after pollution has been released, such as cleaning up a contaminated stream.

📋 Objective: 2.5 (Accounting for environmental and sustainability factors)

✅ Correct answer: $11,040

📌 Explanation: Steel plate is used regularly, so any plate taken from inventory must be replaced. All 3,200 kg are therefore valued at the current replacement cost of $3.45 per kg: 3,200 x $3.45 = $11,040.

❌ Why the other options are wrong: $10,340 values the 2,000 kg in inventory at the historic cost of $3.10, which is sunk; $9,920 values all 3,200 kg at historic cost; $4,140 includes only the 1,200 kg to be bought and treats the inventory as free, although it would have to be replaced for other work.

📋 Objective: 3.1 (Relevant cost analysis)

✅ Correct answer: $1,764

📌 Explanation: Alloy A is not in regular use and will not be replaced, so using it on the order only sacrifices its resale value. The relevant cost is 180 kg x $9.80 = $1,764, the cash the company gives up by not selling that alloy.

❌ Why the other options are wrong: $4,410 uses the current purchase price, which is relevant only when the material would be replaced; $3,960 uses the historic cost of $22.00, a sunk cost; $2,450 values all 250 kg held, although only 180 kg are used and the remaining 70 kg can still be sold.

📋 Objective: 3.1 (Relevant cost analysis)

✅ Correct answer: $8,060

📌 Explanation: Diverting existing welders would cost their pay plus the contribution forgone: $14.00 + $19.00 = $33.00 per hour. Hiring temporary welders at $31.00 per hour is cheaper, so the company would hire them, and the relevant cost is 260 x $31.00 = $8,060.

❌ Why the other options are wrong: $8,580 values the hours at the diversion cost of $33.00, ignoring the cheaper option of temporary welders; $3,640 includes only the welders' pay and ignores the contribution lost on standard frames; $4,940 includes only the contribution forgone and omits the pay that would still be incurred.

📋 Objective: 3.1 (Relevant cost analysis)

✅ Correct answer: $22,733

📌 Explanation: Minimum price = steel $11,040 + alloy A $1,764 + seals $1,470 + skilled labour $8,060 + semi-skilled labour $0 (idle time already paid) + variable overhead 95 x $4.20 = $399, a total of $22,733. Design costs and absorbed fixed overhead are excluded.

❌ Why the other options are wrong: $24,158 adds $1,425 of semi-skilled pay, which is paid anyway under the guaranteed wage; $25,333 adds the $2,600 of design drawings, a sunk cost already incurred; $27,653 adds $4,920 of absorbed fixed overhead, which does not change as a result of the order.

📋 Objective: 3.4 (Pricing decisions)

✅ Correct answer: Exclude it, as total overheads are unchanged

📌 Explanation: For a one-off order only incremental future cash flows are relevant. The fixed overhead is budgeted at $1,248,000 whether or not the order is accepted, so the absorbed amount is not an extra cost of the order and is excluded from the minimum price.

❌ Why the other options are wrong: Including it to cover absorbed overhead confuses cost apportionment with incremental cost; including it only for skilled hours has no basis, as total fixed costs do not change; excluding it because it is sunk gives the wrong reason, since the overhead is a future committed cost, not a past one.

📋 Objective: 3.5 (Make-or-buy and other short-term decisions)

✅ Correct answer: $2,391.50 favourable

📌 Explanation: The 43,000 kg input in the standard mix would be 19,350 kg sardinella, 15,050 kg mackerel and 8,600 kg bonga. Mix variance = (19,350 - 20,150) x $1.84 = $1,472 A, plus (15,050 - 13,020) x $2.60 = $5,278 F, plus (8,600 - 9,830) x $1.15 = $1,414.50 A, a net $2,391.50 favourable.

❌ Why the other options are wrong: $2,391.50 adverse reverses the sign although the blend shifted towards cheaper fish; $1,801.10 favourable is the total usage variance, which also includes the yield effect; $5,278.00 favourable is the mackerel mix variance only and ignores the extra sardinella and bonga used.

