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International Organisation for

Professional Qualifications

GCMA
Global Certified
Management Accountant

Practice Questions

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Practice Questions - GCMA

1. Incan Drugs Ltd manufactures community medicine. Substantial amount of working capital has to be
allocated for research expenditures. In accordance with IAS 38, research costs should be written off as an
expense as they are incurred.

Which ONE of the following is an appropriate rationale behind this accounting treatment?
A It cannot be certain that future economic benefits will probably flow to the entity from the product at its
research stage. There is too much uncertainty about the likely success of the product.
B Research costs are a direct expenditure as it can easily be tailored to a product.
C Research costs are an indirect expenditure and should be included in a product’s overhead costs
D At the research stage of a product, it cannot be certain that future economic benefits will probably flow to
the entity from the product. There is less uncertainty about the likely success of the product.

2. State whether the following events occurring after the end of the reporting period require an adjustment to
the assets and liabilities of the financial statements.

(a) Purchase of an investment


(b) A change in the rate of corporate tax, applicable to the previous year
(c) An increase in pension benefits
(d) Losses due to fire
(e) A bad debt suddenly being paid
(f) The receipt of proceeds of sales or other evidence concerning the net realisable value of inventory
(g) A sudden decline in the value of property held as a long-term asset

3. Sean Plc has prepared draft financial statements for the year ended 30 September 2012. Its reported profit
was $400,000. After the reporting period had ended you are informed that the following events are still to be
adjusted in the statement of Sean Plc:

(I) On 18 October 2012, an insurance claim for a burglary which had taken place on 10 September 2012
and for which Sean Plc had expected to receive $85,000 would be restricted to $45,000;
(II) On 5 December 2012, pension benefits increased to $14,000.

Which ONE of the following is the revised profit of Sean Plc after taking account of the above events?

A $360,000
B $483,093
C $346,000
D $440,000

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Practice Questions - GCMA

4. Denver plc acquired 80% of the ordinary share capital of Corbin Ltd on 30 September 2011. On 31
December 2011, the share capital and retained earnings of Corbin Ltd were as follows.
$'000
Ordinary shares of 50p each 300
Retained earnings at 1 January 2011 80
Retained profit for the year ended 31 December 2011 40
420
The profits of Corbin Ltd have accrued evenly throughout 2011. Goodwill arising on the acquisition of Corbin
Ltd was $20,000.
What was the cost of the investment in Corbin Ltd?

A $356,000
B $328,000
C $348,000
D $430,000

5. It has been discovered that in accounts of Skydivers Ltd, prepayment as a current asset has been
understated Which ONE of the following would be the possible changes in Skydivers Ltd?

A Assets: No change; Liabilities: Reduced; Capital: Increased


B Assets: Increased; Liabilities: No change; Capital: Reduced
C Assets: Reduced; Liabilities: Reduced; Capital: No change
D Assets: Reduced; Liabilities: Reduced; Capital: No change

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Practice Questions - GCMA

6. Turenne Ltd manufactures rust-free metal utensils. Mr. Cesare Maldini, head of accounts department,
submitted Turenne Ltd’s current year master budget which is as follows:
$ $
Sales 480,000

Variable Costs:
Materials (20,000 tonnes at $10 per tonnes) 200,000
Labour 96,000
Variable overhead 48,000
Fixed overhead 72,000
Total cost (416,000)
Budgeted net profit 64,000

Turenne Ltd has substantial excess production capacity. A sales enquiry has been received during the year
that will exceed sales and production budget by 25%.

Extra 5,000 tonnes of materials are required and Turenne Ltd can obtain 5% discount on its normal buying
price if 7,000 tonnes are purchased. The additional 2,000 tonnes will be used to complete the year’s
budgeted production.

In order to earn the same budgeted net profit for the year of $64,000, which of the following price will
Turenne Ltd charge for the special order?

A $83,500
B $100,500
C $82,500
D $101,500

7. Tour Ltd manufactures a traveler waist bags for which cost and selling price data are as follows:

Selling price per unit $12


Variable cost per unit $8
Fixed costs per month $96,000
Budgeted monthly sales (units) 30,000
The margin of safety, expressed as a percentage of budgeted monthly sales, is:

A 20%
B 25%
C 73%
D 125%

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Practice Questions - GCMA

8. The approach to decision making under conditions of uncertainty depends on the attitude of an organisation
and its management to risk. Decision-making should certainly be taken with a proper understanding of the
different possible outcomes.

