CIMAPRO19-P02-1 Practice Questions

The learning curve theory, also known as the experience curve, describes the systematic relationship between cumulative output and the time required to produce a unit. An 80% learning curve specifically means that every time the cumulative quantity of production doubles, the cumulative average time per unit will be 80% of the previous cumulative average time. Therefore, the cumulative average time per unit reduces by 20% (100% - 80%) with each doubling of output. This principle applies to the cumulative average time, not the time taken to produce each individual, successive unit.

A. A reduction by 80% would mean the new average time is 20% of the old, which corresponds to a 20% learning curve, not an 80% one.

C. The learning curve model applies to the cumulative average time per unit when output doubles, not the incremental time for each individual unit.

D. This incorrectly applies the 20% reduction to the time for each successive unit, rather than the cumulative average time when total output doubles.

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1. CIMA Official Terminology (2017). The Chartered Institute of Management Accountants. The definition for 'Learning Curve' states: "An 80% learning curve means that as cumulative output doubles

the cumulative average time per unit produced falls to 80% of what it was." This directly implies a 20% reduction. (Section: L

Page 68).

2. Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson Education. In Chapter 10

"Determining How Costs Behave

" the text explains the cumulative average-time learning model: "The cumulative average time per unit declines by a constant percentage each time the cumulative quantity of units produced doubles." An 80% learning curve means the average time drops to 80%

which is a reduction of 20%. (Chapter 10

pp. 363-364).

3. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. Chapter 10

"The learning curve

" clarifies: "A 90 per cent learning curve means that the cumulative average time per unit will be 90 per cent of the previous cumulative average time per unit each time the cumulative output doubles... This represents a 10 per cent reduction in the cumulative average time per unit." This principle directly applies to the 80% curve in the question

indicating a 20% reduction. (Chapter 10

Section 10.2

p. 248).

The company's current absorption costing system uses a single, volume-related cost driver (machine hours). This method inaccurately allocates overheads, especially when products have different complexities. Model B, despite low machine hours, is complex, requiring more production stages and expert customization. These activities generate significant overheads (e.g., setup, quality control, material handling) that are not driven by machine hours. Activity-Based Costing (ABC) would identify these activities and their true cost drivers. It would likely show that a large portion of overheads is unrelated to machine hours, and would reallocate these costs to Model B, revealing its true, and likely lower, profitability.

B. This states a potential consequence of implementing ABC, not the underlying reason why the current costing system is providing misleading information about Model B's profitability.

C. This statement is incorrect. Activity-Based Costing does not share overheads equally; it allocates them based on the consumption of specific activities, which is fundamentally different from an equal share.

1. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. In Chapter 5

"Activity-Based Costing

" it is explained that traditional volume-based costing systems can report distorted costs. "Products that are produced in small batches and are complex in design will consume a high level of resources per unit... A traditional costing system that relies on a single volume-based overhead rate will understate the cost of these products" (p. 114). This directly supports the scenario where Model B's complexity is not captured by machine hours.

2. Kaplan

R. S.

& Cooper

R. (1988). Measure Costs Right: Make the Right Decisions. Harvard Business Review

66(5)

96-103. This foundational article on ABC highlights that as the diversity of products and production processes increases

overhead allocation based on a single driver like machine hours becomes increasingly inaccurate. The article argues that many overheads are related to transactions (like setups or purchase orders) and complexity

not volume

which explains why a complex product like Model B can be mis-costed.

3. CIMA. (2019). CIMA P2 Advanced Management Accounting Official Study Text. Kaplan Publishing. The chapter on Activity-Based Costing states that ABC "recognises that overhead costs are not all related to production and sales volume" and that it "traces overheads to products by identifying the cost drivers that cause the costs to be incurred." This principle directly validates that ABC would show that overheads are driven by more than just machine hours

as stated in option A.

In the context of management accounting and operations, a "steep" learning curve represents a high rate of learning and rapid improvement. When a task is complex and repetitive, a steep curve indicates that after an initial period of familiarization, the time required to complete the task decreases significantly and quickly with each subsequent repetition. The steepness of the curve on a graph (with cumulative units on the x-axis and time per unit on the y-axis) visually depicts this rapid decline in time or cost, signifying that proficiency is gained quickly.

A. This contradicts the fundamental premise of the learning curve effect, where experience and repetition lead to a reduction in task completion time.

C. A long period before any time reduction occurs would be represented by a flat or shallow curve, indicating a very slow learning process.

