Part 2 : 11/11/10 07:41:20

Transcription

1 Question 1 - CMA Performance Measurement Part 2 : 11/11/10 07:41:20 One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income A. Divided by total assets. B. Divided by the current year's capital expenditures plus cost of capital. C. Divided by fixed assets. D. Minus imputed interest charged for invested capital. A. By definition. The formula for return on investment is operating income divided by total assets (or average total assets). B. This answer is incorrect. See the correct answer for a complete explanation. C. This answer is incorrect. See the correct answer for a complete explanation. D. This answer is incorrect. See the correct answer for a complete explanation. Question 2 - CMA Performance Measurement A segment of an organization is referred to as an investment center if it has A. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply and significant control over the amount of invested capital. B. Authority to make decisions over the most significant costs of operations including the power to choose the sources of supply. C. Authority to provide specialized support to other units within the organization. D. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply. A. By definition, an investment center is a part of the business that has the authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply and significant control over the amount of invested capital. B. This is the definition of a cost center. C. This is the definition of a service center, which is a type of cost center. D. This is the definition of a profit center. An investment center also has a responsibility for invested capital. Question 3 - CMA Overhead Tiny Tykes Corporation had the following activity relating to its fixed and variable overhead for the month of July. Actual costs Fixed overhead $120,000 Variable overhead 80,000 Flexible budget Variable overhead 90,000 Applied (c) HOCK international, page 1

2 Fixed overhead 125,000 Variable overhead spending variance 2,000F Production volume variance 5,000U The fixed overhead efficiency variance is A. $5,000 favorable. B. Never a meaningful variance. C. $3,000 favorable. D. $3,000 unfavorable. Part 2 : 11/11/10 07:41:20 A. There is no fixed overhead efficiency variance because fixed costs are not related to levels of output and therefore are unable to be used efficiently or inefficiently. B. There is no fixed overhead efficiency variance because fixed costs are not related to levels of output and therefore are unable to be used efficiently or inefficiently. C. There is no fixed overhead efficiency variance because fixed costs are not related to levels of output and therefore are unable to be used efficiently or inefficiently. D. There is no fixed overhead efficiency variance because fixed costs are not related to levels of output and therefore are unable to be used efficiently or inefficiently. Question 4 - CMA Overhead Variable overhead is applied on the basis of standard direct labor hours. If, for a given period, the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will be A. The same amount as the labor efficiency variance. B. Favorable. C. Unfavorable. D. Zero. A. This answer is incorrect. See the correct answer for a complete explanation. B. This answer is incorrect. See the correct answer for a complete explanation. C. An unfavorable direct labor efficiency variance means that more direct labor hours were used for production than were budgeted. The variable overhead variance is calculated as follows: (Standard Activity Level for Actual Output - Actual Activity Level) * Standard Application Rate. In this formula actual activity level is actual direct labor hours since it is the allocation base. We know that actual labor hours exceeded the standard, which gives us a negative, or unfavorable, variable overhead variance. D. This answer is incorrect. See the correct answer for a complete explanation. Question 5 - CMA Performance Measurement Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation? A. Fixed assets employed in division operations. (c) HOCK international, page 2

3 B. Division inventories when division management exercises control over the inventory levels. C. Division accounts payable when division management exercises control over the amount of short-term credit used. D. Land being held by the division as a site for a new plant. A. When the denominator for residual income is calculated, it would normally include assets that are in use and expected to generate a return. Fixed assets that are used in division operations are expected to provide a return in the current period and would usually be included in the residual income calculation. B. When the denominator for residual income is calculated, it would normally include assets that are in use and expected to generate a return. Inventories that management controls are expected to provide a return in the current period and would usually be included in the residual income calculation. C. When the denominator for residual income is calculated, it would normally include assets that are in use and expected to generate a return. Accounts payable that management controls are expected to provide a return in the current period and would usually be included in the residual income calculation. D. When the denominator for residual income is calculated, it would normally include assets that are in use and expected to generate a return. Therefore, land that is being held for a future plant would not be included because it is not expected to provide any return in the current period. Question 6 - CMA Overhead Franklin Glass Works' production budget for the year ended November 30 was based on 200,000 units. Each unit requires two standard hours of labor for completion. Total overhead was budgeted at $900,000 for the year, and the fixed overhead rate was estimated to be $3.00 per unit. Both fixed and variable overhead are assigned to the product on the basis of direct labor hours. The actual data for the year ended November 30 are presented as follows. Actual production in units 198,000 Actual direct labor hours 440,000 Actual variable overhead $352,000 Actual fixed overhead $575,000 The fixed overhead applied to Franklin's production for the year is A. $600,000. B. $594,000. C. $484,200. D. $575,000. A. This is the budged fixed overhead amount based on 200,000 units of production. In the calculation of applied overhead we have to use the standard input for the actual level of output. The formula is Standard Application rate * Standard input for the Actual level of output. See the correct answer for a complete explanation. B. The amount overhead applied is calculated as Standard Application rate * Standard input for the Actual level of output. Fixed overhead is assigned to the product on the basis of direct labor hours. The fixed overhead rate was estimated to be $3.00 per unit and two hours are required to produce one unit. Thus, application rate is $1.50 ($3.00 / 2). The standard direct hours allowed for actual output are 396,000 (2 * 198,00 actual production in units). The applied overhead equals $594,000 ($1.50 * 396,000). We also could calculate the amount of applied overhead using actual units produce and unit fixed overhead application rate ($3.00 * 198,000) which gives the same answer $594,000. C. The amount of overhead applied is calculated as Standard Application rate * Standard input for the Actual level of output. See the correct answer for a complete explanation. (c) HOCK international, page 3

