CIMA BA2 · Chapter 1
The context of management accounting MCQs with Answers
12 multiple-choice questions on The context of management accounting for CIMA BA2 Fundamentals of Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following statements correctly distinguishes management accounting from financial accounting?
- A) Management accounting information must be prepared in accordance with IFRS Standards
- B) Management accounting is concerned only with historical results, whereas financial accounting is forward-looking
- C) Management accounting reports are published annually for shareholders and lenders
- D) Management accounting information is prepared mainly for internal users and has no legally prescribed format
Show answer & explanation
Answer: D) Management accounting information is prepared mainly for internal users and has no legally prescribed format
Management accounting serves managers inside the organisation, so its content, format and frequency are chosen to suit their needs and are not set by law or accounting standards. Financial accounting produces general purpose statements for external users and must comply with company law and IFRS Standards. Management accounting is often forward-looking (budgets, forecasts), not purely historical.
Question 2
What is generally regarded as the overall purpose of management accounting within an organisation?
- A) To provide information and analysis that helps managers create, protect and increase value for the organisation's stakeholders
- B) To produce the statutory financial statements required by company law
- C) To calculate the tax liability of the organisation each year
- D) To provide independent assurance to shareholders that the accounts are free from material misstatement
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Answer: A) To provide information and analysis that helps managers create, protect and increase value for the organisation's stakeholders
Management accounting exists to support management decisions so that the organisation creates and preserves value for its stakeholders. Statutory financial statements and tax computations are financial accounting and tax functions, and independent assurance is the role of the external auditor.
Question 3
Which of the following decisions is an example of OPERATIONAL planning and control?
- A) Deciding whether to enter a new overseas market over the next five years
- B) Deciding which machine operators will work on next Tuesday's night shift
- C) Deciding the organisation's mission and long-term objectives
- D) Deciding how to allocate next year's divisional resources between product ranges
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Answer: B) Deciding which machine operators will work on next Tuesday's night shift
Operational decisions are short-term, routine and detailed, such as day-to-day scheduling of staff. Entering new markets and setting objectives are strategic decisions, while allocating a year's resources between product ranges is a tactical (management control) decision.
Question 4
A manager is considering commissioning a detailed market survey. The survey would cost $18,000 and is expected to improve a pricing decision so that profit rises by about $12,000. Which of the following is the most appropriate conclusion?
- A) The survey should be commissioned because more information always leads to better decisions
- B) The survey should not be commissioned because the cost of the information exceeds the value it is expected to provide
- C) The survey should be commissioned because information that is more accurate is always worth its cost
- D) The decision cannot be assessed because the value of information can never be estimated
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Answer: B) The survey should not be commissioned because the cost of the information exceeds the value it is expected to provide
A key quality of good information is that its value should exceed the cost of obtaining it. Here the expected benefit of $12,000 is less than the cost of $18,000, so the survey would reduce value by $6,000. More or more accurate information is not automatically worthwhile.
Question 5
Which of the following best describes the main focus of cost accounting?
- A) Preparing the statement of cash flows for external reporting
- B) Establishing the cost of products, services and activities for purposes such as inventory valuation, pricing and cost control
- C) Raising long-term finance at the lowest possible cost
- D) Auditing the accounting records to detect fraud
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Answer: B) Establishing the cost of products, services and activities for purposes such as inventory valuation, pricing and cost control
Cost accounting gathers, classifies and analyses costs so that the cost of cost units and activities can be determined. This supports inventory valuation, pricing decisions and cost control. It is one part of the wider management accounting function.
Question 6
The Global Management Accounting Principles set out four principles for effective management accounting. Which of the following is NOT one of those principles?
- A) Communication provides insight that is influential
- B) Compliance ensures that management reports follow a statutory format
- C) Information is relevant
- D) Stewardship builds trust
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Answer: B) Compliance ensures that management reports follow a statutory format
The four principles are: communication provides insight that is influential; information is relevant; impact on value is analysed; and stewardship builds trust. Management accounting reports have no statutory format, so compliance with a prescribed format is not one of the principles.
Question 7
The manager of a division is responsible for its revenues, its costs and decisions about the non-current assets it uses. What type of responsibility centre is the division?
- A) Cost centre
- B) Revenue centre
- C) Investment centre
- D) Profit centre
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Answer: C) Investment centre
An investment centre manager controls revenues and costs and also has authority over capital investment in the centre's assets. A profit centre manager controls revenues and costs but not investment, a cost centre manager controls only costs, and a revenue centre manager is accountable only for revenues.
Question 8
In a management accounting system, what is meant by a 'cost object'?
- A) A location in which costs are first collected before being charged to products
- B) An item of expenditure that cannot be traced to a product
- C) Anything for which a separate measurement of cost is required, such as a product, service, customer or department
- D) The total cost of all resources consumed in a period
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Answer: C) Anything for which a separate measurement of cost is required, such as a product, service, customer or department
A cost object is any item for which costs are separately measured, for example a product, a job, a customer, a distribution channel or a department. A location where costs are collected is a cost centre, and expenditure that cannot be traced to a product is an indirect cost.
Question 9
Which of the following describes a FEEDFORWARD control system?
- A) Managers compare forecast results with the plan and take action before deviations occur
- B) Managers compare actual results with the budget and investigate differences after the period
- C) Actual results are compared with results for the same period last year
- D) Managers act only when actual results differ from budget by more than an agreed tolerance
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Answer: A) Managers compare forecast results with the plan and take action before deviations occur
Feedforward control uses forecasts of what will happen if nothing changes, compares them with the plan and triggers corrective action in advance. Comparing actual results with the budget after the event is feedback control. Acting only on significant differences describes management by exception.
Question 10
A call centre wishes to monitor the quality of its service. Which of the following is a NON-FINANCIAL performance measure that would be useful for this purpose?
- A) Cost per call handled
- B) Average time taken to answer a customer call
- C) Revenue per employee
- D) Gross profit margin
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Answer: B) Average time taken to answer a customer call
The average time to answer a call is measured in units of time, not money, and directly reflects service quality. Cost per call, revenue per employee and gross margin are financial measures.
Question 11
A haulage company charges customers according to both the weight carried and the distance travelled. Which of the following is the most suitable COMPOSITE cost unit for this business?
- A) Vehicle
- B) Delivery driver
- C) Tonne-kilometre
- D) Litre of fuel
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Answer: C) Tonne-kilometre
A composite cost unit combines two measures of activity. Since the work done depends on both the weight carried and the distance travelled, cost per tonne-kilometre is the most meaningful unit. A vehicle or driver is a cost centre or resource, and fuel is an input cost.
Question 12
Which of the following is a typical characteristic of the information used for STRATEGIC planning?
- A) It is largely external, forward-looking and covers long time horizons with considerable uncertainty
- B) It is highly detailed, internal and produced daily
- C) It is precise, historical and relates to individual transactions
- D) It is restricted to the cost of individual products
Show answer & explanation
Answer: A) It is largely external, forward-looking and covers long time horizons with considerable uncertainty
Strategic decisions concern the long-term direction of the whole organisation, so the information supporting them is broad, summarised, often external (markets, competitors, the economy), forward-looking and uncertain. Detailed, frequent internal data is typical of operational information.