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Free ACCA Management Accounting Practice Questions & Answers
400 exam-style Management Accounting questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 241
Which budgeting approach is most likely to be used in a start-up with no historical data?
Select an option first.
Correct answer: B — Zero-based budgeting
Explanation: B is correct: with no prior period to increment from, zero-based budgeting is the natural starting point — every cost must be evaluated and justified from scratch. It is also useful for organisations undergoing significant change. A is wrong — incremental budgeting requires a prior period base. C is wrong — rolling budgets still need initial estimates. D is wrong — ABB requires established activity data.
Question 242
Which of the following best describes the purpose of the sales budget?
Select an option first.
Correct answer: C — To forecast expected sales volume and revenue for the budget period
Explanation: C is correct: the sales budget projects the units and revenue expected to be generated in the period — it is the starting point of the entire budgeting process, driving production, purchasing and staffing plans. A is wrong — selling expense control is covered by the selling overhead budget. B is wrong — purchases flow from production, not directly from the sales budget. D is wrong — OAR is derived from overhead and activity level budgets.
Question 243
The discounted payback period differs from the simple payback period because:
Select an option first.
Correct answer: B — It uses discounted (present value) cash flows, accounting for the time value of money
Explanation: B is correct: the discounted payback period applies discounting to each year's cash flows before accumulating them, so the point at which cumulative discounted inflows recover the initial investment is later than with undiscounted payback — it is a more rigorous test. A is wrong — depreciation is excluded from both payback calculations. C is wrong — discounted payback is always equal to or LONGER (not shorter) than simple payback because discounting reduces the value of future cash flows. D is wrong — both use cash flows not profit.
Question 244
What is the profitability index (PI) used for in investment appraisal?
Select an option first.
Correct answer: B — Ranking projects when capital is rationed — maximising NPV per $1 of initial investment
Explanation: B is correct: PI = NPV / initial investment (or PV of inflows / initial investment). It ranks projects by the NPV generated per unit of scarce capital — essential when a firm cannot fund all positive-NPV projects due to capital rationing. A is wrong — accounting profitability is measured by ARR. C is wrong — break-even analysis is a separate tool. D is wrong — payback is a separate method.
Question 245
Hard capital rationing refers to a situation where:
Select an option first.
Correct answer: B — External financial markets restrict the amount of finance available to the company (e.g. banks unwilling to lend)
Explanation: B is correct: hard capital rationing is externally imposed — the capital markets or lenders limit the total funds available to the firm. Soft rationing is self-imposed by management. A is wrong — management-imposed limits are soft rationing. C is wrong — ethical restrictions are a specific subset, not the definition of hard rationing. D is wrong — negative NPVs should be rejected regardless of rationing.
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Question 246
When evaluating mutually exclusive projects of unequal lives, which technique ensures a fair comparison?
Select an option first.
Correct answer: B — The equivalent annual annuity (EAA) method or the lowest common multiple approach
Explanation: B is correct: comparing NPVs directly is unfair for projects with different lifespans. The EAA converts each project's NPV into an equivalent annual amount, enabling like-for-like comparison assuming projects can be replicated. A is wrong — higher NPV may simply reflect a longer project life. C is wrong — payback ignores time value and post-payback flows. D is wrong — ARR ignores time value.
Question 247
Tax in capital investment appraisal is typically included because:
Select an option first.
Correct answer: B — Tax reduces the net cash flows received from a project and can create timing differences that affect NPV
Explanation: B is correct: tax payments reduce the post-tax cash flows of a project, and tax timing (e.g. one year in arrears) affects the NPV. Ignoring tax would overstate the investment's value. Capital allowances (tax depreciation) also affect the timing of tax payments. A is wrong — tax is a real cash flow and is very relevant. C is wrong — tax reduces, not increases, NPV. D is wrong — tax timing is often one year in arrears.
Question 248
Which of the following is an advantage of the payback period method?
Select an option first.