📋 Objective: 4.4 (Material mix and yield variances)

✅ Correct answer: $590.40 adverse

📌 Explanation: The actual output of 37,576 kg should have needed 37,576 / 0.88 = 42,700 kg of input, but 43,000 kg were used. Yield variance = (42,700 - 43,000) x $1.968 weighted standard price per kg of input = $590.40 adverse. Equivalently, the 264 kg output shortfall x $2.2364 per kg of output = $590.40 adverse.

❌ Why the other options are wrong: $590.40 favourable reverses the sign although output fell short of standard; $670.91 adverse values the 300 kg input difference at the standard cost per kg of output instead of per kg of input; $519.55 adverse values the 264 kg output shortfall at the input price of $1.968.

📋 Objective: 4.4 (Material mix and yield variances)

✅ Correct answer: $1,801.10 favourable

📌 Explanation: The usage variance is the sum of the mix and yield variances: $2,391.50 F + $590.40 A = $1,801.10 favourable. As a check, standard input for actual output costs 42,700 x $1.968 = $84,033.60, while actual input at standard prices costs $82,232.50, a difference of $1,801.10 favourable.

❌ Why the other options are wrong: $1,801.10 adverse reverses the sign although actual usage cost less than the standard allowance; $2,981.90 favourable adds the yield variance as if it were favourable; $2,981.90 adverse both mis-signs the yield variance and reverses the overall result.

📋 Objective: 4.4 (Material mix and yield variances)

✅ Correct answer: $2.24

📌 Explanation: A standard 100 kg of input costs (45 x $1.84) + (35 x $2.60) + (20 x $1.15) = $196.80 and produces 88 kg of paste. The standard cost per kg of output is $196.80 / 88 = $2.2364, or $2.24 to the nearest cent.

❌ Why the other options are wrong: $1.97 is the weighted standard cost per kg of input, which ignores the 12% loss in processing; $1.73 multiplies the input cost by 0.88 instead of dividing by it; $2.12 uses a simple average of the three fish prices rather than weighting them by the standard mix.

📋 Objective: 4.4 (Material mix and yield variances)

✅ Correct answer: Adverse yield and weaker product quality

📌 Explanation: A favourable mix variance from using cheaper fish is often offset by an adverse yield variance, as May's results show, and a lower share of mackerel may change the taste and texture that caterers expect. The wider cost of lost quality and customer complaints can outweigh the mix saving.

❌ Why the other options are wrong: A favourable yield is not what May shows, as the yield variance was adverse; price variances are not affected by the blend, and all fish was bought at standard prices; the standard cost per kg of output stays the same unless the standard itself is revised.

📋 Objective: 4.4 (Material mix and yield variances)

Relevant cost of making (per year)

Variable costs: ($142.00 + $38.00 + $11.00) = $191.00 per cartridge x 3,600 = $687,600. Labour is included because the casual technicians would not be engaged if the cartridges were bought in.

Specific fixed costs that would be saved: supervisor $41,000 + press lease $36,500 = $77,500 of avoidable fixed costs.

Rent forgone on the workshop, $28,800, is an opportunity cost of making and is added.

The remaining absorbed fixed overhead is unavoidable general site cost and is excluded because it will be incurred whichever option is chosen.

Total relevant cost of making = $687,600 + $77,500 + $28,800 = $793,900.

Cost of buying = $228.00 x 3,600 = $820,800.

Conclusion. Making is cheaper by $820,800 - $793,900 = $26,900 a year, so on financial grounds the company should continue manufacturing the cartridges itself.

📋 Objective: 3.5 (Make-or-buy and other short-term decisions)

Indifference price = $793,900 / 3,600 = $220.53 per cartridge.

Reduction needed = ($228.00 - $220.53) / $228.00 = 3.28% (3.276% unrounded, about 3.3%), which equals the $26,900 saving divided by the $820,800 buy-in cost.

Comment: the manager can use $220.53 as the ceiling when trying to negotiate with the Nairobi manufacturer. Any price below it makes buying cheaper on financial grounds, although the non-financial factors would still need to be weighed.

