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ACCA PM: Performance Management Practice Questions
45 original practice questions for ACCA Performance Management (PM), written for this site with full explanations. They are original questions in the style of the syllabus - not taken from any official exam. Use them to test coverage, then confirm details against ACCA's official materials.
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Activity-based costing (ABC) assigns overhead costs to products primarily on the basis of:
Correct answer: C. ABC groups overheads into activity cost pools and charges them to products using the driver that causes each pool's cost, such as number of set-ups for set-up costs. A single labour-hour basis is the traditional absorption approach ABC is designed to improve on, equal sharing ignores consumption of activities entirely, and selling price reflects the market rather than the resources a product consumes. -
Compared with traditional absorption costing, ABC is most likely to change reported product costs significantly where:
Correct answer: B. ABC reveals cross-subsidies when substantial overheads are driven by transactions such as set-ups, orders and inspections, and products consume those activities in very different proportions, so low-volume complex products typically gain cost. With negligible overheads or identical products there is little to reallocate, a single product bears all costs however they are attributed, and if overheads truly vary with machine hours a volume basis already charges them accurately. -
In activity-based costing, a cost driver is best defined as:
Correct answer: D. A cost driver is the causal factor behind an activity's cost, for example the number of purchase orders driving ordering costs, and dividing pool cost by driver volume gives the rate charged to products. A manager is a person rather than a causal factor, untraceable fixed cost describes a limitation rather than a driver, and the pool total is the amount being attributed, not the basis of attribution. -
In target costing, the target cost of a new product is calculated as:
Correct answer: A. Target costing starts from what the market will pay, deducts the profit the business requires, and treats the remainder as the cost ceiling the product must be designed to meet. Cost-plus pricing works in exactly the opposite direction, a competitor's internal cost is neither knowable with precision nor the basis of the technique, and dividing fixed costs by volume gives a fixed cost per unit rather than a target cost. -
A company finds that the estimated cost of a planned product exceeds its target cost. Which response is most consistent with target costing?
Correct answer: C. The cost gap is closed on the cost side, ideally at the design stage where most cost is committed, by value engineering features, materials, and processes while protecting what customers value. Raising the price contradicts the market-driven starting point, passively accepting a lower margin defeats the discipline of the technique, and reclassifying costs changes presentation rather than the underlying economics. -
The main argument for life-cycle costing is that:
Correct answer: D. Life-cycle costing accumulates costs from research and design through launch, maturity, decline and decommissioning, because early design decisions lock in most of the total cost and single-period reporting hides this. Restricting attention to manufacturing ignores development and after-sales costs, marketing and design costs are part of the very total being managed, and annual cycles cut across a product's life rather than capturing it. -
In throughput accounting, throughput is defined as:
Correct answer: B. Throughput accounting treats only direct material as truly variable in the short term, so throughput equals sales revenue less direct material cost, and labour plus overheads are lumped together as fixed operating expenses. Deducting all production costs gives profit rather than throughput, contribution less fixed overheads is a marginal costing calculation, and units per hour is a physical rate rather than the financial measure. -
According to the theory of constraints, management seeking to increase total output should focus first on:
Correct answer: A. System output can never exceed the capacity of the binding constraint, so an hour lost at the bottleneck is an hour of throughput lost for the whole plant, and improvement effort belongs there first. The cheapest machine is rarely the constraint, accelerating non-bottlenecks merely piles up work in progress in front of the constraint, and cutting price addresses demand rather than the production limit. -
The throughput accounting ratio (TPAR) is calculated and interpreted as:
Correct answer: C. TPAR compares the return generated per hour of bottleneck time with the operating cost per hour of running the factory, so a ratio above one means the product covers factory costs and adds profit, and it can be raised by increasing throughput per bottleneck hour or trimming operating expenses. The first option inverts the ratio and its interpretation, the second is not the definition and its ceiling claim is baseless, and sales over material cost ignores time on the constraint, which is the heart of the measure. -
When production is restricted by a bottleneck resource, throughput accounting ranks competing products by:
Correct answer: A. Because bottleneck time is the scarce resource, products are ranked by the throughput each generates per hour on the constraint, which maximises total throughput for the time available. Contribution per unit ignores both the time each product takes on the bottleneck and the treatment of labour as fixed, margin percentage ignores volume and time entirely, and total sales value says nothing about how efficiently each product uses the constraint. -
Contribution per unit is defined as:
Correct answer: D. Contribution is what each unit contributes towards covering fixed costs and then generating profit, so it is selling price less variable cost per unit. Deducting total cost gives profit per unit, deducting fixed cost per unit mixes in a figure that depends on an arbitrary volume assumption, and profit after tax divided by units is an average profit rather than contribution. -