4 D. This is the amount of actual fixed overhead $575,000. In fact, the overhead applied and actual overhead differ in most cases, as in this particular case. See the correct answer for a complete explanation. Question 7 - CMA Performance Measurement Listed below is selected financial information for the Western Division of the Hinzel Company for last year. Amount Account (thousands) Average working capital $ 625 General and administrative expenses 75 Net sales 4,000 Average plant and equipment 1,775 Cost of goods sold 3,525 If Hinzel treats the Western Division as an investment center for performance measurement purposes, what is the before-tax return on investment (ROI) for last year? A % B % C % D % A. This answer fails to subtract general and administrative costs in the calculation of income. See the correct answer for a complete explanation. B. This answer is incorrect. See the correct answer for a complete explanation. C. ROI is calculated as Net Income divided by Average Total Assets (or Investments). Average assets are equal to the sum of average plant and equipment plus working capital or $2,400,000 ($625,000 + $1,775,000). Net Incomes equals Net Sales minus COGS and G&A expenses or $400,000 ($4,000,000 - $3,525,000 - $75,000). Now we can calculate ROI: $400,000 / $2,400,000 = 16,67%. D. This answer does not include working capital in average total assets. See the correct answer for a complete explanation. Question 8 - CMA Overhead Water Control Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are as follows: Variable overhead (4 hours at $8/hour) - $32 Fixed overhead (4 hours at $5*/hour) - $20 Total overhead cost per unit - $52 * Based on a capacity of 100,000 direct labor hours per month. The following additional information is available for the month of November: 22,000 pumps were produced although 25,000 had been scheduled for production. 94,000 direct labor hours were worked at a total cost of $940,000. The standard direct labor rate is $9 per hour. (c) HOCK international, page 4

5 The standard direct labor time per unit is 4 hours. Variable overhead costs were $740,000. Fixed overhead costs were $540,000. The variable overhead spending variance for November was A. $48,000 unfavorable. B. $40,000 unfavorable. C. $60,000 favorable. D. $12,000 favorable. Part 2 : 11/11/10 07:41:20 A. This is the variable overhead efficiency variance. See the correct answer for a complete explanation. B. This is the fixed overhead spending variance. See the correct answer for a complete explanation. C. This answer uses the budgeted hours (100,000), not the actual hours (94,000). The variable overhead spending variance is calculated as follows: (Standard Application Rate - Actual Application Rate) * Actual Quantity. D. The variable overhead spending variance is calculated as follows: (Standard Application Rate - Actual Application Rate) * Actual Quantity. The standard application of variable overhead is $8 per labor hour, actual quantity in labor hours is 94,000. The actual application rate of variable overhead multiplied by actual quantity of activity level is the actual amount of variable overhead, or $740,000. Thus, the variable overhead spending variance is $12,000 favorable ($8 * 94,000 - $740,000). The budgeted amount is greater than the actual amount and that is why the variance is favorable. Question 9 - CMA Variances - General Selo Imports uses flexible budgeting for the control of costs. The company's annual master budget includes $324,000 for fixed production supervisory salaries at a volume of 180,000 units. Supervisory salaries are expected to be incurred uniformly throughout the year. During the month of September 15,750 units were produced, and production supervisory salaries incurred were $28,000. A performance report for September would reflect a budget variance of A. $350 favorable. B. $350 unfavorable. C. $1,000 unfavorable. D. $1,000 favorable. A. The variance is unfavorable because the budgeted amount of fixed overhead is less than actual amount. B. In this solution the salaries are treated as variable costs instead of fixed costs. See the correct answer for a complete explanation. C. The fixed (or Spending) overhead budget variance is equal to the difference between the budgeted and actual amounts of fixed overhead. The budgeted (static budget) amount of fixed overhead was $27,000 ($325,000 / 12). Thus, the fixed overhead budget variance is ($1,000) unfavorable ($27,000 - $28,000). D. The variance is unfavorable because the budgeted amount of fixed overhead is less than actual. Question 10 - CMA Performance Measurement Most firms use return on investment (ROI) to evaluate the performance of investment center managers. If top management wishes division managers to use all assets without regard to financing, the denominator in the ROI (c) HOCK international, page 5