A decision maker is risk neutral if he or she is concerned with what will be the most likely outcome. A risk
averse decision maker acts on the assumption that the worst outcome might occur. The two possible
decision making techniques involved are maximum and expected value.

Which of the following correctly matches a manager’s risk preference to these techniques?

Risk neutral Risk averse


A Maximin Neither
B Neither Expected value
C Expected value Maximin
D Expected value Neither

The following case relates to question 9, 10, and 11:

Overhead costs of CBA company comprises of – material handling and quality inspection. The budgeted costs for
the coming year are as follows:

Material handling $1m


Quality inspection $3m
The company currently absorbs overhead using direct labour hours. Direct labour hours is expected to be 50,000
hours.

The factory manager has been asked to submit a bid price and has assembled the following data concerning
proposed job.
Job
$’000
Direct materials 37,000
Direct labour (1,000 hours) 70,000
Number of material moves 10
Number of inspections 5

As an alternative approach, the manager wished to implement ABC approach to assign overhead to jobs. He
estimates that the expected number of material moves for all jobs during the year is 1,000. He also expects 5,000
quality inspections to be performed.

9. Compute the total cost of the proposed job using direct labour hours as basis for absorbing overheads.

10. Compute the total cost of the job using the number of material moves to allocate material-handling costs and
the number of inspections to allocate the quality inspections costs.

11. Which approach reflects the actual cost of the job? Justify your answer.

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Practice Questions - GCMA

12. The Greenway Division's financial statements to 31 March 20X4 show a profit before tax of $56.4m. During
the year, Greenway had incurred $12.6m costs in developing a new product, which is to be launched in the
following year, with an expected market life of three years. These costs had been written off in full against
the profits for the year. Taxation for the year is $17.2m. Greenway's statement of financial position shows net
assets of $184m, with trade, taxation and other such payables standing at $32.5m, and receivables of
$42.5m, after a provision for doubtful debts of $8.5m. Greenway has a loan of $10m upon which they are
paying interest at 6.5% pa; the division's risk adjusted cost of capital is 13%.

Compute Greenway Division's EVA® as far as the information given will allow, ignoring the effects of
taxation on adjustments made.

A $20.18m
B $24.38m
C $21.30m
D $30.72m

13. In the year to 31 December 2012 Renor Co reported a profit after tax of $827,640. A new product was
launched during the year and $180,000 of development costs was incurred. The development costs were
written off in full in the year to 31 May 2011. The expenditure is expected to increased sales volumes for the
next three years.

The statement of financial position of Renor Co shows that the funds invested in the company have a book
value of $4,285,700 and an economic value of $5,180,000. The company’s weighted average cost of capital
is estimated at 14%.

What is the economic value added (EVA®) for the year to 31 December 2012?

A $218,540
B $263,540
C $237,440
D $257,240

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Practice Questions - GCMA

14. The manager of a trading division has complete autonomy regarding the purchase and use of non-current
assets. The division operates its own credit control policy in respect of its customers but the group operates
a central purchasing function through which the division places all orders with suppliers and invoices are
paid by head office.

Inventories of goods for sale are kept in central stores, from which local divisions call off requirements for
local sales on a monthly basis into a local inventory.

Divisional performance is assessed on the basis of controllable residual income. The company requires a
rate of return of ‘R’.

Using the following symbols:


Divisional non-current assets N
Apportioned net book value of central stores S
Divisional working capital
Receivables D
Local inventory I
Bank B
Payables (P)
W
Divisional net assets T
Divisional contribution C
Controllable fixed costs (F)
Head office charges (H)
Divisional net income G

Which ONE of the following formulae calculates the division’s controllable residual income?

A [C – F] – [(N + D + B) x R]
B [C – F] – [(N + D + I + B) x R]
C C – [(N + D) x R]
D G – (T x R)

15. A characteristic of residual income as a measure of divisional performance is that, in contrast to ROI, it is
more likely to motivate management to undertake new investments.

Which one of the following is NOT true in respect of residual income?

