P2 - Session 2

An engineering company is thinking about implementing activity-based management principles. Which of the following is a correct definition of activity-based management? Select ONE definition that applies.

• ABM is an approach to the costing and monitoring of activities which involves tracing resources consumption and costing final outputs. Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activities costs to outputs.

• ABM involves the identification and evaluation of the activity drivers used to trace the cost of activities to cost objects. It may also involve selecting activity drivers with potential to contribute to the cost management function, with particular reference to cost reduction.

• ABM is a method of budgeting based on an activity framework and utilizing cost driver data in the budget setting and variance feedback processes.

• ABM is a system of management which uses activity-based cost information for a variety of purposes including cost reduction, cost modelling and customer profitability analysis.

• ABM is a grouping of all cost elements associated with an activity.

AB plc is a supermarket group which incurs the following costs:

(i) The bought-in price of the good

(ii) Inventory financing costs

(iii) Shelf refilling costs

(iv) Costs of repacking or 'pack out' prior to storage before sale.

AB plc's calculation of Direct Product Profitability would include:

• All of the above costs

• All of the above costs, except (ii)

• All of the above costs, except (iv)

• Costs (i) and (ii) only

• Cost (i) only

Frodo Ltd supplies shoes to Sam Ltd and Gollum Ltd. Each pair of shoes has a list price of $50 and costs Frodo Ltd $25. As Gollum buys in bulk it receives a 10% trade discount for every order for 100 pairs of shoes or more. Sam receives a 15% discount irrespective of order size, because that company collects the shoes, thereby saving Frodo Ltd any distribution costs. The cost of administering each order is $50 and the distribution cost is $1,000 per order. Sam makes 10 orders in the year, totaling 420 pairs of shoes, and Gollum places 5 orders of 100 pairs each.

Which customer is the most profitable for Frodo Ltd?

• Gollum Ltd

• Sam Ltd

A company sells five products. Sales data for the past year are as give above.

How would a Pareto analysis of sales revenue be presented, in a table format?

• In the order A, B, C, D, E

• In the order D, A, B, C, E

• In the order E, C, D, A, B

• In the order B, A, D, C, E

• $0.17

• $0.35

• $0.76

• $3.10

• $0.50 increase

• $0.50 decrease

• $14.00 increase

• $14.00 decrease

When building up the cost of a product or service using activity‐based costing, which of the following would be used as levels of classification?

(i) Facility

(ii) Product

(iii) Batch

(iv) Unit

(v) Value added

(vi) Non‐value added

• i) and (ii) only

• (ii), (iii) and (iv) only

• (i), (ii), (iii) and (iv)

• All of the above

Direct Product Profitability is most commonly found in:

• The car manufacturing industry

• The grocery trade

• Product design departments

• The travel agency business

• Production departments

Calculate the machine set‐up costs that would be attributed to each unit of product Y:

Using customer profitability analysis, the ranking of the customers would be:

• 1st - J | 2nd - H | 3rd - K

• 1st - J | 2nd - K | 3rd - H

• 1st - H | 2nd - J | 3rd - K

• 1st - H | 2nd - K | 3rd - J