6 calculation will be A. Total assets employed. B. Shareholders' equity. C. Working capital plus other assets. D. Total assets available. A. If the company uses total assets employed, there will be no motivation for the managers to make better use of the assets that are currently not employed. B. Using shareholders' equity takes into account only those assets financed with equity. It does not include assets that were financed by debt, or other liabilities. C. By using working capital in this measure the company is excluding assets that are financed by short-term obligations. This is because working capital is current assets minus current liabilities. D. If the company does not care what the financing of the assets used is, the company should use total assets available as the denominator in ROI. This will mean that managers are expected to use all of the assets to generate return for the company. Question 11 - CMA Responsibility Accounting The WK Company uses a performance reporting system that reflects the company's decentralization of decision making. The departmental performance report shows one line of data for each subordinate who reports to the group vice president. The data presented show the actual costs incurred during the period, the budgeted costs, and all variances from budget for that subordinate's department. The WK Company is using a system called A. Cost-benefit accounting. B. Flexible budgeting. C. Responsibility accounting. D. Program budgeting. A. This is not an accounting method. B. Flexible budgeting is the creation of a budget for different levels of outputs. This is not what is described in the question. C. Responsibility accounting is a system in which costs are allocated to managers and/or departments based on who is responsible for the incurrence of the costs. This is the method described in the question. D. This is a budgeting system and it does not describe the situation in the question. Question 12 - CMA Overhead Water Control Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are as follows: Variable overhead (4 hours at $8/hour) - $32 Fixed overhead (4 hours at $5*/hour) - $20 Total overhead cost per unit - $52 * Based on a capacity of 100,000 direct labor hours per month. (c) HOCK international, page 6

7 The following additional information is available for the month of November: 22,000 pumps were produced although 25,000 had been scheduled for production. 94,000 direct labor hours were worked at a total cost of $940,000. The standard direct labor rate is $9 per hour. The standard direct labor time per unit is 4 hours. Variable overhead costs were $740,000. Fixed overhead costs were $540,000. The variable overhead efficiency variance for November was A. $200,000 unfavorable. B. $60,000 favorable. C. $48,000 unfavorable. D. $96,000 unfavorable. Part 2 : 11/11/10 07:41:20 A. This is the difference between the actual direct labor costs over actual variable overhead costs which does not mean anything. See the correct answer for a complete explanation. B. This answer uses capacity, not actual hours. See the correct answer for a complete explanation. C. The variable overhead efficiency variance is calculated as follows: (Standard Activity Level for Actual Output - Actual Activity Level) * Standard Application Rate. Or, putting the numbers into the equation, (88,000-94,000) * $8 = ($48,000). Because this is a negative number, the variance is unfavorable. The standard activity level is calculated as 4 hours of direct labor per unit and since 22,000 units were produced during the period, this gives us 88,000 hours as the standard activity level. D. This is the difference between standard hours allowed for the actual output and capacity hours. See the correct answer for a complete explanation. Question 13 - CIA 589 IV-14 - Other The following data are available for July: Budget Actual Sales 40,000 units 42,000 units Selling price $6 per unit $5.70 per unit Variable cost $3.50 per unit $3.40 per unit What is the sales quantity variance for July? A. $12,600 unfavorable. B. $12,000 unfavorable. C. $5,000 favorable. D. $4,600 favorable. A. The variance is favorable as quantity actually sold (42,000) is greater than budgeted (40,000). See the correct answer for a complete explanation. B. The variance is favorable as quantity actually sold (42,000) is greater than budgeted (40,000). See the correct answer for a complete explanation. C. The sales quantity variance measures the impact of the difference in sales volume and is calculated as follows:(actual Sales Volume - Budgeted Sales Volume) * Standard Contribution per Unit. The standard (c) HOCK international, page 7