Correct answer: C — It is simple to calculate and understand, and gives a quick risk indication
Explanation: C is correct: payback's strengths are simplicity and its use as a rough risk measure — the sooner you get your money back, the less exposure to uncertainty. It is widely used as a first-pass screening tool. A is wrong — payback ignores cash flows after the payback point. B is wrong — simple payback does not discount cash flows. D is wrong — shareholder wealth maximisation requires NPV.
Question 249
Expected value analysis is MOST useful when:
Select an option first.
Correct answer: B — Decisions are made frequently enough for the average outcome to be realised over time
Explanation: B is correct: expected value represents a long-run average — it is most meaningful when a decision is repeated many times, so that the average of all outcomes approaches the expected value. For one-off decisions, the actual outcome will be just one scenario (not the average). A is wrong — certainty means EV is the actual outcome; EV is specifically for uncertainty. C is wrong — for unique decisions, EV is less reliable. D is wrong — equal probability is a special case, not the condition for EV usefulness.
Question 250
Minimax regret criterion selects the option that:
Select an option first.
Correct answer: C — Minimises the maximum regret (opportunity loss) from choosing a sub-optimal option
Explanation: C is correct: for each combination of decision and possible state, regret = the best possible payoff for that state minus the chosen payoff. The minimax regret approach picks the decision that minimises the worst-case regret. A is wrong — that is maximax. B is wrong — that is maximin. D is wrong — that is expected value maximisation.
Question 251
Which of the following is an advantage of zero-based budgeting?
Select an option first.
Correct answer: C — It forces managers to prioritise and justify expenditure, potentially eliminating waste
Explanation: C is correct: ZBB's strength is that it challenges every cost from scratch — forcing a genuine assessment of whether each activity adds enough value to justify its expenditure. This can reveal and eliminate inefficiency that would persist under incremental budgeting. A is wrong — ZBB is time-consuming and complex. B is wrong — the opposite: ZBB prohibits automatic carry-forward. D is wrong — ZBB requires more information, not less.
Question 252
The difference between a flexible and a fixed budget at month-end is most useful for:
Select an option first.
Correct answer: B — Identifying how much of a variance is due to volume differences versus efficiency and expenditure differences
Explanation: B is correct: the fixed budget shows what was planned at one volume. The flexible budget re-expresses that plan at actual volume. The gap between fixed and flexible is the volume variance; the gap between flexible and actual is the efficiency/expenditure variances. This separation is essential for meaningful performance analysis. A is wrong — next year's budget uses this insight but the comparison's purpose is current-period analysis. C is wrong — OAR is set in advance. D is wrong — balance sheet is unrelated.
Question 253
If a standard cost card shows: direct material 4 kg × $6/kg = $24; direct labour 2 hours × $12/hour = $24; fixed overhead absorption $10 per unit. What is the total standard cost per unit?
Select an option first.
Correct answer: B — $58
Explanation: B is correct: standard cost per unit = $24 (material) + $24 (labour) + $10 (fixed overhead) = $58. A is wrong — $48 omits fixed overhead. C is wrong — $34 omits labour. D is wrong — $46 is not supported.
Question 254
A business produces 4,200 units against a budget of 4,000. Standard hours per unit are 3. Fixed overhead absorption rate is $5/hour. What is the fixed overhead volume variance?
Select an option first.
Correct answer: A — $3,000 favourable
Explanation: A is correct: volume variance = (actual output - budgeted output) × standard fixed overhead per unit = (4,200 - 4,000) × (3 hrs × $5) = 200 × $15 = $3,000 favourable. B is wrong — the variance is favourable (more production than budgeted). C is wrong — $15,000 would require 1,000 extra units. D is wrong — $1,000 is not supported.
Question 255
When is a standard costing system most beneficial?
Select an option first.
Correct answer: B — In an organisation with stable, repetitive production of standardised products
Explanation: B is correct: standard costing works best where products are consistent and production methods are stable — the standards can be accurately set and variances are meaningful signals of performance. Custom/variable production makes setting and using standards difficult. A is wrong — custom production makes standard-setting unreliable. C is wrong — not-for-profits with diverse services struggle with standard costing. D is wrong — start-ups lack the historical data needed to set reliable standards.
