Chartered Institute of Management Accountants (CGMA) · Advanced Management Accounting
CIMA P2 Managing the costs of creating value: practice questions with answers
4 free exam-style questions on Managing the costs of creating value for CIMA P2 Advanced Management Accounting. Try each one, then open the answer to read the explanation. Fincora has 48 original questions on this syllabus area.
Question 1
Which of the following statements about life cycle costing is correct?
- A Most of a product's life cycle costs are incurred during the production phase, so cost control should concentrate on that phase
- B A large proportion of a product's life cycle costs is committed at the design stage, even though much of the cost is incurred later
- C Life cycle costing reports costs period by period, in the same way as traditional management accounts
- D Pre-production costs such as research and development are excluded, because they are sunk by the time production begins
Show the answer
Answer: B. Life cycle costing tracks and accumulates a product's costs and revenues over its entire life, from research and design through production and sale to withdrawal and decommissioning.
A key insight is the difference between cost commitment and cost incurrence: a large share of total life cycle cost is committed at the design stage, even though it is spent later. That is why cost management effort is most effective before production starts. Traditional period-based reporting hides this because it writes off R&D as it is incurred and never shows the product's full cost.
Question 2
In which of the following situations is the learning curve effect least likely to apply?
- A A bottling line where the speed of output is set by automated machinery
- B Hand assembly of a newly designed hospital bed by a stable, skilled team
- C Fitting out the first few units of a new yacht design, which involves complex manual work
- D Assembling a new electronic product where workers are paid a bonus for improving output
Show the answer
Answer: A. The learning curve applies where:
- the process is labour-intensive and repetitive, so workers can get faster with practice
- the product or process is new or complex
- there are no long breaks in production and the workforce is stable
It is unlikely to apply when output is machine-paced or highly automated, because the speed of the machinery, not the skill of the operators, sets the time per unit.
Question 3
Westholm Furniture is analysing its activities using Porter's value chain. Which of the following is a support activity?
- A Delivering finished furniture to customers' homes
- B Assembling and finishing furniture in the factory
- C Providing an after-sales repair service to customers
- D Procurement of timber, fabric and fittings from suppliers
Show the answer
Answer: D. Porter's value chain divides an organisation's activities into:
- Primary activities: inbound logistics, operations, outbound logistics, marketing and sales, service
- Support activities: procurement, technology development, human resource management, firm infrastructure
Procurement is the function of purchasing inputs used anywhere in the chain, so it is a support activity. (Receiving and storing the materials once bought is inbound logistics, a primary activity.)
Question 4
Which of the following correctly distinguishes value engineering from value analysis?
- A Value engineering is applied to new products at the design stage; value analysis is applied to products already being made
- B Value engineering reduces costs by cutting product quality; value analysis reduces costs without changing quality
- C Value engineering is applied to products already being made; value analysis is applied at the design stage
- D Value engineering focuses on esteem value only; value analysis focuses on use value only
Show the answer
Answer: A. Value engineering is applied to new products during design, to build in the required functions at the lowest cost before costs are committed.
Value analysis is applied to existing products (or services and processes) to find ways of reducing cost, for example through cheaper materials or simpler designs, without reducing the value to the customer.
Both are used with target costing to close a cost gap.
Keep practising Managing the costs of creating value
Sign up free to practise this syllabus area in full, sit timed CIMA P2 mocks and see your score by area. Every question on Fincora is written by us; none are past exam papers.
More CIMA P2 syllabus areas
Practice questions are for study only and are not official exam questions. Back to CIMA P2 mock exams and practice.