AMA THEORY QUESTIONS AND ANSWERS

QUESTION 1

 Skills of a management accountant

• Knowledge about various branches of study such as financial accounting, cost accounting, and economics among others as management accounting embraces all these fields of study.
• Knowledge of business forecast under anticipated changing environment of business.
• Ability to appraise management from time to time regarding the current position of the business so that management could review the success or future of the business.
• Knowledge of various techniques of management and accounting so that he could prepare and submit reports to enable management to take prompt action to set right adverse conditions.
• Thorough knowledge about budgeting and forecasting so as to consider alternate proposals under consideration.
• Knowledge about sources of funds so that best source could be tapped at minimum cost of borrowing.
• An analytical mind which could see through implications of alternate courses.
• Ability to get along with all levels of management. The reports prepared and submitted must be free from bias of any type.

 

QUESTION 2

 Roles of management accountants

• Managing functions that are critical to business performance.
• Supporting organizational management and strategic development.
• Providing accurate and insightful information for better decisions. –
•   Ensuring the organizations operate with integrity.

 

 

QUESTION 3

 Environments within which decisions could be made

Certainty

In this environment, complete information is available as to which states of nature will occur. The decision making process just involves picking the test alternative.

Risk

Risk involves situations or events which may or may not occur but whose probability by occurrence can be predicted from past records. In this environment, the states of nature are not certain but probability distributions can be assigned.

Fundamental uncertainty

Uncertain events are those whose outcome cannot be predicted with statistical confidence. In this environment, the states of nature are not known nor are their probability distributions.

Competition

In this environment, the decisions made by the firm are affected, by decisions made by other firms with opposing interests.

 

QUESTION 4

Steps required to estimate cost functions from past data  Select the cost (dependent) variable to be predicted.

• • Select potential cost drivers (the causes of costs).
  • Collect data on the dependent variable and the selected cost driver.
  • Plot the observations on a graph.
  • Estimate the cost of function.
  • Test the reliability of the cost function.

 

QUESTION 5

Applications of the learning curve

 

Pricing decisions

The main impact of the learning curve is likely to be in providing better cost predictions to enable price quotations to be prepared for potential orders. An ability to forecast cost reductions and consequent selling price reductions may make the difference between gaining or losing profitable orders.

 

Work scheduling

Learning curves enable firms to predict their required inputs more effectively and this enables them to produce more accurate delivery schedules. This in turn can lead to improved customer relationships and may result in increased future sales.

 

Standards setting

If budgets and standards are set without considering the learning effects, meaning less variances are likely to occur. For example, if the learning curve effect is ignored, inappropriate labour standards will be set that can be easily attained. If the management creates a climate where learning is encouraged and expected then improvements in efficiency are more likely to occur.

 

QUESTION 6

Five primary transfer prices:

• Market based transfer price

Transfer based on the prevailing market price of a similar item or product.

• Marginal cost transfer prices.

Transfers based on the short-run variable costs which are actually direct costs + variable indirect costs.

• Full cost transfer prices:

Transfers made at full/long run costs of producing the product.

• Cost plus a mark-up transfer prices.

A mark-up is added onto the cost of the product to enable the supplying divisions to earn a profit on interdivisional transfers.

• Negotiated transfer prices

Transfer prices are agreed after negotiation between the managers of the supplying division and those of the receiving divisions.

 

QUESTION 7   

Advantage of incremental budgeting

• An incremental approach is much easier and quicker to implement than other forms of budgeting approaches for example, zero based budgeting.
• Public sector organisations tend to be fairly complex and in many cases outputs cannot be measured in monetary terms therefore the link between inputs and outputs difficult to establish. An incremental approach could therefore provide a cost effective approach to budgeting. Disadvantages of incremental budgeting
• 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. The main disadvantage of this is that the cost of past activities becomes fixed and any inefficiencies or wastage is perpetuated.
• The incremental approach means that budget holders in public sector organisations will be encouraged to use up the current year’s budget to ensure that next year’s budget will be as high as possible. Any overspends in the current year will be included in the budget for the following year.

 

QUESTION 8

 Benefits of Activity Based Budgeting (ABB)

Resource allocation is linked to the strategic plan and is prepared after considering alternative strategies. Plus approach ensures that new activities that are required and meet the organization’s strategic objectives are included in the budget.

• Under 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 the form activities required to meet the budget production and sales volumes are included.
• Activity based techniques including activity based budgeting focus on the outputs of 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. Traditional budgeting systems present costs under functional headings. That is the emphasis is on the nature of the cost. The weakness of this approach is that it gives little indication of the link between the level of activity and the cost incurred.
• The approach under a traditional system is to make arbitrary cuts in order to meet overall financial targets. Activity based budgeting allows the identification of value added and non-value added activities and ensures that cuts are made to non-value added activities. ABB is also useful for review of capacity utilization. If it is known that the resources devoted to a particular activity are greater than those currently required then these resources could be reduced or redeployed.

 

QUESTION 9

Consequences of management participation in the budgeting process

• Managers are more likely to be motivated to achieve the target if they have participated in setting the target.
• Participation can reduce the information asymmetry gap that can arise when targets are imposed by senior management.
• Imposed targets are likely to make managers feel demotivated and alienated and alienated and result in poor performance
• Managers might attempt to negotiate budgets that they feel are easy to achieve which gives rise to budget padding or budgetary slack.
• Managers might be tempted to ’empire build’ because they believe that the size of their budget reflects their importance within the organization.

 

QUESTION 10

 Advantages of value added statements.

• It is a means of showing how wealth created by an institution is distributed.
• The emphasis is on all members of the team as opposed to an income statement whose emphasis is wealth to shareholders.
• The statement reflects the employees participation in added value .
• The amount by which the sources of the company increase is shown.
•  It can be used in developing profit sharing schemes.

 

Disadvantages

• The meaning attached to value added is not the same as the economists value added and it may cause confusion.
• The term in a wide sense also includes supplier of goods and services but they do not participate in value addition.
• Most of the items in the statement may be presented in more than one way. This may reduce comparability across firms.

 

1. Zero – based budgeting is a cost benefit approach whereby it is assumed that the cost allowance for an item is zero, and will remain so until the manager responsible justifies the existence of the cost item and the benefit the expenditure brings.
2. Stages in implementing zero – based budgeting

• Definition of decision packages. This is a complete/ comprehensive description of a fact of the organization’s activities or functions which can be individually evaluated.
• Evaluating and ranking of packages. It is the process of allocating scarce resources between different activities minimum requirements which are essential to get the job done and activities necessary to meet legal or safety obligations are given priority.
• Resource allocation and ranking.