Question 1

Explain how probability analysis could be used to assess the risk of the evaluated projects.

Select all the true statements.

Options :

A : The company can determine a range of possible outcomes for each of the cash flows in the project, for example, a high, low and medium estimate of each cash flow could be determined.

B : The net present value (NPV) of the project, if all high, low or medium estimates occurred, can be calculated along with the combined probabilities of their occurrence.

C : The probabilities can be combined to calculate the expected value of each cash flow element and of the project as a whole

D : The NPVs of a sample range of possible outcomes and the probability of each NPV can be calculated. If a small sample is taken the distribution of outcomes can be used to calculate the zero activities deviation of the NPVs and the probability of success of the projects.

Answer: A,B,C

Question 2

A medium-sized manufacturing company, which operates in the electronics industry, has employed a firm of consultants to carry out a review of the company's planning and control systems. The company presently uses a traditional incremental budgeting system and the inventory management system is based on economic order quantities (EOQ) and reorder levels. The company's normal production patterns have changed significantly over the previous few years as a result of increasing demand for customized products. This has resulted in shorter production runs and difficulties with production and resource planning. The consultants have recommended the implementation of activity based budgeting and a manufacturing resource planning system to improve planning and resource management.

What are the benefits for the company that could occur following the introduction of an activity based budgeting system?

Select ALL the correct answers.

Options :

A : Under an activity based budgeting system, resource allocation is linked to the strategic plan and is prepared after considering alternative strategies. This approach ensures that new activities that are required to meet the company-s strategic objectives are included in the budget.

B : Under a traditional incremental budgeting system the focus is on existing resources and operations. Adjustments are then made for changes in activity and price which results in past inefficiencies being perpetuated. Under an activity based budgeting system, only resources that are needed to perform activities required to meet the budgeted production and sales volumes are included.

C : Activity based techniques including activity based budgeting focus on the outputs of a process rather than the input to the process. This approach provides a clear framework for understanding the link between costs and the level of activity. It allows the ranking of activities and the determination of how limited resources should be allocated across competing activities.

D : Activity Based Budgeting Systems present costs under functional headings i.e. the emphasis is on the nature of the cost. The weakness if this approach is that it gives little indication of the link between the level of activity and the cost incurred.

E : The approach under an Activity based Budgeting System is to make arbitrary cuts in order to meet overall financial targets.

Answer: A,B,C

Question 3

Two products being produced by a company require the same material which is limited to 2,600 kgs.

What is the optimal production plan?

Options :

A : 500 units of S & 100 units of T

B : 50 units of S & 400 units of T

C : 400 units of S & 167 units of T

D : 500 units of S & 400 units of T

Answer: A

Question 4

A manager is deciding which one of four services to provide next period.

The contribution earned by each service will depend on the weather conditions as follows.

Using the maximin criterion, which service will the manager provide?

Options :

A : Service P

B : Service Q

C : Service R

D : Service S

Answer: D

Question 5

Some of the movements in a time series follow a pattern over time.
Which type of movement does NOT follow a pattern over time?

Options :

A : Trend

B : Cyclical variation

C : Random variation

D : Seasonal variation

Answer: C

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