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Chartered Institute of Management Accountants (CGMA) · Advanced Management Accounting

CIMA P2 Managing and controlling the performance of organisational units: practice questions with answers

6 free exam-style questions on Managing and controlling the performance of organisational units for CIMA P2 Advanced Management Accounting. Try each one, then open the answer to read the explanation. Fincora has 72 original questions on this syllabus area.

Question 1

Ferncliffe Hotels is building a balanced scorecard. Which of the following measures belongs to the learning and growth (innovation and learning) perspective?

  1. A Revenue per available room
  2. B Percentage of guests rating their stay as excellent
  3. C Average time taken to check in a guest
  4. D Percentage of staff completing training on the new booking system
Show the answer

Answer: D. Kaplan and Norton's balanced scorecard has four perspectives:

| Perspective | Question | Example here |
|---|---|---|
| Financial | How do we look to shareholders? | Revenue per available room |
| Customer | How do customers see us? | % of guests rating stay excellent |
| Internal business process | What must we excel at? | Check-in time |
| Learning and growth | Can we continue to improve and create value? | % of staff trained on new system |

The perspectives are linked: better-trained staff improve processes, which improves customer satisfaction and, in turn, financial results.

Question 2

When accounting profit is adjusted to net operating profit after tax (NOPAT) for an economic value added (EVA) calculation, which of the following adjustments is made?

  1. A Interest paid on debt is deducted from profit
  2. B Accounting depreciation is retained and economic depreciation is ignored
  3. C Increases in non-cash provisions are deducted from profit
  4. D Spending on advertising that builds long-term brand value is added back and treated as an investment
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Answer: D. Typical adjustments from accounting profit to NOPAT:

| Adjustment | Treatment |
|---|---|
| Interest | Exclude (cost of finance is in the capital charge) |
| Value-building spend (advertising, R&D, training) | Add back, capitalise and amortise |
| Accounting depreciation | Add back; deduct economic depreciation |
| Non-cash provisions | Add back increases |
| Tax | Deduct the tax actually paid, adjusted for the tax effect of interest |

EVA = NOPAT − (WACC × capital employed at economic value).

Question 3

Which of the following best describes how economic value added (EVA) differs from residual income (RI)?

  1. A EVA is a percentage measure, while RI is measured in absolute money terms
  2. B EVA deducts interest paid on debt from profit before making a capital charge, while RI does not
  3. C EVA uses profit and capital employed adjusted towards economic values, and charges the weighted average cost of capital
  4. D EVA ignores the cost of capital, while RI deducts an imputed interest charge
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Answer: C. Both RI and EVA = profit − (cost of capital × capital employed), measured in money terms.

EVA refines RI by:
- using NOPAT, adjusted from accounting profit (e.g. adding back non-cash provisions and spending that builds long-term value, using economic rather than accounting depreciation, excluding interest)
- using capital employed at economic values, including capitalised items
- charging the weighted average cost of capital

The aim is to measure the economic profit created for shareholders more accurately than an accounting-based measure.

Question 4

Tamworth Supplies is designing a balanced scorecard. Which of the following measures belongs to the internal business process perspective?

  1. A Customer retention rate
  2. B Return on capital employed
  3. C Percentage of customer orders dispatched within 24 hours
  4. D Number of staff suggestions implemented
Show the answer

Answer: C. Kaplan and Norton's balanced scorecard has four perspectives:

- Financial: how do we look to shareholders? (e.g. ROCE, revenue growth)
- Customer: how do customers see us? (e.g. retention, satisfaction, market share)
- Internal business process: what must we excel at? (e.g. dispatch times, defect rates, cycle times)
- Learning and growth: can we continue to improve and create value? (e.g. training, staff suggestions, new products)

Question 5

In Lynch and Cross's performance pyramid, which measures are used at the base of the pyramid, for individual departments and work centres?

  1. A Customer satisfaction, flexibility and productivity
  2. B Market measures and financial measures
  3. C Corporate vision and strategy
  4. D Quality, delivery, cycle time and waste
Show the answer

Answer: D. Lynch and Cross's performance pyramid links strategy to operations:

1. Top: corporate vision
2. Business units: market and financial objectives
3. Business operating systems: customer satisfaction, flexibility and productivity
4. Departments and work centres: quality, delivery, cycle time and waste

Objectives cascade down the pyramid, and the operational measures at the base support the achievement of the objectives above. Quality and delivery are mainly external (customer-facing) measures, while cycle time and waste are mainly internal.

Question 6

Lanyon Group sets transfer prices between divisions on the basis of the supplying division's costs. Why is it better to use standard cost rather than actual cost?

  1. A It guarantees that the transfer price will equal the external market price
  2. B It stops the supplying division passing the cost of its own inefficiencies on to the buying division
  3. C It ensures that the supplying division always makes a profit on internal transfers
  4. D It removes the need for the supplying division to control its costs
Show the answer

Answer: B. If transfers are priced at actual cost, the supplying division's inefficiencies are simply passed on to the buying division, so the supplier has no incentive to control costs and the buyer does not know its costs in advance.

Using standard cost:
- leaves cost variances (favourable or adverse) with the division responsible for them
- gives the buying division a known, stable price for planning and decision-making

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