CIMA BA2 Planning and control: practice questions with answers

Question 1

Kolbe Engineering Ltd expects that it could sell 50,000 units of its product next year. However, its machines can produce only 42,000 units a year, and materials, labour and cash are all freely available. Which statement about preparing next year's budgets is correct?

1. A Sales demand is the principal budget factor, so the sales budget should be prepared for 50,000 units and the other budgets built from it
2. B Cash is the principal budget factor, because the cash budget is always the first budget to be prepared
3. C There is no principal budget factor, because demand exceeds capacity and so all resources can be budgeted independently
4. D Machine capacity is the principal budget factor, so the production capacity limit should be identified first and the other budgets built around it

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Answer: D. The principal budget factor (limiting factor) is the factor that limits the organisation's activities. It is usually sales demand, but it can be production capacity, labour, materials or cash. It should be identified first, and the budget for it prepared first, because all the other budgets depend on it.

Here the machines can make only 42,000 units, so production capacity is the principal budget factor and the sales budget will be 42,000 units, not 50,000.

Question 2

The standard labour cost of product T is 2.5 hours at $14 per hour. In May, 3,200 units of T were made. Employees were paid $118,690 for 8,300 hours, all of which were worked. What is the labour efficiency variance for May?

1. A $4,290 adverse
2. B $4,200 favourable
3. C $4,200 adverse
4. D $2,490 adverse

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Answer: C. - Standard hours for actual output = 3,200 × 2.5 = 8,000 hours
- Actual hours worked = 8,300 hours
- Labour efficiency variance = (8,300 − 8,000) × $14 = $4,200 adverse

For completeness, the labour rate variance = 118,690 − (8,300 × $14) = $2,490 adverse (actual rate $14.30 per hour).

Question 3

Each year the budget for each department of Linmoor Housing Association is set at last year's budget plus 3% for inflation, adjusted only for changes that managers already know about. What is the main weakness of this approach?

1. A It takes far more management time than other methods, because every activity must be justified from a zero base each year
2. B It cannot be used where costs are affected by inflation, because the budget is based on the previous year's figures
3. C Inefficiencies and slack in past budgets are carried forward, because the need for each activity and its cost are not re-examined
4. D The budget must be updated every quarter by adding a new quarter as each one ends, which is costly to administer

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Answer: C. Linmoor uses incremental budgeting: the starting point is last year's budget, adjusted for inflation and known changes.

- Advantages: simple, quick and stable.
- Main weakness: it assumes that existing activities and spending levels are still needed and efficient. Slack and inefficiency built into past budgets are rolled forward, and managers may spend up to budget to protect next year's base.

Zero-based budgeting addresses this by requiring every activity to be justified from scratch, at the cost of much more time and effort.

Question 4

Raxford Ltd sets its standards on the assumption of perfect operating conditions: no material wastage, no machine breakdowns and no idle time. Which of the following describes this type of standard and its most likely effect on employees?

1. A An attainable standard, which motivates employees because the targets are challenging but achievable
2. B An ideal standard, which motivates employees because the targets can usually be met with normal effort
3. C A basic standard, which is left unchanged for long periods so that trends in performance can be seen
4. D An ideal standard, which may demotivate employees because adverse variances will be reported almost every period

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Answer: D. Types of standard:

| Standard | Basis | Typical effect |
|---|---|---|
| Ideal | Perfect conditions: no wastage, breakdowns or idle time | Rarely met; constant adverse variances can demotivate |
| Attainable | Efficient operation with allowances for normal losses and downtime | Challenging but achievable; usually best for motivation |
| Current | Current conditions, including current inefficiencies | Little incentive to improve |
| Basic | Kept unchanged over long periods | Shows trends over time, but becomes out of date |

Question 5

Ashburn District Council runs a household waste recycling service. Its performance report includes the measures below. Which measure is the best indicator of the service's effectiveness?

1. A The cost per tonne of waste collected, compared with last year
2. B The percentage of household waste recycled, compared with the council's target of 55%
3. C The price paid for each recycling bin, compared with prices quoted by other suppliers
4. D The average number of streets each collection crew completes per shift

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Answer: B. Value for money in not-for-profit organisations is assessed through the 3 Es:

- Economy – buying inputs of the right quality at the lowest cost (price per bin).
- Efficiency – getting the most output from the inputs used (cost per tonne, streets per crew shift).
- Effectiveness – achieving the organisation's objectives (the recycling rate against the 55% target).

Question 6

The standard labour cost of Fernhill Ltd's product is 2.8 hours at $16 per hour. In October, 3,000 units were made. Employees were paid $148,500 for 9,000 hours, but because of a machine breakdown only 8,600 hours were actually worked. What is the idle time variance for October?

1. A $6,600 adverse
2. B $9,600 adverse
3. C $6,400 adverse
4. D $6,400 favourable

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Answer: C. - Idle hours = hours paid − hours worked = 9,000 − 8,600 = 400 hours
- Idle time variance = 400 × standard rate $16 = $6,400 adverse

For completeness, the other labour variances are:

- Rate: (9,000 × 16) − 148,500 = $4,500 adverse (based on hours paid)
- Efficiency: (8,600 − 8,400) × 16 = $3,200 adverse (based on hours worked; standard hours = 3,000 × 2.8 = 8,400)