The breakeven point in units is calculated as:
Correct answer: B. At breakeven, cumulative contribution exactly covers fixed costs, so the required volume is fixed costs divided by the contribution each unit provides. Dividing total costs or fixed costs by selling price ignores the variable cost embedded in each sale, and contribution divided by fixed costs produces a ratio rather than a volume of units. -
The margin of safety measures:
Correct answer: C. Margin of safety is the gap between budgeted or actual sales and breakeven sales, expressed in units, revenue or as a percentage of budgeted sales, and it signals how much demand can slip before losses start. Profit at breakeven is by definition nil, maximum market demand is a forecasting concept, and buffer inventory belongs to stock control rather than cost-volume-profit analysis. -
A multi-product breakeven calculation based on a weighted average contribution-to-sales ratio is valid only if:
Correct answer: A. The weighted average ratio is a blend of the individual products' ratios in the assumed mix, so the breakeven revenue it produces holds only while that mix holds, and any shift towards lower-margin products raises the true breakeven point. Identical prices are unnecessary because the ratio already standardises for price, fixed costs are assumed constant rather than proportional to output, and zero variable costs are neither required nor realistic. -
A company paid for market research last month and is now deciding whether to launch the product. For the launch decision, the research expenditure is:
Correct answer: B. Relevant costs are future incremental cash flows caused by the decision; the research money is already spent and no current choice can recover it, so it is sunk and should be ignored. It is not relevant precisely because it cannot change, it is not an opportunity cost because no alternative benefit is being sacrificed by launching, and it is neither future nor avoidable. -
For a one-off contract, the relevant cost of raw material that is held in inventory and is in regular use by the business is:
Correct answer: D. Using regularly needed material on the contract triggers a replacement purchase, so the cash consequence of acceptance is the current replacement cost. Zero would only apply to material with no use and no resale value, historic price is a sunk figure irrelevant to future cash flows, and scrap value matters only when the material is surplus and would otherwise be sold rather than replaced. -
Skilled workers are fully occupied on existing products that earn contribution, and no extra workers can be hired. The relevant cost of diverting this labour to a special contract is:
Correct answer: C. At full capacity, taking the contract sacrifices the contribution of the displaced work, so the relevant cost is the labour cost charged to the contract plus that lost contribution, the standard variable cost plus opportunity cost measure. Zero and wage-only answers ignore the opportunity cost of the displaced output, while excluding wages understates the total sacrifice because the lost contribution is conventionally measured after deducting labour cost. -
When a single production resource is scarce, short-term profit is maximised by ranking products according to:
Correct answer: B. The scarce resource is what limits profit, so each unit of it should be devoted to the product earning the most contribution per unit of that resource, for example per machine hour or per kilogram of material. Contribution per unit of product ignores how much of the constraint each product consumes, and neither selling price nor low production cost measures the profitability of using the constrained resource. -
The shadow price of a scarce resource is best described as:
Correct answer: D. In limiting factor and linear programming analysis, the shadow price is the increase in total contribution from relaxing a binding constraint by one unit, which caps the extra amount worth paying above the resource's normal cost. The market price and historic cost describe what the resource costs rather than what an extra unit is worth, apportioned overhead is an accounting allocation with no decision content, and a non-binding constraint has a shadow price of nil. -
In a make-or-buy decision where the company has spare capacity and no alternative use for it, a component should be bought externally if:
Correct answer: A. The financial comparison is between the external price and the costs that would actually disappear if internal production stopped, typically variable costs plus any directly attributable fixed costs. Comparing against full absorbed cost misleads because apportioned overheads continue regardless, supplier size is a qualitative consideration rather than a decision rule, and an internal variable cost below the external price is the classic case for continuing to make, not for buying. -
Market skimming, charging a high price at launch, is most appropriate when:
Correct answer: C. Skimming exploits the price-insensitive early segment of a genuinely novel product, harvesting high margins while competition is absent and recouping research spending, with the price lowered in stages later. Price-sensitive demand with easy entry and a share-maximising objective are the classic conditions for penetration pricing instead, and a commodity with abundant substitutes gives no basis for a premium at all. -
Zero-based budgeting requires managers to:
Correct answer: B. Zero-based budgeting builds each budget from a zero base, forcing every activity to be justified and ranked in decision packages before funds are allocated, which challenges historic spending but costs substantial management time and suits discretionary and support costs best. Adding inflation to last year and repeating last year's level are forms of incremental budgeting, and the technique applies to operating expenditure, not merely capital projects. -
The main criticism of incremental budgeting is that it:
Correct answer: D. Because incremental budgets start from last period's figures and adjust at the margin, any waste or padding embedded in the base is perpetuated year after year. Its actual strengths are that it is quick and cheap, so excessive time demands are the criticism of zero-based budgeting instead, it is well suited to stable businesses rather than unusable in them, and building on the prior budget is the opposite of ignoring it. -