D. A slow reduction in time taken is characteristic of a shallow learning curve, which is the opposite of a steep curve.

1. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. In Chapter 11

"The learning curve

" the text explains that a higher learning rate (e.g.

an 80% learning curve implies a 20% time reduction for every doubling of output) results in a steeper graphical curve

representing a more rapid reduction in labour time compared to a lower learning rate (e.g.

90%).

2. Wright

T. P. (1936). Factors Affecting the Cost of Airplanes. Journal of the Aeronautical Sciences

3(4)

122-128. https://doi.org/10.2514/8.155. This foundational paper establishes the learning curve model

demonstrating that the time to produce a unit decreases at a constant percentage rate as cumulative production doubles. A higher percentage decrease results in a "steeper" curve and thus a more rapid improvement in efficiency.

3. Jaber

M. Y. (Ed.). (2011). Learning Curves: Theory

Models

and Applications. CRC Press. Chapter 1

"An Introduction to Learning Curves

" clarifies that the slope of the learning curve indicates the rate of learning. A steep slope corresponds to a high learning rate

meaning performance improves quickly as the task is repeated.

The Value for Money (VFM) framework, based on the three Es (Economy, Efficiency, Effectiveness), is a cornerstone of public sector performance measurement. The Balanced Scorecard (BSC) is also widely adapted for this context.

Public satisfaction is a crucial measure of 'Effectiveness' in the VFM framework, as it indicates whether the service is achieving its intended outcomes. Similarly, in a public sector BSC, public satisfaction is a primary metric within the 'Customer' (or 'Citizen/Stakeholder') perspective.

The three Es approach was indeed designed for and is central to public sector auditing and management. The BSC, while originating in the private sector, has proven to be a flexible tool that public sector organizations use to translate their unique strategic objectives into a comprehensive set of performance measures.

A. The Balanced Scorecard's 'Internal Business Process' perspective explicitly measures operational efficiency through metrics like cycle times, resource utilization, and cost per transaction.

B. Both frameworks consider financial and non-financial aspects. The three Es include 'Economy' (cost of inputs) and non-financial measures for 'Efficiency' and 'Effectiveness'.

D. The three Es approach is not solely about cost reduction. 'Effectiveness' is fundamentally concerned with the extent to which the organization's objectives and desired outcomes are achieved.

1. CIMA Official Study Text P2 Advanced Management Accounting (2019). Chapter 3

Section 4

"Not-for-profit organisations

" discusses the application of both the Balanced Scorecard and the Value for Money (three Es) framework in the public sector. It clarifies that effectiveness is about "doing the right thing" (achieving objectives) and that the BSC's customer perspective in the public sector focuses on service users (the public).

2. Kaplan

R. S. (2001). Strategic Performance Measurement and Management in Nonprofit Organizations. Nonprofit Management and Leadership

11(3)

pp. 353-370. This article by the co-creator of the Balanced Scorecard details its adaptation and use in non-profit and government organizations

confirming its applicability beyond the private sector. It highlights how the mission and customer perspectives are modified for this context. DOI: https://doi.org/10.1002/nml.11307

3. National Audit Office (UK). (2018). Framework for Value for Money audit. This official document from a major public sector auditing body defines Value for Money based on Economy

Efficiency

and Effectiveness. Section 1.4 states

"Effectiveness: The extent to which the objectives of a policy

programme or project are achieved." This confirms the framework's focus on achieving objectives

not just cost.

4. LSE Public Policy Group. (2011). Maximising the value of public spending: a review of the VFM approach. This university-affiliated report discusses the VFM framework's origins and application in the UK public sector

establishing it as a purpose-built model for this environment. It also notes the rise of complementary frameworks like the Balanced Scorecard. (See Section 2: "The VFM approach in the UK").

The primary objective of establishing a transfer pricing system is to promote goal congruence. This ensures that the decisions made by divisional managers, who are motivated to maximize their own division's profits, also align with the overall objectives and maximize the profits of the company as a whole. A well-designed system prevents sub-optimal decisions where a division might reject an internal transfer that would have been beneficial for the entire organization. The transfer price should guide managers to make the correct decision from a corporate viewpoint.

B. Increasing market share is a high-level corporate strategy; transfer pricing is an internal accounting mechanism and does not directly influence it.

C. Rewarding managers is an outcome of the performance evaluation system that transfer pricing supports, not the primary objective of setting the price itself.