A Project investments’ return higher than cost of capital will increase residual income
B Residual income is more flexible since a different cost of capital can be applied to investments with
different risk characteristics
C It does not facilitate comparisons between investment centres
D It relates the size of a centre's income to the size of the investment

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Practice Questions - GCMA

16. Which of the following is an aspect of a just-in-time (JIT) system?

(i) The use of small frequent deliveries against bulk contracts


(ii) Flexible production planning in small batch sizes
(iii) A reduction in machine set-up time
(iv) Production driven by demand
(v) Reduced cost of holding inventory
(vi) Improvement in utilisation of production capacity

A (i) and (vi) only


B (i), (ii), (iii), (iv) and (v) only
C (i), (ii), (iii), (iv), (v) and (vi)
D (i), (ii), (iv) and (vi) only

The following information relates to questions 17 and 18

Ranger plc uses a standard costing system, with its material inventory account being maintained at standard
cost. The following details have been extracted from the standard cost card in respect of materials.

8 kg @ $0.80/kg = $6.40 per unit


Budgeted production in a particular month was 850 units.

The following details relate to actual materials purchased and issued to production during April when actual
production was 870 units.

Materials purchased 8,200 kg costing $6,888


Materials issued to production 7,150 kg

17. The material price variance for the month was:

A $286 adverse
B $286 favourable
C $328 adverse
D $328 favourable

18. The material usage variance for was:

A $152 favourable
B $152 adverse
C $159.60 adverse
D $280 adverse

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Practice Questions - GCMA

19. Which ONE of the following criteria should be fulfilled by a transfer pricing system?

A Should encourage dysfunctional decision making.


B Should encourage output at an organisation-wide profit-maximising level.
C Should encourage divisions to act in their own self interest.
D Should encourage divisions to make entirely autonomous decisions.

20. Which ONE of the following best describes a dual pricing system of transfer pricing?

A The receiving division is charged with the market value of transfers made and the supplying division is
credited with the standard variable cost.
B The receiving division is credited with the market value of transfers made and the supplying division is
charged with the standard variable cost.
C The receiving division is charged with the standard variable cost of transfers made and the supplying
division is credited with the market value.
D The receiving division is credited with the standard variable cost of transfers made and the supplying
division is charged with the market value.

21. Setting a price was regarded as the single most important factor in marketing. In modern marketing
philosophy, although pricing decisions remain important, price is just one element in the marketing mix.

Which one of the following factors is NOT a factor in setting a price?


A The satisfaction of customer wants and needs by providing products of the right type, quality and image
B Targeting particular types of customer
C Advertising and sales promotion
D The delivery of goods or services at a location or by a delivery method that marketing executives prefer

22. In accordance with IAS 36 Impairment of Assets which of the following assets must be tested for impairment
annually?

(1) All assets


(2) Any assets where there is an indication of a potential impairment
(3) All intangible assets with indefinite useful lives
(4) Goodwill acquired in a business combination

A (1) only
B (2) only
C (2) and (3)
D (2), (3) and (4)

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Practice Questions - GCMA

23. According to IAS 38 Intangible Assets which of the following types of research and development
expenditure must be written off in the year it is incurred?

A Costs of designing a pre-production prototype


B Legal costs in connection with registration of a patent
C Costs of searching for possible alternative products
D Costs of research work which are to be reimbursed by a customer

24. Which of the following are true?

(i) With FIFO, the inventory valuation will be close to replacement cost
(ii) With LIFO, inventories are issued at a price which is close to the current market value
(iii) Decision making can be difficult with both FIFO and LIFO because of the variations in prices
(iv) A disadvantage of the weighted average method of inventory valuation is that the resulting issue
price is rarely an actual price that has been paid and it may be calculated to several decimal places.

A (i) and (ii) only


B (i), (ii) and (iv) only
C (i) and (iii) only
D (i), (ii), (iii) and (iv)

25. Lauren Ltd bought some land on 1 January 2004 for $500,000. On 31 December 2005 this land was
revalued to $700,000. On 31 December 2007 the fair value less costs to sell of this land was estimated at
$400,000 and its value in use at $450,000.

According to IAS 36 Impairment of Assets what amount will be included in the income statement of
Lauren Ltd for the year ended 31 December 2007 in respect of the impairment loss on this land?

