QUESTION: 61

Total cost of ownership of a solar panel is $5,000 and it is expected that the panel will make a sav-ing of $1,000 each year. So it would take 5 years for the benefits to repay the investment. Therefore, the firm plans to keep the solar panel for at least 5 years. Is payback period calculation right for making the business decision?

Yes, because it takes everything into account
No, because payback period can be only used to calculate the depreciation of a fixed asset
No, because payback period doesn't take into account price fluctuations
Yes, because payback period shows how long the firm recovers the investment

Answer(s): D

Explanation:

There are many factors that need to be considered when making a business decision. Costs and benefits are among those factor. To estimate the length of time in which an investment reaches a break-even point, businesses often use the payback period. The payback period refers to the amount of time it takes to recover the cost of an investment.

'Yes, because it takes everything into account': It ignores the time value of money (TVM), unlike other methods of capital budgeting such as net present value (NPV), internal rate of return (IRR), and discounted cash flow.
'No, because payback period doesn't take into account price fluctuations': Though it doesn't take into account price fluctuation, payback period is still useful in financial and capital budgeting. 'No, because payback period can be only used to calculate the depreciation of a fixed asset': Payback period only calculates the length of time in which the benefits of a charge repay its costs.
LO 1, AC 1.3

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QUESTION: 62

Which of the following can cause overhead variance? Select 2 that apply:

Rising production worker's wage rate per hour
Decrease in production volume
Spike in material price
Decreasing packaging costs
Spike in monthly leasing fee

Answer(s): B,E

Explanation:

Overhead variances arise when the actual overhead costs incurred differ from the expected amounts. Managers want to understand the reasons for these differences, and so should consider computing one or more of the overhead variances described below. Each of these variances applies to a different aspect of overhead expenditures. It is not necessary to calculate these variances when a manager cannot influence their outcome.
Fixed Overhead Spending Variance
The fixed overhead spending variance is the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense. An unfavorable variance means that actual fixed overhead expenses were greater than anticipated. The formula for this variance is:
Actual fixed overhead - Budgeted fixed overhead = Fixed overhead spending variance The amount of expense related to fixed overhead should (as the name implies) be relatively fixed, and so the fixed overhead spending variance should not theoretically vary much from the budget.
Fixed Overhead Volume Variance
The fixed overhead volume variance is the difference between the amount of fixed overhead actually applied to produced goods based on production volume, and the amount that was budgeted to be applied to produced goods. For example, a company budgets for the allocation of $25,000 of fixed overhead costs to produced goods at the rate of $50 per unit produced, with the expectation that 500 units will be produced. However, the actual number of units produced is 600, so a total of $30,000 of fixed overhead costs are allocated. This creates a fixed overhead volume variance of $5,000.
Variable Overhead Efficiency Variance
The variable overhead efficiency variance is the difference between the actual and budgeted hours worked, which are then applied to the standard variable overhead rate per hour. The formula is:
Standard overhead rate x (Actual hours - Standard hours) = Variable overhead efficiency variance
A favorable variance means that the actual hours worked were less than the budgeted hours, resulting in the application of the standard overhead rate across fewer hours, resulting in less expense being incurred. However, a favorable variance does not necessarily mean that a company has incurred less actual overhead, it simply means that there was an improvement in the allocation base what was used to apply overhead.
Variable Overhead Spending Variance
The variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. The variance is used to focus attention on those overhead costs that vary from expectations. The formula is:
Actual hours worked x (Actual overhead rate - standard overhead rate) = Variable overhead spending variance
A favorable variance means that the actual variable overhead expenses incurred per labor hour were less than expected.
In the study guide, CIPS splits overhead variance into volume and expenditure variance. They can be understood as variable and fixed overhead variance respectively.

Reference:

- CIPS study guide page 59
- What are overhead variances? -- AccountingTools
LO 1, AC 1.4

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QUESTION: 63

Which of the following may allow suppliers free to choose the materials, manufacturing process or delivery process?

Performance specification
Design specification
Technical specifications
Conformance specification

Answer(s): A

Explanation:

The Performance Specifications define what the system being designed must do, and not how it must do it. In this step a list of needs and wants should be created. The needs are customer requirements, while the wants are engineering desires. If a buyer adopts performance specification, the supplier will be free to choose how to make and deliver the product. A technical specification document outlines how you're going to address a technical problem by designing and building a solution for it.

A design specification is a detailed document providing a list of points regarding a product or pro- cess. For example, the design specification could include required dimensions, environmental fac- tors, ergonomic factors, aesthetic factors, maintenance that will be needed, etc. It may also give specific examples of how the design should be executed, helping others work properly (a guideline for what the person should do).
With conformance specification the buyer says what they want and how they want it and the supplier has to meet this

Reference:

CIPS study guide page 119-124
LO3, AC 3.1

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QUESTION: 64

Which of the following problems may be identified as closed problems? Select 2 that apply:

A cyber attack takes down whole company's IT system
Shortage of key medicines in healthcare industry
There are not enough data for procurement analytics
Logistics costs incur a large portion in wholesale prices
The suppliers don't comply with the company's policy on underage labour.

Answer(s): A,B

Explanation:

Closed problem is something happens that should not have happened. To solve this type of prob- lem, procurement professional should find a way to correct the situation or try to adapt to it. On the other hand, open ended problem is a obstacle to your short-term objective. You will need to overcome this obstacle.
Shortage of key medicines is a situation in which procurement must find a substitution or try to save the current stock.
In case of cyber attack, procurement should find a way to recover the IT system as soon as possible. Otherwise, 'There are not enough data for procurement analytics' is an open-ended problem be- cause it prevents company to conduct procurement analytics (an objective). 'Logistics costs incur a large portion in wholesale prices': In this situation, logistics costs are hur-dles that prevent companies to reach lower wholesale.
'The suppliers don't comply with the company's policy on underage labour': In this situation, pro- curement should seek ways to help supplier comply with the company's labour policy.
LO 1, AC 1.1

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QUESTION: 61

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QUESTION: 62

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QUESTION: 63

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QUESTION: 64

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