A rolling (continuous) budget is one that is:
Correct answer: C. A rolling budget always extends a fixed distance ahead because a fresh period is added, and the rest re-examined, as each period drops away, keeping plans realistic in fast-changing conditions at the price of more frequent budgeting effort. A once-a-year static document is a fixed periodic budget, the technique concerns continuous updating rather than long horizons, and it covers revenues and costs generally, not just cash. -
Before actual costs are compared with budget for control purposes, the budget should be flexed to:
Correct answer: A. A flexed budget restates budgeted revenue and variable costs at the actual volume achieved, so that remaining differences reflect prices and efficiency rather than the volume change itself. Comparing against the original fixed budget confuses volume effects with control performance, and next year's or theoretical maximum volumes have no bearing on evaluating what this period's costs should have been. -
A common risk of allowing managers to set their own budget targets (participative budgeting) is that they may:
Correct answer: B. Participation improves motivation and taps local knowledge, but self-interested managers may pad cost estimates or hold down revenue forecasts so their targets are comfortably achievable, which is budgetary slack and distorts both planning and evaluation. Managers rarely volunteer impossible targets for themselves, refusal to participate is not the characteristic risk, and local knowledge is exactly what participation brings in rather than removes. -
Feedforward control differs from feedback control in that feedforward control:
Correct answer: A. Feedforward control is anticipatory: an updated forecast, such as a revised cash projection, is set against the plan so that corrective action can be taken before the shortfall materialises. Comparing actuals with budget after the event is feedback control, both forms of control depend on targets to compare against, and either can be applied to financial and non-financial measures alike. -
The controllability principle in responsibility accounting states that managers should:
Correct answer: B. Responsibility accounting matches accountability to influence, so a manager's performance report should focus on items the manager can control or significantly affect, which is why apportioned head office costs distort divisional evaluation. Charging managers with company-wide costs breaks that link, abandoning cost targets altogether removes control rather than refining it, and cross-approving other departments' budgets has nothing to do with the principle. -
Advocates of moving beyond traditional annual budgeting argue mainly that annual budgets:
Correct answer: C. The beyond budgeting critique is that a fixed annual contract of numbers ages rapidly, invites slack-building and end-of-year spending games, and ties managers to a plan when markets demand adaptation, with rolling forecasts and relative targets proposed instead. The complaint is rigidity rather than excessive flexibility, the proposed remedies actually use more external and relative benchmarking, and no listing rule forbids budgets. -
Which of the following is the most plausible cause of an adverse direct material usage variance?
Correct answer: A. The usage variance compares actual material consumed with the standard quantity for the actual output, so extra waste, poor-quality input or careless working drives it adverse. A price fall affects the price variance rather than usage, output volume by itself does not create a usage variance because the standard flexes to actual production, and wage rates belong to the labour rate variance. -
A favourable material price variance combined with an adverse material usage variance most plausibly indicates that:
Correct answer: D. The classic interdependence explanation is a buying decision: cheaper material beats the standard price, creating the favourable price variance, but its lower quality wastes input and drives usage adverse, so the two variances share one cause and should be judged together. Overtime affects labour variances, a deliberately loose standard price would not explain the adverse usage, and exceeding budgeted volume does not itself produce a usage variance because usage is measured against actual output. -
The main purpose of splitting a total variance into planning and operational elements is to:
Correct answer: B. Where the original standard proves unrealistic, for example after an unforeseen market-wide price change, the planning variance quantifies the standard-setting error against a revised standard, and operational variances then measure managers against that realistic benchmark. The split reclassifies rather than enlarges the total, adverse operational variances can and should still appear, and the whole technique depends on revising the standard rather than avoiding revision. -
A materials mix variance measures the effect on cost of:
Correct answer: A. Where materials are substitutable, the mix variance isolates the cost effect of blending the actual total input in non-standard proportions, holding prices at standard, while the related yield variance captures whether that total input produced the expected output. Price differences are the price variance, output volume against budget is a volume matter rather than mix, and mid-period changes to the standard are a standard-setting issue, not a mix effect. -
An adverse materials yield variance indicates that:
Correct answer: C. Yield compares the output actually obtained with the output the standard says the total input should have produced, so an adverse result means the process converted input into output less efficiently than standard, through spillage, waste or process problems. The cost of the blend is the mix variance, purchase prices drive the price variance, and sales shortfalls belong to sales variances rather than production yield. -
The sales volume variance is usefully subdivided into mix and quantity variances when:
