Free ACCA Performance Management Practice Questions

Question 1

Division A: profit 80,000; net assets 500,000. Division B: profit 55,000; net assets 300,000. Cost of capital 14%. Calculate ROI and RI for both.

Accepted Answer

A: ROI 16%, RI 10,000; B: ROI 18.3%, RI 13,000

Answer

A: ROI 20%, RI 10,000; B: ROI 18.3%, RI 5,000

Answer

A: ROI 16%, RI 80,000; B: ROI 18.3%, RI 55,000

Question 2

Division C has ROI of 22% and considers a project earning 17% (company hurdle 15%). Decision under ROI vs RI?

Accepted Answer

ROI: reject (dilutes average); RI: accept (positive RI) — RI is goal congruent

Answer

ROI: accept; RI: reject

Answer

ROI: accept; RI: also accept — both say yes

Answer

ROI and RI always give the same answer

Question 3

Transfer pricing: selling division variable cost 35, full capacity, external market price 55. Buying division external supplier price 50. Is internal transfer goal congruent?

Accepted Answer

No — minimum TP is 55 (variable cost + opportunity cost = 35+20=55) but buying division can source externally at 50. Transferring internally at 55 costs group 55 (S's VC=35 + S's opportunity cost=20). Buying externally costs group 50. External purchase saves group 5 per unit — not goal congruent to transfer internally

Answer

Yes — always transfer internally

Answer

Yes — the selling division's costs are lower so group saves money

Answer

Transfer at variable cost of 35 — this is always goal congruent

Question 4

Transfer pricing in a multinational: selling division in low-tax country (10% tax), buying division in high-tax country (28%). Variable cost 25/unit. Set TP at 25 (VC) vs market price 60. Assess group tax impact.

Accepted Answer

Low TP (25) shifts profit to high-tax country (buying division pays high tax on margin 60-25=35). High TP (60) shifts profit to low-tax country (selling division earns margin 60-25=35, taxed at 10%). High TP reduces group tax — motivation for multinationals to set high transfer prices to selling divisions in low-tax jurisdictions

Answer

Both transfer prices give the same group tax

Answer

Low TP always reduces group tax

Answer

Transfer pricing has no tax implications

Question 5

What is the minimum transfer price when the selling division is operating at full capacity and external selling price is 80, variable cost 35?

Accepted Answer

80

Answer

35

Answer

45

Answer

57.50

Question 6

A division's net assets are 1,200,000. It is considering two projects: Project A (investment 300,000, annual profit 45,000) and Project B (investment 200,000, annual profit 32,000). Current divisional profit: 180,000. COC: 13%. Evaluate under ROI and RI.

Accepted Answer

Both reject under ROI; both accept under RI

Answer

Both accept under ROI; both accept under RI

Answer

Reject A under ROI; accept B under RI; accept A under RI

Answer

Reject both under RI

Question 7

A multinational uses cost-based transfer prices. The selling division has variable cost 30 and full cost 50. Tax rate in selling division's country is 20%; buying division's country is 30%. Which transfer price minimises group tax?

Accepted Answer

Variable cost (30) — all profit in low-tax country

Answer

Full cost (50) — all profit in high-tax country

Answer

Market price — irrelevant to tax

Answer

Cost plus 10%

Question 8

A company values divisional net assets at net replacement cost rather than historical cost net book value. What effect does this have on ROI and why might it be better?

Accepted Answer

Using replacement cost typically results in higher asset values than fully depreciated historical cost, reducing ROI. However, it gives a more economically realistic measure of the investment required — preventing the ROI inflation caused by old, fully-depreciated assets. It makes divisional ROI more comparable across divisions with different asset ages

Answer

It increases ROI artificially

Answer

It has no effect on ROI

Answer

It makes ROI identical to RI

Question 9

A buying division can source a component internally (TP=60) or externally (market price=55). The selling division has spare capacity and variable cost of 40. From the group's perspective, what is the best decision?

Accepted Answer

Buy internally — the group's true cost is only 40 (selling division's variable cost). Buying externally at 55 costs the group 15 more per unit than internal supply. The TP of 60 is an internal accounting transfer, not a real group cost

Answer

Buy externally — external price is lower than TP

Answer

Always use external market price

Answer

Transfer at variable cost is never appropriate

Question 10

A company uses ROI for divisional bonuses. Division A's assets are 8 years old (mostly depreciated, high ROI). Division B uses new equipment (high NBV, lower ROI). Is the comparison fair?