A $Nil
B $50,000
C $200,000
D $250,000

26. In accordance with IAS 36 Impairment of Assets which of the following assets must be tested for impairment
annually?

(1) All assets


(2) Any assets where there is an indication of a potential impairment
(3) All intangible assets with indefinite useful lives
(4) Goodwill acquired in a business combination

A (1) only
B (2) only
C (2) and (3)
D (2), (3) and (4)

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Practice Questions - GCMA

27. On 1 January 2012, the first day of its accounting year, Ran Ltd entered into an operating lease. The terms
of the lease provided for an initial non-returnable deposit of $60,000 and then three annual rentals of
$30,000, payable on the last day of each year.

According to IAS 17 Leases what is the charge to the income statement for the year ended 31December
2012and what balance is reflected in the statement of financial position as at 31December 2012 in respect of
this lease?

A Income statement charge = $30,000; Statement of financial position = $Nil


B Income statement charge = $90,000; Statement of financial position = $Nil
C Income statement charge = $50,000; Statement of financial position = Asset of $40,000
D Income statement charge = $50,000; Statement of financial position = Liability of $40,000

28. Brains Co had 100,000 shares in issue, but then makes a 1 for 5 rights issue on 1 October 20X2 at a price of
$1. The market value on the last day of quotation with rights was $1.60.

Calculate the EPS for 20X2 and the corresponding figure for 20X1 given total earnings of $50,000 in 20X2
and $40,000 in 20X1.

29. In 20X7 Farrah Co had a basic EPS of 105c based on earnings of $105,000 and 100,000 ordinary $1
shares. It also had in issue $40,000 15% Convertible Loan Stock which is convertible in two years' time at
the rate of 4 ordinary shares for every $5 of stock. The rate of tax is 30%. In 20X7 gross profit of $200,000
and expenses of $50,000 were recorded, including interest payable of $6,000.

30. Deferred tax is a balance sheet item that is used to accrue tax to the appropriate period. In other words, this
is an accounting measure used to match the tax effects of transactions with their accounting impact and
thereby produce less distorted results. Deferred tax is calculated so as not to misrepresent to users of the
financial statements the amount of the surplus attributable to owners and recognised in other comprehensive
income.

Which of the following may raise the issue of deferred tax?

i) Losses that result in a tax credit that can only be claimed against the tax on future profits.
ii) Differences between depreciation of an asset and the tax allowances.
iii) Dividends remitted to the parent company from a subsidiary that results in tax liability.

A (i) and (ii) only


B (ii) and (iii) only
C (i) and (iii) only
D (i), (ii) and (iii)

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Practice Questions - GCMA

31. A provision for deferred tax of $128,500 had been included in the statement of financial position of Blue-Bird
Ltd at 31 December 2010. On the same date, the fixed asset had a net book value of $2,650,000 and a tax
written down value of $1,872,000. Assume the corporation tax rate is 20%.

At 30 September 2002 the balance sheet of CBN Ltd included a provision for deferred tax of $128,500. At 30
September 2003 the fixed assets had a net book value of $2,650,000 and a tax written down value of
$1,872,000. The tax rate is 20%.

What is the balance on the deferred tax account at 31 December 2010? (Ignore discounting)

A $27,100
B $128,500
C $155,600
D $778,000

32. A retailing company's current assets and current liabilities comprise inventory at cost $2,100, receivables,
cash and trade payables. Its financial ratios include the following:

Quick (liquidity) ratio 2:1


Rate of inventory turnover 10 times p.a.
Gross profit margin 30%
Receivables collection period 1 month
Payables payment period 1.6 months

The opening inventory, receivables and payables balances are the same as the closing balances.
Select the value that represents the closing cash in hand balance.

A $3,100
B $2,170
C $1,000
D $100

33. Within decentralised organisations there may be cost centres, investment centres and profit centres. Which
of the following statements is true?

A Cost centres have a higher degree of autonomy than profit centres


B Investment centres have the highest degree of autonomy and cost centres the lowest
C Investment centres have the lowest degree of autonomy
D Profit centres have the highest degree of autonomy and cost centres the lowest

34. Uula plc makes a single product, which it sells for $16 per unit. Fixed costs are $76,800 per month and the
product has a contribution ratio of 40%. In a month when actual sales were $224,000, Uula plc's margin of
safety, in units, was:
A 2,000
B 12,000
C 14,000
D 32,000

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Practice Questions - GCMA

35. A company makes three products to which the following budget information relates:
B A T
$ per unit $ per unit $ per unit
Selling price 100 120 145
Labour at $20 per hou 40 40 60
Materials at $10 per kg 10 20 30
Fixed overheads 30 40 20
Profit 20 20 35

The marketing department says the maximum annual demand is for 1,000 units of Product B, 1,200 units of
product A and 1,500 units of product T, and the factory has budgeted to produce that number of units. It has
just been discovered that next year materials will be limited to 5,000 kg and labour to 10,000 hours.

