CIMA P1 Value Pack (Frequently Bought Together)

JDM is considering whether to go ahead with the launch of a new product. Profit from the new product is dependent on the level of demand.
The following table shows the estimated profits and their respective probabilities at different levels of demand.
The company could still cancel the launch of the product but would incur a cost of $7,000.

What is the maximum amount that the company should pay for perfect information about demand for the product?

• A. $37,850
• B. $13,350
• C. $41,000
• D. $16,500

'Public sector organizations are often judged by their economy, efficiency and effectiveness.
Consequently, they should use an approach to budgeting other than incremental budgeting.' Required:
Explain ONE advantage and TWO disadvantages of public sector organizations using incremental budgeting.
Select all true statements.

• A. The main advantage of incremental budgeting is that the cost of past activities becomes fixed and any inefficiencies or wastage is perpetuated.
• B. An incremental; approach is not as easy and fast to implement than other forms of budgeting approaches e.g. zero based budgeting.
• C. The incremental approach means that budget holders in public sector organizations will be encouraged to use up this year's budget will be as high as possible.
• D. Public sector organizations tend to be fairly complex and in many cases outputs cannot be measured in monetary terms therefore the link between inputs and outputs is difficult to establish. An incremental approach can therefore provide a cost effective approach to budgeting.
• E. Under an incremental approach to budgeting, existing operations and the current budgeted allowance for these existing activities are taken as the base level for preparing the budget.
• F. The incremental approach encourages managers in public sector organizations to look at the efficiency and effectiveness of activities undertaken.

LM operates a parcel delivery service. Last year its employees delivered 15,120 parcels and travelled
120,960 kilometers. Total costs were $194,400.
LM has estimated that 70% of its total costs are variable with activity and that 60% of these costs vary with the number of parcels and the remainder vary with the distance travelled.
LM is preparing its budget for the forthcoming year using an incremental budgeting approach and has produced the following estimates:
* All costs will be 3% higher than the previous year due to inflation
* Efficiency will remain unchanged
* A total of 18,360 parcels will be delivered and 128,800 kilometers will be travelled.
Calculate the following costs to be included in the forthcoming year's budget:
(i) the total variable costs related to the number of parcels delivered.
(ii) the total variable costs related to the distance travelled.

• A. Parcel related cost for next year = $112,308; Distance related costs for next year = $79,590
• B. Parcel related cost for next year = $112,118; Distance related costs for next year = $59,699
• C. Parcel related cost for next year = $105,306; Distance related costs for next year = $30,590
• D. Parcel related cost for next year = $115,306; Distance related costs for next year = $31,590
• E. Parcel related cost for next year = $109,118; Distance related costs for next year = $89,699

A manufacturing company has a capacity of 10,000 units. The flexed production cost budget of the company is as follows:

All costs are either fixed, variable or semi-variable.
What is the budgeted total production cost if the company operates at 85% capacity?

• A. $12,852
• B. $15,980
• C. $14,025
• D. $13,680

A small manufacturing company makes a single product. Direct labour costs and factory rent account for
80% and 15% of total cost respectively. Activity levels have not varied by more than 5% for a number of years and there is no evidence of operational inefficiency.
Which of the following is the most appropriate approach to budgeting for this company?

• A. Activity based budgeting (ABB)
• B. Zero based budgeting (ZBB)
• C. Rolling budgeting
• D. Incremental budgeting