8 contribution per unit is $2.50 ($6.00 sales price - $3.50 variable costs). The sales volume variance is $5,000 favorable [(42,000-40,000) * $2.50]. D. The sales quantity variance measures the impact of the difference in sales volume and is calculated as follows:(actual Sales Volume - Budgeted Sales Volume) * Standard Contribution per Unit. We have to use the standard contribution margin ($2.50), not the actual contribution margin ($2.30) as is used in this answer. See the correct answer for a complete explanation. Question 14 - CIA 1191 IV-19 - Transfer Pricing A carpet manufacturer maintains a retail division consisting of stores stocking its brand and other brands, and a manufacturing division that makes carpets and pads. An outside market exists for carpet padding material in which all padding produced can be sold. The proper transfer price for padding transferred from the manufacturing division to the retail division is A. Variable manufacturing division production cost plus variable selling and administrative cost. B. Variable manufacturing division production cost. C. The market price at which the retail division could purchase padding. D. Variable manufacturing division production cost plus allocated fixed factory overhead. A. When there is an external market for the product, market price is almost always the best transfer price to use. B. When there is an external market for the product, market price is almost always the best transfer price to use. C. The basic issue of transfer prices is how much should one unit of a company charge another unit of the same company for its goods or services. The goal in setting a transfer price is that the method used will stimulate the department managers to do what will provide the greatest benefit to the company as a whole, rather than to act in their own interest. Since there is an outside market exists for padding produced can be sold there best transfer price is a market price. D. When there is an external market for the product, market price is almost always the best transfer price to use. Question 15 - CIA 1191 IV-18 - Responsibility Accounting A company plans to implement a bonus plan based on segment performance. In addition, the company plans to convert to a responsibility accounting system for segment reporting. The following costs, which have been included in the segment performance reports that have been prepared under the current system, are being reviewed to determine if they should be included in the responsibility accounting segment reports: I. Corporate administrative costs allocated on the basis of net segment sales. II. Personnel costs assigned on the basis of the number of employees in each segment. III. Fixed computer facility costs divided equally among each segment. IV. Variable computer operational costs charged to each segment based on actual hours used times a predetermined standard rate; any variable cost efficiency or inefficiency remains in the computer department. Of these four cost items, the only item that could logically be included in the segment performance reports prepared on a responsibility accounting basis would be the A. Personnel costs. (c) HOCK international, page 8

9 B. Fixed computer facility costs. C. Variable computer operational costs. D. Corporate administrative costs. A. An allocation basis should be one in which the managers are able to control the incurrence of costs by their department. In an allocation basis of personnel, an individual segment manager is able to control only their own staff numbers, not the staff numbers of other segments. Therefore, this allocation of costs would not be appropriate for responsibility accounting. B. The equal allocation of fixed computer costs is not appropriate for responsibility accounting because the individual mangers are not able to control how much the computer department spends. This also does not relate to the usage of the computer department by each segment. C. An allocation based on the actual usage of the item being allocated is an appropriate method of allocation for responsibility accounting. Therefore, these variable computer costs can be included in the responsibility accounting report. D. An allocation basis should be one in which the managers are able to control the incurrence of costs by their department. In an allocation basis of sales, an individual segment manager is able to control only their own sales, not the sales of other segments. Therefore, this allocation of costs would not be appropriate for responsibility accounting. Question 16 - CIA 1192 IV-22 - Responsibility Accounting An organization employs a system of internal reporting that furnishes departmental managers with revenue and cost information on only those items that are subject to their control. Items not subject to the manager's control are not included in the performance reports. This method of accounting is known as A. Responsibility accounting. B. Absorption cost accounting. C. Segment reporting. D. Contribution margin reporting. A. Responsibility accounting is a system in which the cost of revenue data is reported based on who (manager or division) is able to control them or is responsible for them. This is the system described in the question. B. Absorption cost accounting relates to the allocation of fixed costs. This is not descriptive of the method used by this company. C. Segment reporting is the reporting of results by segment - either product line, geography or some other distinguishing characteristic. This is not descriptive of the method used by this company. D. Contribution margin reporting breaks costs down into fixed and variable costs. While this may be used in conjunction with responsibility accounting, this by itself is not describing the method used by the company. Question 17 - CMA Variances - General Clear Plus, Inc. manufactures and sells boxes of pocket protectors. The static master budget and the actual results for May appear below. Actuals Static Budget (c) HOCK international, page 9