Accepted Answer

No — the comparison is unfair: Division A's high ROI partly reflects old, depreciated assets (low denominator), not necessarily superior management performance. Division B's new assets give a high denominator, depressing ROI despite potentially better long-run capability. Using gross book value, replacement cost, or RI with economic depreciation provides a fairer basis

Answer

Yes — ROI accounts for asset age

Answer

ROI is always fair regardless of asset age

Answer

Division B should buy older assets

Question 11

Division X has: profit 90,000; net assets 600,000; COC 14%. A new investment of 150,000 will generate 25,000 annual profit. Evaluate under ROI and RI.

Accepted Answer

Both ROI and RI say accept

Answer

ROI: current 15%; new project 16.7% — accept (improves average). RI of project: 25,000-(150,000x14%)=25,000-21,000=4,000 positive — accept. Both criteria agree: accept

Answer

ROI says accept; RI says reject

Answer

ROI: reject (dilutes); RI: accept

Question 12

Division Y: net assets 800,000; profit 96,000; COC 11%. A project requiring 200,000 investment would generate 18,000 annual profit. Evaluate.

Accepted Answer

Accept under both ROI and RI

Answer

Current ROI=12%; Project ROI=9% — ROI says reject (dilutes below current 12%). Project RI=18,000-(200,000x11%)=18,000-22,000=-4,000 negative — RI also says reject. Both criteria agree: the project earns below the cost of capital.

Answer

Accept under RI; reject under ROI

Answer

Reject under ROI; accept under RI

Question 13

A multinational sets transfer prices using the arm's length principle required by OECD guidelines. This means:

Accepted Answer

Transfer prices between related parties should be set as they would be between independent parties in comparable circumstances — using market prices, cost-plus or profit-split methods to comply with international tax regulations

Answer

Transfer prices can be set freely at any level

Answer

Transfer prices should always be set at variable cost

Answer

Transfer prices should be set to minimise group tax regardless of market rates

Question 14

Division A currently has ROI of 20%. It is evaluating two projects: Project 1 — investment 500,000, profit 90,000 (ROI 18%). Project 2 — investment 200,000, profit 42,000 (ROI 21%). COC = 15%. Which projects should be accepted under RI and ROI respectively?

Accepted Answer

RI: both; ROI: Project 2 only (Project 1 dilutes below 20% but both earn above COC)

Answer

RI: both; ROI: only Project 2

Answer

RI: only Project 1; ROI: only Project 2

Answer

ROI: reject both

Question 15

Division X: profit 120,000; net assets 700,000 (includes fully depreciated asset original cost 200,000, still in use). Company COC 13%. Division considers replacing fully-depreciated asset with new asset at 200,000 (net book value). Profit unchanged. Calculate ROI before and after replacement and comment.

Accepted Answer

Before: 17.1%; After: 13.3% — ROI falls, manager may resist replacement

Answer

Before: 17.1%; After: 17.1% — no change

Answer

Before: 20%; After: 13.3% — manager should replace anyway

Answer

ROI is irrelevant to this decision

Question 16

A group has four divisions. Headquarters allocates 20% of its costs (500,000 total HQ costs = 100,000 per division) to each division. Division P has: profit before HQ allocation 60,000; after HQ allocation -40,000. Net assets 400,000. COC 12%. Should Division P be closed based on these figures?

Accepted Answer

No — if HQ costs are not avoidable (they will be reallocated or remain regardless), Division P should be evaluated on its controllable profit. Its contribution before non-avoidable HQ costs is 60,000, giving positive RI of 60,000 - (400,000x12%) = 12,000. Closure would eliminate the 60,000 contribution while saving no HQ costs.

Answer

Yes — it reports a loss after HQ allocation

Answer

Yes — ROI is negative

Answer

No — HQ allocations are always avoidable

Question 17

Group X has three divisions. Division 1: profit 200,000, net assets 1,000,000. Division 2: profit 140,000, net assets 700,000. Division 3: profit 80,000, net assets 800,000. COC=15%. Calculate RI for each and advise on resource allocation.

Accepted Answer

Division 1 RI=50,000; Division 2 RI=35,000; Division 3 RI=-40,000. Divisions 1 and 2 create value; Division 3 destroys value. Invest further in Divisions 1 and 2; investigate and address Division 3's underperformance

Answer

All three create value — invest equally

Answer

All three are performing well — ROI is the better measure

Answer

Division 3 should be closed immediately

Question 18

Division P earns ROI of 18% on net assets of 2,000,000. It receives a proposal: new machine (cost 500,000, annual profit contribution 70,000). COC=13%. Evaluate under both ROI and RI, and recommend.

Accepted Answer

Accept under RI (positive); Reject under ROI (dilutes from 18% to 16.7%). RI is goal congruent — the project earns above COC (14% > 13%) and adds value. ROI evaluation leads to dysfunctional rejection.

