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Advanced Management Accounting Questions 118–122 (page: 10)

Which of the following would change if the cost of capital of a proposed project was increased?

A company currently absorbs production overheads based on labor hours. The overheads absorbed by the two products that are made, L and M, are $4 per unit and $10 per unit respectively. These were based on the budgeted overheads of $7,000 and budgeted labor hours of 1,750. The budgeted output was 500 units of each product.

The company is investigating the use of activity based costing (ABC). Analysis has shown that the total production overheads of $7,000 are made up of $4,000 for set up costs and $3,000 for inspection costs. The cost driver for set up costs is the number of set ups and for inspection costs it is the number of inspections.

The cost driver rate for set ups is $160 per set up. Product L would need 5 production runs. Both types of product would need 1 set up for each production run.

Product L would need 2 inspections for each production run. Product M would need 1 inspection per production run.

The products are made in the same department and use the same equipment and staff but they are produced separately.

Which of the following statements are correct?

Select ALL that apply.

A company is considering four mutually exclusive projects. There are three possible future demand conditions but the company has no idea of the probability of each of these demand conditions occurring. The forecast net present values (NPVs) of each of the four projects, under each of the three possible future demand conditions, are as follows.



Using the maximax criterion, which investment should be selected?

A senior manager is concerned about the dysfunctional consequences of a company's current approach to budget preparation. The senior manager has discovered that budget holders are carrying budgetary slack forward from one period to the next without this being identified or challenged.

Which of the following approaches to budget preparation is the company using?

A company has just launched a new product at a selling price that is designed to rapidly gain market share and to discourage other competitors from entering the market.

Which pricing strategy is the company using?