10 Unit sales 12,000 10,000 Sales $132,000 $100,000 Variable costs of sales 70,800 60,000 Contribution margin 61,200 40,000 Fixed costs 32,000 30,000 Operating income $29,200 $10,000 Which one of the following statements concerning Clear Plus, Inc.'s actual results for May is correct? A. The flexible budget variance is $8,000 favorable. B. The sales price variance is $32,000 favorable. C. The sales volume variance is $8,000 favorable. D. The flexible budget variable cost variance is $10,800 unfavorable. A. To answer such a question we have to solve for each possible suggested statement. It is better to start with the easiest ones. The flexible budget variance equals the difference between actual operating results and flexible budget operating results. The flexible budget contribution margin equals actual units times standard contribution margin or $48,000 ($4.00 standard contribution margin * 12,000 actual quantity). The flexible budget operating income equals flexible budget contribution margin less master budget (static budget) fixed costs: $18,000 ($48,000 - $30,000). Now we can determine the flexible budget variance as $11,200 favorable ($29,200 - $18,000). So this statement is not correct. B. To answer such a question we have to solve for each possible suggested statement. It is better to start with the easiest ones. The sales price variance measures the impact of the difference in contribution margin per unit caused by variance in price and is calculated as follows: (Actual Contribution per unit - Standard Contribution per unit) * Actual Quantity. Actual contribution per unit is $5.10 ($61,200 12,000), the standard contribution margin is $4.00 ($40,000 10,000). The sales price variance is therefore $13,200 favorable ($ $4.00) * 12,000. So this statement is not correct. C. To answer such a question we have to solve for each possible suggested statement. It is better to start with the easiest ones. The sales volume variance measures the impact of difference in sales volume and is calculated as follows: (Actual Sales Volume - Budgeted Sales Volume) * Standard Contribution per Unit. The standard contribution per unit is $4.00 ($40,000 10,000). The sales volume variance is therefore $8,000 favorable (12,000-10,000) * $4.00. The variance is favorable as the actual quantity of units sold is greater than budgeted. So this statement is correct. D. To answer such a question we have to solve for each possible suggested statement. It is better to start with the easiest ones. The flexible budget variable cost variance is the difference between the flexible budget variable costs and actual variable costs. The standard variable cost is calculated using static (master) budget figures: $60,000 10,000 = $6.00. The flexible budget variable cost is calculated as the standard unit variable cost multiplied by the actual level of output ($6.00 * 12,000 = $72,000). The flexible budget variable cost variance is $1,200 favorable ($72,000 - $70,800). So this is not a correct statement. Question 18 - CMA Variances - Material and Labor An unfavorable direct labor efficiency variance could be caused by a(n) A. Unfavorable material usage variance. B. Unfavorable variable overhead spending variance. C. Favorable fixed overhead volume variance. D. Favorable variable overhead spending variance. (c) HOCK international, page 10

11 A. An unfavorable direct labor efficiency variance means that more time was spent in production than budgeted. A number of reasons could cause this: poor performance of production employees, poor product design, waste, theft, poor material quality, etc. An unfavorable material usage variance means that more material was spent to produce units of finished product. Poor material quality could cause an unfavorable material usage variance. The poor quality material could also require more time spent by production workers to perform their task. That is why an unfavorable direct labor efficiency variance could be caused by unfavorable material usage variance. B. The variable overhead spending variance is the difference between the standard application rate and the actual application rate (the actual application rate is calculated as the actual overhead costs the actual usage of the allocation base) multiplied by the actual quantity of the application base. The difference in application rates (positive or negative) does not relate to the direct labor usage (efficiency) variance. C. The fixed overhead volume variance is the difference between the amount of fixed overhead applied (standard rate * standard input for the actual level of output) and the budgeted amount of fixed overhead. The difference (positive or negative) between applied and budgeted fixed overhead does not relate to the direct labor usage (efficiency) variance. D. The variable overhead spending variance is the difference between the standard application rate and the actual application rate (the actual application rate is calculated as the actual overhead costs the actual usage of the allocation base) multiplied by the actual quantity of the application base. The difference in application rates (positive or negative) does not relate to the direct labor usage (efficiency) variance. Question 19 - CMA Overhead Franklin Glass Works' production budget for the year ended November 30 was based on 200,000 units. Each unit requires two standard hours of labor for completion. Total overhead was budgeted at $900,000 for the year, and the fixed overhead rate was estimated to be $3.00 per unit. Both fixed and variable overhead are assigned to the product on the basis of direct labor hours. The actual data for the year ended November 30 are presented as follows. Actual production in units 198,000 Actual direct labor hours 440,000 Actual variable overhead $352,000 Actual fixed overhead $575,000 Franklin's fixed overhead volume variance for the year is A. $55,000 unfavorable. B. $6,000 unfavorable. C. $19,000 favorable. D. $25,000 favorable. A. The fixed overhead volume variance is difference between the amount of fixed overhead applied (standard rate * standard input allowed for the actual level of output) and the budgeted amount of fixed overhead. See the correct answer for a complete explanation. B. The fixed overhead volume variance is difference between the amount of fixed overhead applied (standard rate * standard input allowed for the actual level of output) and the budgeted amount of fixed overhead. The fixed overhead rate was estimated to be $3.00 per unit and 200,000 units were scheduled for production. The total budgeted fixed overhead was $600,000 ($3.00 * 200,000). Two hours are required to produce one unit. Thus, the application rate is $1.50 ($3.00 / 2). The standard direct hours allowed for actual output are 396,000 (2 * 198,00 actual production in units). The applied overhead equals $594,000 ($1.50 * 396,000). We also could (c) HOCK international, page 11