D. While transfer prices are based on costs which may include overheads, their fundamental purpose is to influence decision-making and evaluate performance, not simply to act as a cost allocation method.

1. Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson Education. In Chapter 22

"Multinational: Transfer Pricing and Tax Considerations

" the text explicitly states that the first and most important criterion for evaluating a transfer price is that it "should promote goal congruence" (p. 816).

2. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. Chapter 19

"Divisional financial performance measures

" outlines the objectives of transfer pricing

stating

"The transfer pricing system should be designed so that it encourages goal congruence" (p. 568). It emphasizes that this prevents sub-optimal decisions that harm overall company profitability.

3. Chartered Institute of Management Accountants (CIMA). (2022). CIMA Official Terminology 2022. The principles underlying the CIMA syllabus (including P2) consistently identify goal congruence

performance measurement

and divisional autonomy as the key objectives of transfer pricing. The system is designed to ensure divisional actions contribute to corporate goals.

When a perfect external market exists for an intermediate product, the ideal transfer price is the market price. This is because the market price represents the opportunity cost for the supplying division (the revenue it forgoes by not selling externally) and the cost the receiving division would incur if it purchased from an external supplier. Setting the transfer price at the market price ensures that divisional performance is measured accurately and that decisions made by divisional managers to maximize their own profit also maximize the profit for the company as a whole, thus achieving goal congruence.

A. Actual variable cost: This ignores the opportunity cost of the external sale for the supplying division, potentially leading it to refuse an internal transfer that is beneficial for the company.

C. Standard variable cost: Like actual variable cost, this method fails to account for the opportunity cost (lost contribution margin from external sales) for the supplying division.

D. Full cost plus: This method can result in a transfer price higher than the market price, leading the receiving division to buy externally, which is a suboptimal decision for the company.

1. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. In Chapter 18

Section 18.5

it is stated: "Where a perfectly competitive market exists for the intermediate product

the optimal transfer price is the market price... Using the market price as the transfer price will induce managers to make correct decisions." (p. 518).

2. Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2017). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson. Chapter 22

"Pricing Decisions and Cost Management

" explains that in a perfectly competitive market for the intermediate product

the market price is the optimal transfer price. The chapter notes

"A market-based transfer price promotes goal congruence in decisions..." (p. 841).

3. CIMA (Chartered Institute of Management Accountants). (2017). CIMA Official Terminology. "Market-based transfer price: A transfer price that is based on the price that would be charged if the product were to be sold to an external customer or purchased from an external supplier." This definition supports its use when an external market exists. (p. 68).

The unit manufacturing margin is $30 ( $50 – $20 ). Delivery adds $3 per unit for A, $4 for B and $6 for C, so unit contribution becomes $27, $26 and $24 respectively.

General overheads ($60 000) are not volume-related; with only three customers they are most reasonably apportioned equally ($20 000 each). Customer B’s very large volume means that the fixed $20 000 charge is spread over far more units than for A or C, so its profit after overheads represents the highest proportion of its sales revenue. Hence Customer B has the highest profit-to-sales (profit : sales) ratio.

A. Unit margins differ (27 vs 24); after equal overhead apportionment B and C cannot have identical profit ratios.

B. Customer A does not have the highest sales revenue, so cannot simultaneously top all three measures.

C. Customer B’s high volume gives it the highest, not the lowest, sales, profit and profit ratio.

1. CIMA Official Learning System – P2 Management Accounting (2019)

Ch. 8 “Customer profitability analysis”

Example on fixed-overhead apportionment and margin %

pp. 229-231.

2. Drury

C. (2018). Management and Cost Accounting

10th ed.

Chapter 21 “Activity-based cost management”

pp. 754-759 (effect of fixed cost allocation on customer margins).

3. Horngren

C. T. et al. (2021). Cost Accounting: A Managerial Emphasis

16th ed.

Section 14.3

pp. 566-568 (customer profitability and profit-to-sales measures).

Direct Product Profitability (DPP) is a management accounting technique used, particularly in the retail sector, to calculate the profitability of individual products by tracing all attributable direct costs to them. This goes beyond the simple gross margin calculation. The detailed cost analysis enables better decision-making. By identifying the true costs of warehousing and handling for each product, DPP directly facilitates improved management of storage space (A). This information also strengthens the company's position when negotiating with suppliers on terms, delivery methods, and packaging, thus improving relationships (B). Furthermore, by providing a more accurate picture of a product's net profitability, DPP allows for more informed and strategic pricing decisions (C).