Question 256
The fixed overhead capacity variance measures:
Select an option first.
Correct answer: C — Whether actual hours worked differed from budgeted hours, expressed in terms of fixed overhead
Explanation: C is correct: capacity variance = (actual hours worked - budgeted hours) × fixed overhead rate per hour. It measures whether the workforce worked more or fewer hours than budgeted (regardless of how efficient those hours were). A is wrong — that is the expenditure variance. B is wrong — efficiency is the efficiency variance. D is wrong — output vs budget is the overall volume variance.
Question 257
Which of the following best explains the purpose of a standard cost card?
Select an option first.
Correct answer: B — A pre-determined document setting out the expected quantity and cost of each element for one unit of production
Explanation: B is correct: a standard cost card details the standard inputs (material quantities, labour hours, overhead rates) and their standard prices/rates for one unit — providing the benchmark against which actual costs are compared in variance analysis. A is wrong — actual costs are recorded in the cost ledger. C is wrong — actual materials used are in production records. D is wrong — spending authorisation is a different document.
Question 258
Simulation (Monte Carlo analysis) in capital budgeting involves:
Select an option first.
Correct answer: B — Running thousands of random scenarios by varying all key inputs simultaneously according to their probability distributions
Explanation: B is correct: Monte Carlo simulation assigns probability distributions to all uncertain input variables and runs thousands of iterations, randomly sampling from each distribution to produce a probability distribution of NPV outcomes — giving a richer risk picture than single-point or scenario analysis. A is wrong — that is sensitivity analysis. C is wrong — using expected values is a simpler expected value approach. D is wrong — two scenarios is scenario analysis.
Question 259
A project has cash flows of: Year 0: -$80,000; Year 1: $30,000; Year 2: $30,000; Year 3: $30,000. What is the simple payback period?
Select an option first.
Correct answer: B — 2.67 years
Explanation: B is correct: after year 1: -$80,000 + $30,000 = -$50,000. After year 2: -$50,000 + $30,000 = -$20,000. In year 3, need $20,000 of the $30,000. Payback = 2 + ($20,000/$30,000) = 2.67 years. A is wrong — 2 years recovers only $60,000 of the $80,000. C is wrong — 3 full years recovers $90,000, more than needed. D is wrong — 1.5 years only recovers $45,000.
Question 260
What does the term 'relevant cash flows' mean in investment appraisal?
Select an option first.
Correct answer: B — Future, incremental cash flows that arise specifically as a result of the investment decision
Explanation: B is correct: only future cash flows that will differ between the 'invest' and 'do not invest' alternatives are relevant. Sunk costs (already spent), committed costs (unavoidable) and non-cash items (depreciation) are excluded. A is wrong — not all management account items are relevant. C is wrong — historical cash flows are sunk. D is wrong — committed costs are irrelevant.
Question 261
Which of the following is an advantage of standard costing for a manufacturing business?
Select an option first.
Correct answer: C — It simplifies inventory valuation, aids performance control and provides a basis for pricing decisions
Explanation: C is correct: standard costing benefits include: consistent, easy inventory valuation (at standard cost); management by exception through variance reporting; and cost data that informs pricing and product decisions. A is wrong — standard costing identifies variances; it doesn't eliminate them. B is wrong — standard costing uses pre-set costs, not detailed actual records per transaction. D is wrong — budgeting and standard costing complement each other.
Question 262
Ideal standards are generally considered INAPPROPRIATE for routine budgeting motivation because:
Select an option first.
Correct answer: B — They set unachievable targets, leading to demotivation and distrust of the standard costing system
Explanation: B is correct: ideal standards assume zero waste and perfect efficiency — which is never achieved in practice. Workers and managers quickly become demoralised when variances are always adverse, making the system lose credibility as a motivational tool. A is wrong — ideal standards are harder, not simpler. C is wrong — ideal standards have no slack. D is wrong — who sets them is separate from why they are inappropriate.
Question 263
Which of the following is a disadvantage of rolling budgets?
Select an option first.