12 calculate the amount of applied overhead using actual units produce and unit fixed overhead application rate ($3.00 * 198,000) which gives the same answer $594,000. Thus, fixed overhead volume variance is $6,000 unfavorable ($594,000 - $600,000). The applied amount was less than the budgeted amount which means that some amount of overhead wasn't applied to the final product i.e. it was underapplied. C. The fixed overhead volume variance is difference between the amount of fixed overhead applied (standard rate * standard input allowed for the actual level of output) and the budgeted amount of fixed overhead. See the correct answer for a complete explanation. D. The fixed overhead volume variance is difference between the amount of fixed overhead applied (standard rate * standard input allowed for the actual level of output) and the budgeted amount of fixed overhead. See the correct answer for a complete explanation. Question 20 - CMA Performance Measurement Edith Carolina, president of the Deed Corporation, requires a minimum return on investment of 8% for any project to be undertaken by her company. The company is decentralized, and leaves investment decisions up to the discretion of the division managers as long as the 8% return is expected to be realized. Michael Sanders, manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past 3 years and expects the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return, what will be the preference for taking on the proposed cosmetics line by Edith Carolina and Michael Sanders? A. CarolinaSanders AcceptReject B. CarolinaSanders RejectAccept C. CarolinaSanders RejectReject D. CarolinaSanders AcceptAccept A. Residual income measures the dollar return of an investment. Since the return on this investment is 12% and the required return is 8%, both of these projects will have a positive residual income and both Carolina and Sanders would accept the proposal. B. Residual income measures the dollar return of an investment. Since the return on this investment is 12% and the required return is 8%, both of these projects will have a positive residual income and both Carolina and Sanders would accept the proposal. C. Residual income measures the dollar return of an investment. Since the return on this investment is 12% and the required return is 8%, both of these projects will have a positive residual income and both Carolina and Sanders would accept the proposal. D. Residual income measures the dollar return of an investment. Since the return on this investment is 12% and the required return is 8%, both of these projects will have a positive residual income and both Carolina and Sanders would accept the proposal. Question 21 - CMA Variances - Material and Labor The efficiency variance for either labor or materials can be divided into A. Spending variance and yield variance. (c) HOCK international, page 12

13 B. Yield variance and price variance. C. Volume variance and mix variance. D. Yield variance and mix variance. A. The total material quantity (efficiency) and labor efficiency variances can be broken down into the two subvariances - the mix and the yield variances. B. The total material quantity (efficiency) and labor efficiency variances can be broken down into the two subvariances - the mix and the yield variances. C. The total material quantity (efficiency) and labor efficiency variances can be broken down into the two subvariances - the mix and the yield variances. D. The total material quantity (efficiency) and labor efficiency variances can be broken down into the two subvariances - the mix and the yield variances. The mix variance is the part of the quantity variance that results because the mix of material actually used was different from the mix that was supposed to have been used. (For example, including more corn and less wheat in the cereal than is normal). The yield variance results from the difference between the total quantity of the inputs that were actually used to produce the actual output and the standard quantity that should have been used to produce the actual output. Question 22 - CMA Variances - Material and Labor Price variances and efficiency variances can be key to the performance measurement within a company. In evaluating the performance within a company, a materials efficiency variance can be caused by all of the following except the A. Design of the product. B. Sales volume of the product. C. Actions of the purchasing department. D. Performance of the workers using the material. A. The materials efficiency variance could be caused by a number of reasons: poor workers performance, spoilage, shrinkage, theft, design of the product, poor quality of materials, downtimes, etc. The design of the product can cause the materials efficiency variance. B. The materials efficiency variance is simply the difference between the actual material usage and the standard usage for this level of output, multiplied by the standard price. It does not relate to the sales volume of the product. C. The materials efficiency variance could be caused by a number of reasons: poor workers performance, spoilage, shrinkage, theft, design of the product, poor quality of materials, downtimes, etc. Actions of the purchasing department can cause the materials efficiency variance. D. The materials efficiency variance could be caused by a number of reasons: poor workers performance, spoilage, shrinkage, theft, design of the product, poor quality of materials, downtimes, etc. The performance of the workers using the material can cause the materials efficiency variance. Question 23 - CMA Responsibility Accounting The most fundamental responsibility center affected by the use of market-based transfer prices is a(n) A. Profit center. B. Investment center. (c) HOCK international, page 13

