CIMA P2 Practice Exam Questions

CIMA P2 Sample Question Answers

Question # 1

A company currently absorbs production overheads based on labor hours. The overheads absorbed by the two products that are made, L and M, are $4 per unit and $10 per unit respectively. These were based on the budgeted overheads of $7,000 and budgeted labor hours of 1,750. The budgeted output was 500 units of each product.The company is investigating the use of activity based costing (ABC). Analysis has shown that the total production overheads of $7,000 are made up of $4,000 for set up costs and $3,000 for inspection costs. The cost driver for set up costs is the number of set ups and for inspection costs it is the number of inspections. The cost driver rate for set ups is $160 per set up. Product L would need 5 production runs. Both types of product would need 1 set up for each production run. Product L would need 2 inspections for each production run. Product M would need 1 inspection per production run. The products are made in the same department and use the same equipment and staff but they are produced separately. Which of the following statements are correct? Select ALL that apply.  

A. The current production overhead absorption rate is $4.00 per hour. 
B. The current production overhead absorption rate is $500 per hour. 
C. If ABC was used, set up costs per unit of Product L would be $1.60. 
D. If ABC was used, set up costs per unit of Product M would be $4.00. 
E. If ABC was used, inspection costs per unit of Product L would be $4.00. 
F. If ABC was used, inspection costs per unit of Product M would be $4.00. 

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Question # 2

If transfer prices are set at variable costs, the supplying division does not cover its fixed costs. Which of the following does NOT resolve this problem? 

A. Each division can be given a share of the overall contribution earned by the organization. 
B. A system of dual pricing can be adopted. 
C. Reduce the level of fixed costs. 
D. Central management can impose a range within which the transfer price should fall. 

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Question # 3

Which TWO of the following are reasons why cost-based approaches to transfer pricing are often used in practice? 

A. The buying division will want to maximize its profits. 
B. The transferring division will want to maximize its profits. 
C. Because the external market is imperfect. 
D. Because there is often no external market for the product that is being transferred. 
E. The approach allows the organization to cover all the costs. 

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Question # 4

Which TWO of the following expressions are correct? 

A. 1 + money rate = (1 + real rate) x (1 + inflation rate) 
B. 1 + real rate = (1 + money rate) / (1 + inflation rate) 
C. 1 + real rate = (1 + inflation rate) / (1 + money rate) 
D. 1 + money rate = (1 + inflation rate) / (1 + real rate) 
E. 1 + inflation rate = (1 + money rate) x (1 + real rate) 

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Question # 5

A company has a 31 December year end and pays corporation tax at a rate of 30%. Corporation tax is payable 12 months after the end of the year to which the cash flows relate. The company can claim tax allowable depreciation at a rate of 25% reducing balance. It pays $1 million for a machine on 31 December 20X4. The company's cost of capital is 10%. What is the present value of the benefit of the first portion of tax allowable depreciation? 

A. $250,000 
B. $227,500 
C. $75,000 
D. $68,175 

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Question # 6

The net present value of the cost of operating a machine for the next 4 years is £6,340. The discount rate used is 10%.What is the equivalent annual cost and the present value of the cost in perpetuity of operating this machine? Use discount factors to 3 decimal places.  

A. Equivalent annual cost = £92,825 Present value of cost in perpetuity = £9,283 
B. Equivalent annual cost = 9,283 Present value of cost in perpetuity = £92,825 
C. Equivalent annual cost = £2,000 Present value of cost in perpetuity = £20,000 
D. Equivalent annual cost = £20,000 Present value of cost in perpetuity = £2,000 

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Question # 7

A company has recently developed a new lawnmower with an estimated market life of 5 years. Production and sale of the lawnmower will require investment in new production equipment costing $750,000. It is expected that this equipment could be sold back to the original vendor for $50,000 at the end of five years. Purchase of the equipment would be financed by a 5 year fixed rate bank loan at an interest rate of 6%. A manager already employed by the company would be moved from their current position to manage production of the new lawnmower. Their original position would be filled by a new recruit on a fixed annual salary of $35,000. Which of the following statements is NOT correct?  

A. If the lawnmower is a failure then management can terminate the project early and sell the equipment, giving them an abandonment option. 
B. The salary of the replacement manager is a relevant cash flow in the decision. 
C. The interest costs on the bank loan are a relevant cash flow in the decision. 
D. Launching a new lawnmower gives an opportunity to launch more new versions and provides a follow-on option. 

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Question # 8

Which of the following statements are fundamental concepts that underlie the Beyond Budgeting approach? 1. Use traditional budgeting in conjunction with other techniques. 2. Use adaptive management processes rather than the more rigid annual budget. 3. Move towards devolved networks rather than centralized hierarchies. 4. Move towards centralized hierarchies rather than devolved networks. 

A. Statements 1 and 2 apply. 
B. Statements 1, 2 and 3 apply. 
C. Statements 2 and 3 apply. 
D. Statements 2, 3 and 4 apply. 

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Question # 9

A company is determining the selling price for its new product.At a selling price of $16 per unit there will be zero demand but for every $1 reduction in the price, demand will increase by 100 units per period. Production must be in batches of 100 units. The variable cost per unit will be $8 if 400 units are produced in a period. For each additional batch produced in a period the variable cost per unit will increase by $1 per unit for the additional batch only. No inventories will be held. Which of the following sales and production volumes will generate the highest contribution per period?  

A. 400 units 
B. 500 units 
C. 600 units 
D. 700 units 

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Question # 10

Risk management can be represented as a four step process. The four steps, shown randomly, are:1. Establish appropriate risk management policies. 2. Risks are identified by key stakeholders. 3. Risks are monitored on an ongoing basis. 4. Risks are evaluated according to the likelihood of occurrence and impact on the organization. Which of the following is the correct order for the four steps?  

A. 1, 2, 3, 4 
B. 2, 1, 4, 3 
C. 1, 2, 4, 3 
D. 2, 4, 1, 3 

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