📋 Objective: 3.5 (Make-or-buy and other short-term decisions)

Reliability of supply. The cartridges would travel by road from Nairobi through Uganda, and border hold-ups have lasted up to ten days. Because a missing cartridge shuts a scrubbing unit and stops gas production, the company would need security of supply, for example by holding buffer inventory or agreeing delivery penalties, which adds cost not shown in part (a).

Quality and safety. The cartridges protect a gas-scrubbing process on a lake platform, so a failed cartridge has safety as well as production consequences. The company would lose direct quality control over manufacture and would need inspection of deliveries and a service level agreement setting the specification and remedies.

Loss of expertise and flexibility. The workshop designed the cartridge and has modified it twice as the lake's gas composition changed. Outsourcing would mean a loss of expertise and in-house know-how, and future modifications would depend on the supplier's willingness and speed. Once the press lease is cancelled, restarting in-house production would be difficult.

Dependence on one supplier. After the three-year contract the manufacturer would have strong bargaining power because the company has no alternative source, and it could raise prices. The company should also consider the effect on the casual technicians and the local community in Rubavu, and on its reputation, if the work moves to Kenya.

📋 Objective: 3.5 (Make-or-buy and other short-term decisions)

Cold Chain, current year: ROI = $2,236,000 / $13,000,000 = 17.2% (about 17%). Imputed interest = 11% x $13,000,000 = $1,430,000, so RI = $2,236,000 - $1,430,000 = $806,000.

Solar Kits, current year: ROI = $684,000 / $4,500,000 = 15.2% (about 15%). Imputed interest = 11% x $4,500,000 = $495,000, so RI = $684,000 - $495,000 = $189,000.

Blast-freezing facility alone: ROI = $436,800 / $3,250,000 = 13.4% (about 13%). Imputed interest = 11% x $3,250,000 = $357,500, so RI = $436,800 - $357,500 = $79,300.

Cold Chain with the facility: profit $2,236,000 + $436,800 = $2,672,800; net assets $13,000,000 + $3,250,000 = $16,250,000. ROI = $2,672,800 / $16,250,000 = 16.4% (about 16%). RI = $2,672,800 - (11% x $16,250,000 = $1,787,500) = $885,300.

📋 Objective: 5.2 (Divisional performance and transfer pricing)

Manager's view under ROI. The facility's ROI of 13.4% is below the division's current 17.2%, so adding it would cut divisional ROI to 16.4%. Because the bonus is lost if ROI falls, the manager is likely to reject the facility.

Group view. The facility earns more than the group's 11% cost of capital and has a positive residual income of $79,300 a year, so it adds value for shareholders; divisional RI would rise from $806,000 to $885,300. The board's wish to proceed is supported by the figures.

Evaluation. Rejection would be a dysfunctional decision: the ROI-based bonus lacks goal congruence, because a division already earning a high ROI turns down projects that beat the cost of capital but dilute its percentage. Measuring the manager on RI, or adding an RI target to the bonus, would align the manager's decision with the group's interest.

📋 Objective: 5.2 (Divisional performance and transfer pricing)

Size of the divisions. RI is an absolute measure (an absolute figure in dollars), so the larger Cold Chain division shows a much higher RI ($806,000) than Solar Kits ($189,000) partly because it has almost three times the capital. RI alone cannot show which division uses its capital better.

Age of assets. Both measures use net book value after depreciation. Cold Chain's assets are on average nine years old and heavily written down, which flatters its ROI, while Solar Kits' newer assets carry a high value and depress its ROI. The 17.2% versus 15.2% comparison is therefore distorted and older assets make a division look better.

Short-termism and different businesses. Both are single-period measures that encourage short-termism, such as delaying replacement of old refrigeration plant. The divisions also face different risks and markets, so a single 11% target may not suit both, and non-financial measures such as customer satisfaction are needed for a fair comparison.

📋 Objective: 5.2 (Divisional performance and transfer pricing)