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Free ACCA Advanced Performance Management Practice Questions & Answers
400 exam-style Advanced Performance Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 31
What is the general principle for setting an optimal transfer price?
Select an option first.
Correct answer: B — The transfer price should be set at the opportunity cost of the supplying division — the minimum it needs to be no worse off by transferring internally rather than selling externally
Explanation: The theoretical optimal transfer price = Marginal cost of supply + Opportunity cost of transferring internally (any contribution forgone from external sales). A, C and D are specific methods that may or may not represent the optimal price.
Question 32
In transfer pricing, when the supplying division has spare capacity and there is NO external market for the intermediate product, the minimum transfer price should be:
Select an option first.
Correct answer: B — Variable (marginal) cost of production — the supplying division forgoes no external contribution so no opportunity cost premium is needed
Explanation: With spare capacity and no external market: opportunity cost = 0. Therefore minimum TP = Marginal cost. This ensures the supplying division is no worse off and enables the group to optimise profit. A, C and D add mark-ups not justified by the absence of opportunity cost.
Question 33
What is the purpose of a 'reward system' in performance management?
Select an option first.
Correct answer: B — To align the behaviour of managers and employees with the strategic objectives of the organisation by linking rewards to performance
Explanation: Effective reward systems motivate behaviour that drives strategic goals — through bonuses linked to KPIs, share options, profit-sharing, etc. A is punitive not motivational; C and D miss the strategic link.
Question 34
What does the Ansoff Matrix help management decide?
Select an option first.
Correct answer: B — Strategic growth options based on the combination of existing/new products and existing/new markets
Explanation: Ansoff's Matrix: Market Penetration (existing product/market), Product Development (new product/existing market), Market Development (existing product/new market), Diversification (new product/new market). It frames strategic growth choices. A, C and D are operational/financial decisions.
Question 35
What is 'value chain analysis' (Porter)?
Select an option first.
Correct answer: B — A framework for identifying the activities that create value for the customer — from inbound logistics through operations, outbound logistics, marketing, and service — to identify where competitive advantage lies
Explanation: Porter's Value Chain: primary activities (inbound logistics, operations, outbound logistics, marketing & sales, service) and support activities (firm infrastructure, HR, technology, procurement) create value. A, C and D are incorrect.
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Question 36
What are 'non-financial performance indicators' (NFPIs)?
Select an option first.
Correct answer: B — Qualitative and quantitative measures that capture aspects of performance not reflected in financial accounts — such as customer satisfaction, staff turnover, product quality, and delivery times
Explanation: NFPIs capture dimensions of performance that drive future financial results but are not captured in traditional financial statements — customer loyalty, innovation, and quality. A is too narrow; C and D are wrong.
Question 37
Which of the following is an example of a non-financial performance indicator?
Select an option first.
Correct answer: B — Employee satisfaction score
Explanation: Employee satisfaction score is a qualitative measure of workforce engagement, not appearing in financial statements. A, C and D are all financial ratios. NFPIs include measures like on-time delivery, defect rates, customer retention, and brand loyalty.
Question 38
What does 'brand loyalty' as a non-financial performance indicator measure?
Select an option first.
Correct answer: B — The tendency of customers to repeatedly purchase from the same brand rather than switching to competitors — a leading indicator of future revenue sustainability
Explanation: Brand loyalty measures customer retention and repeat purchase behaviour — a critical non-financial driver of long-term revenue. It was specifically highlighted in the 2025-26 APM syllabus. A, C and D are costs or accounting values, not the measure itself.
Question 39
In the context of strategic performance management, what is meant by 'lead indicators'?
Select an option first.
Correct answer: B — Forward-looking measures that predict future performance — e.g., new customer enquiries, employee training hours, or R&D investment
Explanation: Lead (or leading) indicators predict future outcomes. Lagging indicators (A) report past results (e.g., profit). The distinction is important for proactive performance management. C and D are wrong.
Question 40
What is a 'lag indicator' in performance management?
Select an option first.
Correct answer: B — A measure of past performance that confirms whether an objective has been achieved — e.g., last year's profit, customer complaints this quarter
Explanation: Lag (or lagging) indicators report results that have already occurred. A is a lead indicator. A balanced scorecard contains both types. C and D are wrong.
Question 41
What is 'Goal Congruence' in a performance management context?
Select an option first.
Correct answer: B — The alignment of individual managers' and employees' personal goals with the strategic objectives of the overall organisation
Explanation: Goal congruence: what is best for the individual manager is also best for the organisation. Poor systems (e.g., ROI-based rewards) can cause goal incongruence (dysfunctional behaviour). A, C and D misstate the concept.