If the company wishes to maximise profit, the priority in which the products should be made and sold is:

A B then A then T
B A then B then T
C T then A then B
D T then B then A

36. On 1 January 2004 Luke plc entered into a finance lease for a machine with a fair value of $2,050. Lease
payments of $500 are payable annually in arrears for five years, starting on 31 December 2004. Luke plc
allocates finance charges on a sum-of-the-digits basis.

According to IAS 17 Leases what is Luke plc's liability in respect of this finance lease as at 31 December
2004?

A A $1,550
B B $1,230
C C $1,320
D D $1,700

37. 37A business has opening inventory of $7,200 and closing inventory of $8,100. Purchases for the year were
$76,500, carriage inwards was $50 and carriage outwards was $180.

What is the value of cost of sales, in accordance with IAS 2 Inventories?


A $75,550
B $75,650
C $75,830
D $77,450

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Practice Questions - GCMA

38. A company has budgeted sales revenue of $500,000 for Period 1, with an associated contribution of
$275,000. Fixed production costs are $137,500 and fixed selling costs are $27,500.

What is the breakeven sales revenue?


A A $165,000
B B $250,000
C C $300,000
D D $366,667

39. Ways and means of reducing the cost gap in an organisation where target costing is in practice has been
suggested by all of the following EXCEPT:

A Reducing the amount of packaging


B Training staff
C Implementing efficient technology
D Cutting out non–value added activities

40. A high-technology company manufactures a range of products, that includes product A and product B.
Product A is made in standard batch sizes of 300 units, and product B is made in standard batch sizes of
100 units. Direct production costs and other cost information is as follows.

Product A Product B
Production run (size) 300 units 100 units
Direct materials cost per unit $27.50 $40
Direct labour time per unit 0.25 hours 0.5 hours
Direct labour cost per hour $10 $10
Number of set-ups per batch 5 2
Machine hours per unit 0.5 hours 0.5 hours

Overhead costs are as follows.


Total annual costs Annual volume of activity
Set-up costs $1,500,000 2,500 set-ups
Handling costs $1,000,000 1,000 batches (production runs)
Other production overheads $2,000,000 200,000 machine hours

A system of ABC is used. Set-up costs are charged to products on the basis of a cost per set-up, and handling
costs are charged on the basis of a cost per batch/production run. Other production overheads are absorbed on a
machine hour basis.

Required
Using ABC methodology, calculate the cost per unit of product A and the cost per unit of product B.

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Practice Questions - GCMA

Solution

1. A (see GCMA text – page 438)

2. (b), (e) and (f)

3. A
(I) This is an adjusting event. Therefore the restated profit would be $(400,000 – 85,000 + 45,000) =
$360,000.
(II) This is non-adjusting event. Therefore no effect on profit

4. C
$'000
Fair value of net assets acquired
Ordinary shares 300
Retained earnings at 1 January 2011 80
Retained profit for the 9 months ended 30 September 2011 (9/12 × 40) 30
410
Attributable to NCI (410 x 20%) (82)
Attributable to group 328
Add Goodwill 20
Cost of investment 348

5. D

6. C

The total sales will use 25,000 tonnes of material, at a cost of:
(18,000 × $10) + (7,000 × $10 × 95%) =
($180,000) + ($70,000 × 95%) = $246,500

The variable labour and overhead cost for this level of production would increase to:

($96,000 + $48,000) × 125% = $144,000 × 125% = $180,000


The fixed costs remain at $72,000
Total costs are therefore ($246,500 + $180,000 + $72,000) = $498,500
The requirement is to earn the same budget profit of $64,000. This means the total required sales income will be
($498,500 + $64,000) = $562,500.
The sales revenue without the extra order is $480,000 and therefore the revenue to be generated from the extra
order is ($562,500 – $480,000) = $82,500.
If you calculated the answer as $100,500 then you probably incorrectly increased the fixed costs by 25% as well,
from $72,000 to $90,000, meaning an extra $18,000 would need to be recovered through the selling price.
If you calculated the answer as either $83,500 or $101,500 then you either followed the correct logic or the
incorrect logic set out above, and also made an arithmetical error.