D. DPP requires non product-specific costs to be apportioned rather than allocated.

This is incorrect. DPP specifically focuses on direct product costs and excludes non-product-specific overheads to avoid the arbitrary apportionments that can distort profitability analysis.

E. DPP provides summary information on the profitability of each customer group.

This is incorrect. DPP analyses the profitability of products. The technique for analysing the profitability of customer groups is Customer Profitability Analysis (CPA).

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1. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.

In support of A

B

C: Chapter 12

Section 12.6

"Direct product profitability

" explains that DPP assigns direct product costs such as warehousing

storage

and transportation to specific products. The text notes that this information is used for decisions on product assortment

space allocation

promotion

and pricing. It also highlights its use in negotiating with suppliers. (pp. 300-302).

In support of D: The same section clarifies that DPP focuses on tracing direct costs and does not include the apportionment of general

non-product-specific overheads. The goal is to measure the contribution a product makes towards these common overheads. (p. 301).

In support of E: Chapter 12

Section 12.5

"Customer profitability analysis

" explicitly distinguishes CPA from DPP

stating that CPA "reports the profitability of selling to particular customers or groups of customers

" whereas DPP focuses on products. (p. 298).

2. Bhimani

A.

Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2019). Management and Cost Accounting (7th ed.). Pearson Education.

In support of A

B

C: Chapter 14

"Cost Allocation

Customer-Profitability Analysis

and Sales-Variance Analysis

" discusses how activity-based costing principles

which underpin DPP

can be used to trace costs like distribution and warehousing to products. This detailed cost information improves decisions related to pricing

product mix

and supplier management. (pp. 520-524).

The target cost gap is the difference between the forecast cost and the target cost.

1. Calculate Total Required Profit: The required return on the $500,000 investment is 12%, which equals $60,000 ($500,000 0.12).

2. Calculate Required Profit per Unit: This total profit is spread across the forecast sales volume of 500 units, resulting in a required profit of $120 per unit ($60,000 / 500).

3. Calculate Target Cost per Unit: The target cost is the selling price minus the required profit per unit: $300 - $120 = $180.

4. Calculate Target Cost Gap: The gap is the forecast unit cost minus the target cost: $210 - $180 = $30.

1. Chartered Institute of Management Accountants (CIMA). (2019). P2 Advanced Management Accounting Syllabus. Section C1(c): Target Costing. The syllabus outlines the requirement to "calculate a target cost in manufacturing and service industries" and "identify a cost gap

" which involves these specific calculations.

2. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. Chapter 20

Section: "Deriving a target cost

" explains the formula: Target Cost = Competitive Market Price – Desired Profit. The text further explains that the cost gap is the difference between the estimated current cost and the target cost.

3. Kaplan

R. S.

& Atkinson

A. A. (1998). Advanced Management Accounting (3rd ed.). Prentice Hall. Chapter 6

"Target Costing and Kaizen Costing

" details the process of setting a target cost based on market price and required profit margin

and subsequently identifying the cost gap for reduction efforts. (pp. 245-249).

The Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of a project's cash flows equals zero. For this project, the initial investment of $30.328 million must equal the present value of the 5-year annuity of $8 million. The present value annuity factor is calculated as the initial investment divided by the annual cash inflow: $30.328m / $8m = 3.791. By referencing present value annuity tables or using a financial calculator, a 5-year annuity factor of 3.791 for a 5-year period corresponds to a discount rate of 10%. Therefore, the project's IRR is 10%.

1. Brealey

R. A.

Myers

S. C.

& Allen

F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education. In Chapter 5

Section 5-2

"The Internal Rate of Return

" the IRR is defined as "the rate of discount that makes NPV = 0." The methodology of equating the initial investment to the present value of an annuity is demonstrated.

2. Massachusetts Institute of Technology. (2003). 15.402 Finance Theory II

Spring 2003. MIT OpenCourseWare. In Lecture Notes

"Lecture 2: Capital Budgeting

" page 3

the IRR is defined as the discount rate

y

that solves: NPV = Σ [CFt / (1 + y)^t] = 0. This supports the principle of finding the rate that equates the present value of inflows to the initial cost.

3. Ross

S. A.

Westerfield

R. W.

& Jaffe

J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education. Chapter 5

"Net Present Value and Other Investment Rules

" details the calculation of IRR through trial and error or by solving for the rate (r) in the present value of an annuity formula

which is the method applied here.