Question 42
What is the role of the 'financial perspective' in the Balanced Scorecard?
Select an option first.
Correct answer: B — To show how well the strategy is translating into shareholder value — financial results are the ultimate measure of strategic success
Explanation: The financial perspective provides the ultimate accountability measure — value creation for shareholders. The other three perspectives are means to achieve financial goals. A, C and D are wrong.
Question 43
What is meant by 'mission drift'?
Select an option first.
Correct answer: B — When an organisation gradually moves away from its original mission, often due to external pressures, funding requirements, or short-term focus
Explanation: Mission drift: the organisation's actual activities diverge from its stated purpose — common in not-for-profit organisations when they accept funding tied to different objectives. A, C and D are unrelated.
Question 44
In what context is the 'three Es' framework (Economy, Efficiency, Effectiveness) most commonly applied?
Select an option first.
Correct answer: B — Public sector and not-for-profit organisations where profit is not the primary objective — measuring whether resources are used responsibly to achieve intended outcomes
Explanation: The three Es are the public sector equivalent of profit performance measures: Economy (spending wisely — inputs), Efficiency (converting inputs to outputs), Effectiveness (achieving intended outcomes). A, C and D are different contexts.
Question 45
In the 'three Es' framework, 'efficiency' means:
Select an option first.
Correct answer: B — The ratio of outputs to inputs — producing maximum output from a given set of inputs or achieving a given output with minimum inputs
Explanation: Efficiency measures productivity — the relationship between inputs and outputs. Economy (A) measures input price. Effectiveness (C) measures goal achievement. D is compliance, not efficiency.
Question 46
A division reports ROI of 25%. The company's required rate of return is 18%. A new project offers ROI of 20%. What problem might arise?
Select an option first.
Correct answer: B — The divisional manager may reject the project because it would reduce the division's overall ROI from 25%, even though the project earns above the company's required rate of 18%
Explanation: This is the classic ROI sub-optimisation problem. The project earns 20% > 18% (company's minimum) so it is value-creating, but accepting it would pull the division's average ROI below 25%. A manager rewarded on ROI has an incentive to reject it. RI avoids this problem. A, C and D are wrong.
Question 47
If a division has controllable profit of $500,000 and net assets of $2,500,000, what is the division's ROI?
Select an option first.
Correct answer: A — 20%
Explanation: ROI = Controllable Profit ÷ Net Assets × 100% = $500,000 ÷ $2,500,000 × 100% = 20%. B, C and D are arithmetic errors.
Question 48
A division has controllable profit of $800,000, net assets of $4,000,000, and the group's cost of capital is 12%. What is the Residual Income?
Select an option first.
Correct answer: C — $480,000
Explanation: Residual Income = Controllable Profit − (Net Assets × Cost of capital) = $800,000 − ($4,000,000 × 12%) = $800,000 − $480,000 = $320,000. Wait: RI = $800,000 − $480,000 = $320,000 (B). Let me recheck: capital charge = 4,000,000 × 0.12 = 480,000. RI = 800,000 − 480,000 = 320,000. Answer is B ($320,000). C is the capital charge; A is the raw profit; D is wrong.
Question 49
What are the main criticisms of using accounting-based measures (ROI, RI) for divisional performance?
Select an option first.
Correct answer: B — They are based on historical accounting figures affected by depreciation methods and asset valuation; they encourage short-termism; and they may not reflect economic reality or future value creation
Explanation: Accounting measures: subject to manipulation, affected by accounting policies (depreciation), historical-looking, and may discourage long-term investment. A, C and D are wrong or contradictory.
Question 50
What adjustments are typically made to convert accounting profit to NOPAT for EVA purposes?
Select an option first.
Correct answer: B — Accounting profit is adjusted by adding back items such as R&D written off (treated as an asset), goodwill amortisation, and adjusting for operating lease costs — to reflect economic rather than accounting performance
Explanation: EVA adjustments (Stern Stewart): capitalise R&D, reverse goodwill amortisation, treat operating leases as debt, adjust for exceptional items. These convert accounting profit and capital to economic equivalents. A, C and D are wrong.
Question 51
What does a positive EVA indicate?
Select an option first.
Correct answer: B — The company is generating returns above the cost of all capital employed — creating genuine economic value for shareholders
Explanation: EVA > 0: the business earns more than it costs to finance all capital (both debt and equity). This creates wealth for shareholders. Accounting profit can be positive while EVA is negative (if the return doesn't cover equity cost). A, C and D are wrong.