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Practice Questions - GCMA

7. A
20%
Breakeven point = Fixed costs/Contribution per unit
= $96,000/ ($12 – $8)
= 24,000 units
Budgeted sales = 30,000 units
Margin of safety = 6,000 units
Expressed as a % of budget = 6,000/30,000 x 100% = 20%

If you selected 25% you calculated the correct margin of safety in units, but you then expressed this as a
percentage of the breakeven point.

If you selected 73% you divided the fixed cost by the selling price to determine the breakeven point, but the
selling price also has to cover the variable cost.

You should have been able to eliminate the option of 125%; the margin of safety expressed as a percentage
must always be less than 100%.

8. C

9. The total cost of the proposed job is $187,000. (W1)


(W1) Total overhead = $1m + $3m = $4m.

Plant-wide absorption rate = $80 per direct labour hour.


$’000
Direct materials 37
Direct labour 70
Prime cost 107
Overhead costs (1,000 hours x 80) 80
Total cost 187

10.
In ABC approach, consumption ratios are different for overhead activities (material handling and quality
inspection in this case). Therefore, overhead pools are formed for each activity. The overhead rates for each of
these pools are as follows:

Material moves = $10, 00,000/1,000 material moves


=$1,000 per move
Quality inspections =$30, 00,000/5,000 quality inspection
=$600 per inspection

$’000
Direct materials 37
Direct labour 70
Prime cost 107
Overhead costs:
Material moves (10 x $1,000) 10
Inspection (5 x $600) 3
Total cost 120

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Practice Questions - GCMA

11.
The total cost of proposed job under traditional cost assignment (using direct labour hour) is $2, 33,750 and
under ABC approach is $1, 50, 000. The traditional approach overestimates the overhead and therefore, the
company using this system would overbid the proposed job. ABC approach best reflects the actual cost of the
proposed job.

12. A
NOPAT = 56.4 + 12.6 – (12.6/3 + 17.2) = $47.6m
Capital invested = $184m + $10m + $(12.6 – 12.6/3)m + $8.5m = $210.9m

(note that you are given net assets, thus we just need to add back the loan capital; the other payables are
already deducted)

EVA® = $47.6m – 13% × $210.9m = $20.18m

13. A
$
Profit after tax 827,640
Unamortised development expenditure (135,000) ($180,000 x ¾)
NOPAT 962,640

Economic value of assets $


per SOFP 5,180,000

Development expenditure 135, 000


5,315,000
Capital charge at 14% 744,100
EVA® 218,540

14. B
[C – F] – [(N + D + I + B) x R]
The fixed costs are labelled as controllable therefore they should be deducted from the contribution but the head
office charges should not. The divisional manager cannot exercise control over the latter costs and therefore
should not be held responsible for them.
The divisional manager is responsible for the non-current assets and all of the current assets. Although
inventories of goods for sale are kept in central stores, the division calls off its requirements on a monthly basis.
The divisional manager is therefore responsible for the amount of inventory held.

15. D

16. B

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Practice Questions - GCMA

17. C
Material price variance
$
8,200 kg did cost 6,888
But should have cost (x $0.80) 6,560
328 (A)

If you calculated the variance to be $286 you based your calculations on the materials issued to production.
However, the material inventory account is maintained at standard cost, therefore the material price variance is
calculated when the materials are purchased. If you selected $328 favourable you calculated the size of the
variance correctly but you misinterpreted it as favourable.

18. B $152 adverse

870 units did use 7,150 kg


But should have used (x 8 kg) 6,960 kg
Usage variance in kg 190 (A)
Usage variance in $ = (190 kg x standard price per kg $0.80) $152 A

If you selected $152 favourable you calculated the size of the variance correctly but you misinterpreted it as
favourable.

If you selected $159.60 adverse you evaluated the usage variance in kg at the actual price per kg, instead of the
standard price per kg.

The result of $280 adverse bases the calculation of standard usage on the budgeted production of 850 units. This
is not comparing like with like. The comparison should be based on a flexed budget for the actual production
level.