14 C. Cost center. D. Production center. A. A profit center is responsible for revenues and costs (and therefore profit). The transfer price does affect a profit center. B. While an investment center would be affected by the transfer price, it is not the most fundamental (basic) of the centers that is affected by the transfer price. C. A cost center is not responsible for revenues so it would not be affected by the transfer price. D. Production centers are not always responsible for revenues and costs so the transfer price that is used would not always affect a production center. Question 24 - CMA Responsibility Accounting The segment margin of an investment center after deducting the imputed interest on the assets used by the investment center is known as A. Return on assets. B. Operating income. C. Residual income. D. Return on investment. A. The return on assets does not take into account the imputed interest rate on the assets of the investment center. See the correct answer for a complete explanation. B. Operating income does not take into account the imputed interest rate on the assets of the investment center. See the correct answer for a complete explanation. C. Residual income is the amount of return after a certain required return on the assets in use by the division. This describes the situation in the question. D. Return on investment is calculated as the income divided by the invested amount. There is no deduction of an imputer interest rate in the calculation of return on investment. Question 25 - CMA Performance Measurement James Webb is the general manager of the Industrial Product Division, and his performance is measured using the residual income method. Webb is reviewing the following forecasted information for his division for next year: Category Amount (thousands) Working capital $1,800 Revenue 30,000 Plant and equipment 17,200 If the imputed interest charge is 15% and Webb wants to achieve a residual income target of $2,000,000, what will costs have to be in order to achieve the target? A. $10,800,000 (c) HOCK international, page 14

15 B. $25,690,000 C. $9,000,000 D. $25,150,000 A. See the correct answer for a complete explanation. B. See the correct answer for a complete explanation. C. See the correct answer for a complete explanation. D. Residual income is equal to net income before taxes on project or investment opportunity minus target return in dollars (a % of assets or invested capital). Invested capital is equal to the sum of working capital and plant and equipment or $19,000,000 ($1,800,000 + $17,200,000). Hence, imputed interest charge is equal to $2,850,000 ($19,000,000 * 15%). Net income has to be equal to the sum of imputed interest charge and amount of residual income or $4,850,000 ($2,850,000 + $2,000,000). Thus, costs are equal to the revenue minus net income or $25,150,000 (30,000,000 - $4,850,000). Question 26 - CIA 595 III-24 - Control Concepts and Principles Which of the following management practices involves concentrating on areas that deserve attention and placing less attention on areas operating as expected? A. Benchmarking. B. Management by objectives. C. Management by exception. D. Responsibility accounting. A. Benchmarking is the process of a company using the standards set by other companies as a target or model for its own operations. (This is also called best practices.) It is the process of continuously trying to emulate (imitate) the best companies in the world. B. The primary MBO objective is goal congruence; it is behavioral, communication-oriented, and a responsibility approach system. C. Management by exception means that management focus on areas where there are problems, as identified by the fact that there is a variance from the standard. To manage by exception the standards and the system where variances are identified and reported to the appropriate level of the company have to be set. D. Responsibility accounting is an accounting system that measures accounting results of each responsibility center separately; it also measures consolidated results. Question 27 - CMA Responsibility Accounting The budgeting process that uses management by objectives and input from the individual manager is an example of the application of A. Human resource management. B. Responsibility accounting. C. Capital budgeting. D. Flexible budgeting. A. Human resource management is not what is described in the question. (c) HOCK international, page 15

16 B. Though this is not the best definition of responsibility accounting, this answer is a better choice than any of the other answers. C. Capital budgeting is the long term budgeting for fixed assets. This is not what is described in the question. D. Flexible budgeting is the creation of a budget for different levels of outputs. This is not what is described in the question. Question 28 - CMA Variances - General The purpose of identifying manufacturing variances and assigning their responsibility to a person/department should be to A. Determine the proper cost of the products produced so that selling prices can be adjusted accordingly. B. Pinpoint fault for operating problems in the organization. C. Use the knowledge about the variances to promote learning and continuous improvement in the manufacturing operations. D. Trace the variances to finished goods so that the inventory can be properly valued at year-end. A. The selling price is mostly determined by the manufacturing costs and other aspects like market price level, service costs allocation, etc. The variances are usually not significant aspects in process of selling price determination. B. To pinpoint fault for operating problems in the organization is the one of the reasons of responsibility accounting. However, it is not the major and ultimate purpose of variances and responsibility accounting. C. The purpose of identifying manufacturing variances and assigning their responsibility to a person/department is to use the knowledge about the variances to promote learning and continuous improvement. One of the main purposes for responsibility centers and responsibility accounting are to enable evaluation of subunits' performance and contribute to measuring the performance of the subunits' managers. This provides motivation for managers of the subunits. By knowing what they are responsible for and controlling those items, managers should be more motivated than if they were evaluated on something outside of their control. D. Depending on the significance of variance it is either written off to the finished goods account or allocated to the inventory accounts and finished goods on pro-rata basis. They are not valued at the end of the year. Question 29 - CMA Other Folsom Fashions sells a line of women's dresses. Folsom's performance report for November follows. Actual Budget Dresses sold 5,000 6,000 Sales $235,000 $300,000 Variable costs (145,000) (180,000) Contribution margin 90, ,000 Fixed costs (84,000) (80,000) Operating income $6,000 $40,000 The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income. (c) HOCK international, page 16