Answer

Reject under both — ROI falls

Answer

Accept under both

Answer

The project should be rejected as the profit is too low

Question 19

A company is considering two methods of measuring divisional performance for bonus purposes: (A) Divisional ROI vs target ROI; (B) Residual Income (RI). Which is more likely to lead to goal congruent investment decisions, and why?

Accepted Answer

Method B (RI) is more goal congruent for investment decisions because it rewards acceptance of any investment earning above the cost of capital, regardless of how it affects the division's ROI percentage. ROI bonuses may cause managers to reject value-creating investments that dilute their average ROI, harming the group

Answer

Method A — ROI is always better

Answer

Both are equally goal congruent

Answer

Method A is better because it is simpler

Question 20

Head office allocates 20% of group central costs (total 1,000,000) to Division M. This allocation increases Division M's reported costs by 200,000, turning a 50,000 profit into a 150,000 loss. The allocated costs are non-avoidable (they continue regardless of Division M's existence). Evaluate the fairness and usefulness of this performance measurement.

Accepted Answer

The allocation is misleading for performance evaluation: Division M's controllable profit is +50,000. The 200,000 non-avoidable allocation does not reflect M's actual resource consumption or decisions. Evaluating M on the reported -150,000 loss may drive incorrect closure decisions and demotivates the divisional manager by holding them responsible for costs they cannot control

Answer

The allocation is fair — all costs must be absorbed

Answer

Head office costs should always be allocated to divisions

Answer

Division M should be closed because it reports a loss

Question 21

Company Z uses RI to evaluate all four divisions. Division W consistently generates high RI but has not invested in new equipment for 5 years (assets mostly depreciated). Division V generates moderate RI but invested heavily last year. Compare the quality of each division's RI and recommend measurement improvements.

Accepted Answer

Division W's high RI partly reflects low capital charge from depreciated assets (low net asset denominator) rather than superior management. Division V's lower RI reflects the high capital charge on recently acquired assets that have not yet generated full returns. To improve fairness: use gross asset values or replacement cost for net assets; supplement RI with qualitative assessment of asset condition and strategic investment plans.

Answer

Both divisions RI figures are equally reliable

Answer

RI is always reliable — no improvements needed

Answer

Division V should be penalised for investing

Question 22

The Balanced Scorecard provides performance measures across which four perspectives?

Accepted Answer

Financial, customer, internal business process, learning and growth

Answer

Financial, operational, strategic, social

Answer

Profit, cash flow, assets, liabilities

Answer

Sales, production, HR, finance

Question 23

A non-financial performance indicator (NFPI) is:

Accepted Answer

A measure of performance that does not use monetary values

Answer

Any ratio expressed as a percentage

Answer

A measure used only by non-profit organisations

Answer

A measure based on budgeted figures

Question 24

Value for money (VFM) in the public sector is assessed through three Es. What are they?

Accepted Answer

Economy, efficiency, effectiveness

Answer

Ethics, equity, excellence

Answer

Earnings, expenses, equity

Answer

Environment, employees, external

Question 25

Benchmarking involves:

Accepted Answer

Comparing performance against best practitioners inside or outside the industry to identify improvement opportunities

Answer

Setting targets based on last year's performance

Answer

Calculating the average performance of competitors

Answer

Reviewing strategy once every 5 years

Question 26

A key risk of relying solely on financial performance measures is:

Accepted Answer

They encourage short-termism — cutting investment in training, R&D and maintenance to boost current profit at the expense of long-term value creation

Answer

They are too complex to calculate

Answer

They are not used by investors

Answer

They are too slow to produce

Question 27

The performance pyramid (Lynch and Cross) measures performance at:

Accepted Answer

Four levels: corporate vision, business units, business operating systems, and departments/work centres

Answer

One corporate level only

Answer

Three levels: strategic, tactical, operational

Answer

Two levels: financial and non-financial

Question 28

The learning curve effect describes:

Accepted Answer

The tendency for the average time per unit to fall by a fixed percentage each time cumulative output doubles

Answer

Costs rising as production increases

Answer

The diminishing returns from capital investment

Answer

The relationship between price and demand

Question 29

Which perspective of the Balanced Scorecard asks 'How do we look to our shareholders?'

Accepted Answer

Financial

Answer

Customer

Answer

Internal business process

Answer

Learning and growth

Question 30

The internal business process perspective of the BSC focuses on:

Accepted Answer

What internal processes must the business excel at to satisfy customers and shareholders

Answer

How customers perceive the business

Answer

Employee skills and development

Answer

Financial returns to shareholders

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Free ACCA Performance Management Practice Questions & Answers

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