19. B Should encourage output at an organisation-wide profit-maximising level

20. C
The receiving division is charged with the standard variable cost of transfers made and the supplying division is
credited with the market value The use of standard cost ensures that efficiencies and inefficiencies are not
transferred to the receiving division. The use of variable cost avoids the situation where the receiving division
perceives the supplying division’s fixed costs to be variable costs of the organisation as a whole. This could lead
to sub-optimal decisions.

Crediting the supplying division with the market value reduces the likelihood of sub-optimal decision making and
improves goal congruence.

21. D
The delivery of goods or services at a location or by a delivery method that customers prefer

22. D
In addition to intangible assets with indefinite useful lives and goodwill acquired in a business combination, which
must be tested for impairment annually, other assets are only required to be tested for impairment if there are
indications of a possible impairment (such as a fall in market values or evidence of physical damage).

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Practice Questions - GCMA

23. C
C is given as an example of research activities in IAS 38. Research costs are written off as incurred. A is given as
an example of development activities in IAS 38 and may therefore be carried forward if certain conditions are
met. B –the cost of the patent, including these legal costs, will be capitalised as a separately acquired intangible.
D –recoverable costs will be an asset in their own right (a receivable from the customer).

24. D
(i), (ii), (iii) and (iv)
With FIFO, the oldest prices are charged first to cost of sales and inventory is valued at the latest prices paid,
which will be close to replacement cost.
With LIFO, the most recent prices are charged first to cost of sales, therefore inventories are issued at a price
which is close to the current market value.

25. B
Recoverable amount is the higher of fair value less costs to sell and value in use ie $450,000.
The impairment loss is therefore $250,000 (700,000 – 450,000). Since there is $200,000
(700,000 – 500,000) in the revaluation surplus in respect of this land, then $200,000 of the impairment loss can
be set against the revaluation surplus, with the remaining $50,000 charged to the income statement.

26. D
In addition to intangible assets with indefinite useful lives and goodwill acquired in a business combination, which
must be tested for impairment annually, other assets are only required to be tested for impairment if there are
indications of a possible impairment (such as a fall in market values or evidence of physical damage).

27. C
$
Cash paid (60,000 + 30,000) 90,000
Income statement charge ((60,000 + (3 × 30,000)) ÷ 3)) (50,000)
Prepayment 40,000

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Practice Questions - GCMA

28.
Calculation of theoretical ex-rights price:
$
Before issue 5 shares, value × $1.60 8.00
Rights issue 1 share, value × $1.00
1.00
Theoretical value of 6 shares
9.00
Theoretical ex-rights price = $9 / 6 = $1.50
EPS for 20X1
EPS as calculated before taking into account the rights issue = 40c ($40,000 divided by 100,000 shares).
EPS = 60 .1 / 50.1 × 40c = 37½c
(Remember: this is the corresponding value for 20X1 which will be shown in the financial statements for Brains
Co at the end of 20X2.)
EPS for 20X2

Number of shares before the rights issue was 100,000. 20,000 shares were issued.
Stage 1: 100,000 × 9 / 12 × 50.1 / 60.1 = 80,000
Stage 2: 120,000 × 3/12 =30,000
EPS = 110,000 / $50,000 = 45½c
The figure for total earnings is the actual earnings for the year.

29.
Diluted EPS is calculated as follows.
Step 1 Number of shares: the additional equity on conversion of the loan stock will be 40,000 × 4/5 = 32,000
shares
Step 2 Earnings: Farrah Co will save interest payments of $6,000 but this increase in profits will be taxed. Hence
the earnings figure may be recalculated:
$
Gross profit 200,000
Expenses (50,000 – 6,000) (44,000)
Profit before tax 156,000
Tax expense (30%) (46,800)
Earnings 109,200

Step 3 Calculation: Diluted EPS = 132,000 / $109,200 = 82.7c


Step 4 Dilution: the dilution in earnings would be 105c − 82.7c = 22.3c per share

30. D

31. C
Timing difference ($2,650,000 – $1,872,000) = $778,000
Deferred tax at 20% = $155,600

20
Practice Questions - GCMA

32. A
The inventory value is $2,100. The rate of inventory turnover is 10 times p.a., therefore the annual cost of sales
is $21,000 (we are told opening inventory equals closing inventory). The gross profit margin is 30% which means
annual sales are $21,000/0.7 = $30,000.