Question 52
A company has NOPAT of $2,000,000, WACC of 10%, and capital employed of $15,000,000. What is the EVA?
Select an option first.
Correct answer: D — −$500,000
Explanation: EVA = NOPAT − (WACC × Capital Employed) = $2,000,000 − (10% × $15,000,000) = $2,000,000 − $1,500,000 = $500,000. Wait: that gives $500,000 (A). Let me recheck: 10% × 15,000,000 = 1,500,000. EVA = 2,000,000 − 1,500,000 = 500,000. Answer is A ($500,000). D (−$500,000) would require capital charge > $2,000,000. B is NOPAT only; C uses wrong capital charge.
Question 53
Which of the following is a key advantage of EVA over traditional accounting profit?
Select an option first.
Correct answer: B — EVA charges for the full cost of capital including equity — traditional profit only charges for debt (interest) and ignores the opportunity cost of shareholders' funds
Explanation: Traditional profit deducts interest (cost of debt) but not the cost of equity capital. EVA deducts a charge for all capital — highlighting whether the business truly covers all its costs of financing. A, C and D are wrong.
Question 54
Which of the following is the most appropriate transfer price when there IS a competitive external market for the intermediate product?
Select an option first.
Correct answer: B — Market price — this reflects the true opportunity cost of the supplying division and avoids distorting the profitability of either division
Explanation: When an external market exists, the supplying division could sell externally at market price. The transfer price should be market price so neither division is disadvantaged. A, C and D don't reflect the opportunity cost correctly when external markets exist.
Question 55
When a supplying division has NO spare capacity and an external market exists, the minimum transfer price should be:
Select an option first.
Correct answer: B — Variable cost + Opportunity cost (contribution forgone from lost external sales) = effectively Market price
Explanation: With no spare capacity: every internal transfer means one fewer external sale. The opportunity cost = contribution forgone. Minimum TP = VC + (SP − VC) = SP = Market price. A ignores opportunity cost; C includes fixed costs but not opportunity cost; D is wrong.
Question 56
What is the 'two-part tariff' approach to transfer pricing?
Select an option first.
Correct answer: B — A transfer pricing arrangement where the supplying division charges variable cost per unit for each transfer PLUS a lump-sum fixed charge to cover its fixed costs and contribute to profit
Explanation: The two-part tariff solves the conflict between: the receiving division wanting TP = VC (to make good short-run decisions) and the supplying division needing to cover fixed costs. VC per unit + lump-sum for fixed costs achieves both. A, C and D are wrong.
Question 57
What is the 'dual pricing' approach to transfer pricing?
Select an option first.
Correct answer: B — Each division is charged a different price for the same transfer — the buying division pays at cost (or below market) for decision-making purposes, while the supplying division is credited at market price — with the difference absorbed centrally
Explanation: Dual pricing: buying division pays VC (making correct decisions), supplying division receives market price (properly rewarded). The central group absorbs the difference. This promotes goal congruence but creates a loss at group level from internal transactions — hence is rarely used in practice. A, C and D are wrong.
Question 58
In international transfer pricing, what is the primary concern for governments and tax authorities?
Select an option first.
Correct answer: B — Whether multinational companies are manipulating transfer prices to shift profits to lower-tax jurisdictions, thereby avoiding tax in higher-tax countries
Explanation: Governments require 'arm's length' transfer prices (as if transacting with an unrelated party) to prevent profit-shifting to low-tax territories. The OECD Transfer Pricing Guidelines apply internationally. A, C and D miss the tax avoidance concern.
Question 59
What is a 'performance-related pay' (PRP) scheme?
Select an option first.
Correct answer: B — A reward system where part of the compensation package depends on measured performance against agreed targets — aligning individual interests with organisational goals
Explanation: PRP links bonuses, commissions, or salary increments to performance metrics (KPIs, sales targets, profit). It motivates behaviour aligned with strategy. A is fixed pay; C and D are different compensation elements.
Question 60
What is the 'agency problem' in the context of performance management?
Select an option first.
Correct answer: B — The conflict of interest between principals (e.g., shareholders) and agents (e.g., managers) who may make decisions in their own interests rather than those of the principal
Explanation: The agency problem (principal-agent theory): managers (agents) may shirk, take excessive risk, or act in self-interest unless incentivised/monitored effectively. A, C and D are not the core concept.
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