Correct answer: C — They are resource-intensive — managers must continually revise and extend the budget
Explanation: C is correct: rolling budgets require ongoing effort — as each period expires, a new one must be added, demanding continuous management time and attention. This can be burdensome, especially in organisations with limited finance function capacity. A is wrong — rolling budgets remain current; becoming out of date is a flaw of fixed annual budgets. B is wrong — rolling budgets require continuous updating, not once a year. D is wrong — rolling budgets can fully incorporate seasonal patterns.
Question 264
A company has budgeted to sell 10,000 units at $30 each. Actual sales were 9,500 units at $31 each. The sales price variance is:
Select an option first.
Correct answer: A — $9,500 favourable
Explanation: A is correct: sales price variance = (actual price − standard price) × actual units = ($31 − $30) × 9,500 = $1 × 9,500 = $9,500 favourable. B is wrong — $4,750 = $0.50 × 9,500 (wrong price difference). C is wrong — $15,000 adverse would imply a $1.58 shortfall. D is wrong — the variance is favourable (actual price > standard).
Question 265
The sales volume variance at standard contribution (marginal costing) for the above data, with standard contribution of $12/unit, is:
Select an option first.
Correct answer: A — $6,000 adverse
Explanation: A is correct: volume variance = (actual units − budgeted units) × standard contribution = (9,500 − 10,000) × $12 = −500 × $12 = $6,000 adverse. B is wrong — the variance is adverse (below budget volume). C is wrong — $5,000 would require a $10 contribution. D is wrong — $12,000 would require 1,000 units shortfall.
Question 266
When preparing a budgeted statement of financial position, which of the following would be included?
Select an option first.
Correct answer: B — Projected balances of all assets and liabilities at the end of the budget period
Explanation: B is correct: a budgeted balance sheet (statement of financial position) projects all asset, liability and equity balances at the end of the period — built up from opening balances adjusted for all budgeted transactions. A is wrong — cash alone is the cash budget. C is wrong — current assets and liabilities are also included. D is wrong — revenue and expenses appear in the budgeted income statement.
Question 267
Which of the following is a reason why budget variances may NOT be investigated?
Select an option first.
Correct answer: B — The variance is within a pre-defined tolerance level and deemed immaterial
Explanation: B is correct: management by exception means only significant variances warrant investigation. Small variances within an acceptable tolerance band (e.g. ±5%) are ignored to save management time for genuinely important deviations. A is wrong — not all variances are significant. C is wrong — variance analysis is widely used. D is wrong — many investigations are cost-effective.
Question 268
A company's standard material cost is $5/kg and 4 kg are needed per unit. Actual production is 800 units using 3,400 kg costing $17,850. What is the material price variance?
Select an option first.
Correct answer: A — $850 favourable
Explanation: A is correct: standard price = $5/kg. Actual price = $17,850 / 3,400 = $5.25/kg. Price variance = ($5.00 − $5.25) × 3,400 = −$0.25 × 3,400 = −$850 = $850 adverse. Wait — adverse means actual price > standard. B is correct: actual price ($5.25) > standard ($5.00) → adverse. Price variance = $850 adverse.
Question 269
Using the previous data (800 units, 3,400 kg used, standard 4 kg/unit), what is the material usage variance?
Select an option first.
Correct answer: A — $1,000 favourable
Explanation: A is correct: standard quantity for actual output = 800 × 4 = 3,200 kg. Usage variance = (3,200 − 3,400) × $5 = −200 × $5 = −$1,000 = $1,000 adverse. Wait — 3,400 used > 3,200 standard → adverse. B is correct: $1,000 adverse.
Question 270
The total direct labour variance = $2,400 adverse. The rate variance = $800 favourable. What is the efficiency variance?
Select an option first.
Correct answer: A — $3,200 adverse
Explanation: A is correct: total variance = rate variance + efficiency variance → −$2,400 = +$800 + efficiency variance → efficiency variance = −$2,400 − $800 = −$3,200 = $3,200 adverse. B is wrong — $1,600 doesn't satisfy the equation. C is wrong — $2,400 is the total, not efficiency alone. D is wrong — the efficiency variance is adverse.
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