The receivables collection period is 1 month, which means closing receivables are $30,000/12 = $2,500.
The payables payment period is 1.6 months, which means closing payables are $21,000/12 × 1.6 = $2,800.
The quick ratio is 2:1 which means current assets (excluding inventory) are $2,800 × 2 = $5,600. As receivables
are $2,500 the cash balance must be ($5,600 – $2,500) = $3,100.

If you calculated incorrectly the cash balance as $1,000 then you probably incorrectly calculated closing payables
as $21,000/12 = $1,750 which would mean current assets (excluding inventory) of $3,500 and cash of ($3,500 –
$2,500) = $1,000.

If you calculated incorrectly the cash balance as $100 then you probably incorrectly calculated closing
receivables as $2,100/12/0.7 = $250 and closing payables as $2,100/12 = $175 and therefore current assets
(excluding inventory) of $350.

33. B
Cost centres have the lowest degree of autonomy with managers only able to control costs. Profit centres have a
higher degree of autonomy as managers can not only control costs but can also control sales prices and
revenue. Investment centres have the highest degree of autonomy as managers can not only control costs and
revenues but can also make investment decisions not open to managers in either of the other two centres.

34. A
2,000
Breakeven point = Fixed costs/Contribution ratio
= $76,800/0.40
= $192,000
Actual sales = $224,000
Margin of safety = $224,000 – $192,000
= $32,000
Margin of safety in units = $32,000/$16
= 2,000 units

21
Practice Questions - GCMA

35. B
Rank the products by contribution per kg of material (the limiting factor).
B A T Total
Maximum sales (units) 1,000 1,200 1,500 N/a
Material kg needed 1,000 2,400 4,500 7,900
Labour hours needed 2,000 2,400 4,500 8,900

Thus, labour is not a limiting factor but material is a limiting factor.


The products must be ranked according to their contribution per kg of material.
B A T
Contribution per unit ($) 50 60 55
Kg of material per unit 1 2 3
Contribution per kg of material ($) 50 30 18.33
Rank by contribution per kg of material 1 2 3

36. D
Year ended B/f Interest Payment C/f
$ $ $ $
31 Dec 20X4 2,050 (5/15) 150 (500) 1,700
31 Dec 20X5 1,700 (4/15) 120 (500) 1,320
Borrowing over five periods (since paying in arrears)
Therefore SOTD = (5 × 6) ÷ 2 = 15
Total interest = (5 × 500) – 2,050 = $450

37. B
$
Opening inventories 7,200
Purchases 76,500
Carriage inwards 50
Less: (closing inventory) (8,100)
75,650

22
Practice Questions - GCMA

38. B
$
Total cost of 150,000 units (x $41.50) 6,225,000
Total cost of 100,000 units (x $47.50) 4,750,000
Variable cost of 50,000 units 1,475,000
Variable cost per unit $29.50
Substituting $
Total cost of 100,000 units 4,750,000
Variable cost of 100,000 units (x $29.50) 2,950,000
Fixed costs 1,800,000
Breakeven point = $1,800,000/ ($49.50 – $29.50) = 90,000 units

If you selected 36,364 you divided the fixed cost by the unit selling price, but the variable costs must also be
taken into account.

If you selected 101,020 you assumed that the production overheads and the marketing and administration costs
were wholly fixed. In fact the marketing costs are the only wholly fixed costs. You can test this by multiplying the
unit rate by the output volume at each level of activity.

If you selected 225,000 you divided the fixed cost by the profit per unit instead of the contribution per unit.

39. B

40.
Overhead item Annual cost Activity level O'hd recovery rate
Set-up costs $1,500,000 2,500 set-ups $600 per set-up
Handling costs $1,000,000 1,000 batches $1,000 per batch
Other $2,000,000 200,000 machine hours $10 per m/c hour

A B
Batch size 300 units 100 units
$ $
Direct materials (300 × $27.50) 8,250 (100 × $40) 4,000
Direct labour (300 × 0.25 × $10) 750 (100 × 0.5 × $10) 500
Set-up cost (5 × $600) 3,000 (2 × $600) 1,200
Handling cost 1,000 1,000
Other overheads (300 × 0.5 × $10) 1,500 (100 × 0.5 × $10) 500
Full production cost 14,500 7,200
Cost per unit $48.33 $72.00

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