Correct answer: D. The subdivision reveals how much of the volume effect came from selling a richer or poorer mix and how much from selling more or fewer units overall, which is only informative when products carry different margins. With a single product there is no mix to analyse, with identical margins a mix shift has no profit effect so the mix variance is nil, and the level of fixed costs is irrelevant to whether the split is meaningful. -
A fixed production overhead volume variance arises:
Correct answer: C. Absorption costing charges fixed overhead to output at a predetermined rate per unit or hour, so producing more or less than budget absorbs more or less overhead than budgeted, creating the volume variance. Marginal costing writes fixed overhead off as a period cost and therefore reports no volume variance, spending differences are the expenditure variance instead, and genuinely variable behaviour would remove the fixed classification altogether. -
Routinely setting an ideal standard, assuming perfect efficiency with no waste or downtime, is most likely to:
Correct answer: D. Ideal standards assume flawless operation, so actual results fall short almost by definition, the reports fill with adverse variances that carry little information, and employees stop responding to targets they can never hit; attainable standards preserve motivation better. Favourable variances become nearly impossible rather than guaranteed, variances swell rather than disappear, and currently attainable conditions describe a different, more realistic type of standard. -
Divisional return on investment (ROI) is normally calculated as:
Correct answer: A. ROI relates the profit a division generates, ideally controllable operating profit, to the capital invested in it, giving a percentage comparable across divisions and against a target. Sales over profit inverts a margin measure, contribution over fixed costs is a breakeven-style ratio, and cash flow over revenue is a cash margin, none of which measures return on invested capital. -
A division currently earns a very high ROI. If the manager is appraised on ROI alone, the manager may dysfunctionally reject a proposed project that:
Correct answer: B. Any project returning less than the current average drags the division's ROI down, so the manager is tempted to refuse it even when its return exceeds the cost of capital and would add value for the group, a classic goal congruence failure that residual income avoids. Rejecting projects below the cost of capital or with negative net present value is correct behaviour rather than dysfunctional, and a fall in sales alone is not the issue the ROI critique addresses. -
Residual income (RI) is calculated as:
Correct answer: C. RI charges the division notionally for the capital it uses, deducting capital employed multiplied by the required rate of return from divisional profit, so any project earning above that rate raises RI and managers are steered towards value-adding decisions. Profit over capital employed is ROI, revenue less variable costs is contribution, and cash flow less depreciation is neither measure; RI's own weakness is that, as an absolute figure, it favours large divisions in comparisons. -
The four perspectives of the balanced scorecard are:
Correct answer: D. The balanced scorecard supplements financial results with the customer perspective, the internal processes the business must excel at, and the innovation and learning that sustain future performance, linking each to objectives and measures. Profitability, liquidity and gearing are traditional ratio categories, the economy-efficiency-effectiveness set is the value-for-money framework for public and not-for-profit bodies, and product-price-promotion-place is the marketing mix. -
Value for money in a not-for-profit organisation is usually assessed through:
Correct answer: B. Because profit is not the objective, performance is judged by the three Es: buying resources at the right cost, maximising output from those resources, and actually achieving the organisation's stated goals. Not-for-profit bodies typically have no listed shares, pay no dividends, and are not primarily competing for market share, so the other measures are either unavailable or beside the point. -
The economically sensible minimum transfer price from the selling division's perspective is:
Correct answer: A. The seller must recover the incremental cost of the units transferred plus whatever contribution it sacrifices elsewhere, so with spare capacity the minimum falls to marginal cost, and at full capacity it rises to marginal cost plus the contribution lost on displaced external sales, which typically equals market price. Full cost plus mark-up can block transfers the group would gain from, market price is only the ceiling or the special case at full capacity in a perfect market, and a zero price would make the seller subsidise transfers below its own incremental cost. -
Where the selling division has spare capacity with no alternative use, a transfer price set just above marginal cost:
Correct answer: D. Spare capacity means transfers sacrifice nothing, so any price at or above marginal cost keeps the seller whole, and a small margin above it gives both divisions an incentive while the group gains whenever the buyer's final product covers the incremental cost. Fixed costs are incurred regardless of the transfer so their non-recovery per unit does not harm the group, no rule forces market price, and the buying division benefits from, rather than should refuse, a low internal price. -
Setting a transfer price based on the selling division's actual cost, rather than standard cost, is criticised mainly because it:
Correct answer: B. If actual costs are simply recharged, every cost overrun by the seller flows through to the buyer, so the seller faces no pressure to work efficiently, whereas a standard cost basis leaves efficiency gains and losses with the division that causes them. Actual cost is if anything easier to observe than to justify, transfer prices reallocate profit between divisions without changing the group total, and cost-based pricing is typically used precisely because no perfect external market exists.
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