Advanced Management Accounting (P2)

Answer: D. Relevant cash flows are those that are incremental — occurring only if the project proceeds — and are actual future cash flows. Incremental annual operating costs meet both criteria and are therefore included. Sunk costs such as past market research spending are irrecoverable regardless of the decision and are excluded. Depreciation is a non-cash accounting charge, not a cash flow, so it is excluded from DCF analysis (though the tax effect of capital allowances may be included separately). Apportioned shares of overhead that do not change in total are not incremental and are therefore irrelevant to the investment decision.

Answer: A. Setting deliberately undemanding targets to make them easy to achieve — building in a comfortable margin — is the classic example of budget slack. It protects the manager's performance rating at the cost of the organisation receiving a less ambitious plan. Goal congruence is the alignment of individual and organisational goals, which budget slack actively undermines. Budget bias relates to inflating cost requests to obtain more resources, which is related but distinct. Dysfunctional behaviour more broadly describes actions that conflict with organisational goals; budget slack is a specific form of it, not the general phenomenon of abandoning the process entirely.

Answer: A. The key distinction is that ABC traces overhead costs to products via the specific activities that drive those costs — using multiple cost drivers — whereas traditional absorption costing spreads overheads across products using a single volume-based rate (such as labour hours or machine hours). This means the two methods can produce materially different product costs, particularly where the production mix is varied and overheads are not truly volume-driven. ABC does not eliminate overheads; it reallocates them more precisely, and neither system is universally more accurate for every product type.