ACCA Performance Management
Past Questions

AI Explanation

**The reasoning** Marginal costing is a decision-making technique that separates costs by **behavior**, not just totals. It focuses on **variable costs** (costs that change with production volume—like raw materials, direct labor) and **contribution** (selling price minus variable cost per unit). The key formula: **Contribution = Sales − Variable Costs** This contribution then covers fixed costs and generates profit. Marginal costing helps managers answer questions like: "Should we accept this special order?" or "Which product is most profitable?" by looking at what each unit *contributes* after covering its variable costs. **Why the wrong options tempt you** **A) Total costs only** — Sounds comprehensive, but marginal costing deliberately *ignores* fixed costs in unit costing to focus on what changes with each decision. **C) Fixed costs only** — The opposite trap! Fixed costs (rent, salaries) exist regardless of production, so they're treated as period costs, not unit costs in marginal costing. **D) Sales taxes** — Completely unrelated. That's taxation, not cost accounting. **Quick takeaway** Remember: **"Marginal = Variable + Contribution"** — it's about tracking what *moves* with production and what each unit *contributes* to covering fixed costs.

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**The reasoning** A flexible budget is like having multiple versions of your budget based on how busy your business gets. Think of it as a "what-if" planning tool. The key principle: **Flexible budgets separate costs into fixed and variable components**, then adjust the variable costs based on actual activity levels (units produced, sales volume, hours worked, etc.). For example, if you budgeted to produce 1,000 units but actually produced 1,200 units, a flexible budget recalculates your expected costs for 1,200 units. This lets you fairly compare actual performance against what you *should* have spent at that activity level. **Why the wrong options tempt you** - **A (Wages only)**: Yes, wages often vary with activity, but flexible budgets adjust *all* variable costs (materials, utilities, commissions), not just wages. - **C (Inflation only)**: That's more about economic adjustments, not operational flexibility. - **D (Foreign exchange only)**: Currency changes are external factors, not the activity-level focus of flexible budgeting. **Quick takeaway** A flexible budget is your "smart" budget that bends with how much work you actually do—it's not stuck on one activity level like a static budget.

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**The reasoning** Fixed costs are expenses that don't change with production level — like rent, salaries, or equipment. Whether you produce 10 items or 1,000 items, you pay the same total amount. Here's the key: **Fixed cost *per unit* = Total fixed cost ÷ Number of units** Example: Your factory rent is ₦100,000/month (fixed). - Produce 100 units → ₦100,000 ÷ 100 = ₦1,000 per unit - Produce 1,000 units → ₦100,000 ÷ 1,000 = ₦100 per unit As output increases, you're spreading the same fixed cost over more units, so the cost *per unit* **falls**. This is called **economies of scale**. **Why the wrong options tempt you** **A) Rise** — You might confuse this with *total costs*, which do rise with output. But fixed costs *per unit* work differently. **C) Stay same** — This describes *variable costs* per unit (like raw materials), not fixed costs. **D) Double** — No mathematical reason supports this; it's just a distractor. **Quick takeaway** *Fixed costs per unit fall as you produce more — you're sharing the burden across more products.*

AI Explanation

**The reasoning** Marginal cost answers the question: "How much MORE will it cost if I produce ONE MORE unit?" Think of a small chops vendor in Lagos. She's already made 100 packs. If she decides to make pack number 101, what extra cost does she incur? That extra flour, oil, labor for just that ONE additional pack — that's her marginal cost. The word **"marginal"** in economics always means **"at the edge"** or **"the next one."** Marginal cost specifically measures the change in total cost when you increase production by **one additional unit**. **Why the wrong options tempt you** - **A) fewer** — This would be about reducing production, not increasing it. Marginal cost looks forward (next unit), not backward. - **C) total** — Total cost is everything combined; marginal cost isolates just the *change* from one more unit. - **D) fixed** — Fixed costs don't change with production (like rent). Marginal cost is about *variable* costs that respond to output changes. **Quick takeaway** Marginal = **additional** — always remember: it's the cost of making "one MORE" unit, not fewer, not the total, not what stays fixed.

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Contribution per unit = SP − VC. It first covers fixed costs and then contributes to profit.

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BEP units = total fixed cost ÷ contribution per unit. At BEP, total contribution exactly covers fixed costs.

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BEP = 200,000 ÷ (100 − 60) = 5,000 units.

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Margin of safety shows how much sales can fall before reaching the break-even (no-profit) point.

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Absorption costing absorbs fixed production overheads into product cost; marginal costing treats them as period costs.

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Rising inventory defers some fixed overhead expense (capitalised into inventory) so absorption profit > marginal profit.

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Adverse variances move profit below standard — actual was worse than expected.

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Labour efficiency variance = (SH − AH) × SR. Positive means workers were faster than standard.

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Relevant costs are future, incremental cash flows. Sunk and committed costs are irrelevant.

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Sunk costs are past and unrecoverable — irrelevant for current decisions.

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Opportunity cost is the benefit lost by choosing one alternative over the next-best — always relevant in decisions.

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Make-or-buy: compare avoidable cost of making vs cost of buying; consider opportunity cost of freed capacity.

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Payback measures recovery time. Simple but ignores time value of money and post-payback cash flows.

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NPV discounts cash flows at the cost of capital. NPV > 0 → accept (project adds value).

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Positive NPV implies IRR exceeds cost of capital (under conventional cash-flow assumptions).

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ZBB requires every activity to be justified anew each cycle — promotes cost discipline vs incremental budgeting.

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Standard costs are pre-determined and used to benchmark performance via variance analysis.