17 The effect of the sales quantity variance on the contribution margin for November is A. $15,000 unfavorable. B. $20,000 unfavorable. C. $30,000 unfavorable. D. $18,000 unfavorable. A. This is the sales price variance. See the correct answer for a complete explanation. B. This question is asking for the sales volume/quantity variance that is calculated as follows: (Actual Sales Volume - Budgeted Sales Volume) * Standard Contribution per Unit. The total budgeted contribution margin was $120,000, which gives us a $20 contribution margin per unit ($120,000 / 6,000). Now we can calculate the sales volume variance: (5,000-6,000) * $20 = ($20,000) unfavorable. The actual sales volume was lower than budgeted, and that caused the negative impact of $20,000 on the contribution margin. C. This is the total sales variance, which includes variances caused by differences in both the sales price and in the quantity sold. The total sales variance is the difference between actual and budgeted amount of contribution margin. The sales volume/quantity variance is calculated as follows: (Actual Sales Volume - Budgeted Sales Volume) * Standard Contribution per Unit. See the correct answer for a complete explanation. D. This variance was calculated by using the actual unit contribution margin, not the standard unit contribution margin. See the correct answer for a complete explanation. Question 30 - CIA 595 III-96 - Responsibility Accounting Which of the following techniques would be best for evaluating the management performance of a department that is operated as a cost center? A. Return on assets ratio. B. Variance analysis. C. Payback method. D. Return on investment ratio. A. A cost center is a type of center in responsibility accounting classifications that is responsible only for the incurrence of costs. A cost center does not have any revenue, and therefore does not have any profit. Thus, any type of return ratios cannot be calculated. B. A cost center is a type of center in responsibility accounting classifications that is responsible only for the incurrence of costs. A cost center does not have any revenue, and therefore does not have any profit. Thus, performance evaluation based on variance analysis of costs is the best basis for performance evaluation of a cost center manager. C. The payback method is usually used to analyze alternative investment opportunities, not management performance. D. Cost center is a type of center in responsibility accounting classifications that is responsible only for the incurrence of costs. A cost center does not have any revenue, and therefore does not have any profit. Thus, any type of return ratios cannot be calculated. Question 31 - CIA 594 III-73 - Variances - Material and Labor A company manufactures one product and has a standard cost system. In April the company had the following (c) HOCK international, page 17

18 experience: Direct Materials Direct Labor Actual $/unit of input (lbs. & hrs.) $28 $18 Standard price/unit of input $24 $20 Standard inputs allowed per unit of output 10 4 Actual units of input 190,000 78,000 Actual units of output 20,000 20,000 The direct materials efficiency variance for April is A. $156,000 favorable. B. $240,000 favorable. C. $760,000 unfavorable. D. $240,000 unfavorable. A. This is the direct labor rate variance. See the correct answer for a complete explanation. B. The quantity variance (also called the efficiency or usage variance) is calculated as: (Standard Quantity for Actual Output - Actual Quantity) * Standard Price. The standard quantity allowed for the output of 20,000 units of product is 200,000 lb. (20,000 * 10lb. standard quantity of material per unit of finished product). The direct materials efficiency variance is $240,000 favorable [(200, ,000) * $24]. The variance is favorable because the standard quantity allowed for the actual output is greater than actual quantity of materials used in production. C. This is the direct materials price variance. The direct materials efficiency variance is favorable because the standard quantity allowed for the actual output is greater than actual quantity of materials used in production. See the correct answer for a complete explanation. D. The direct materials efficiency variance is favorable because the standard quantity allowed for the actual output is greater than actual quantity of materials used in production. See the correct answer for a complete explanation. Question 32 - CMA Variances - Material and Labor Under a standard cost system, the materials efficiency variances are the responsibility of A. Sales and industrial engineering. B. Purchasing and industrial engineering. C. Production and industrial engineering. D. Purchasing and sales. A. Industrial engineers are involved in designing product and setting the standards of material usage thus, bearing a part of responsibility of efficiency of material usage. However, sales personnel rarely can influence material usage by production workers. B. Industrial engineers are involved in designing product and setting the standards of material usage thus, bearing a part of responsibility of efficiency of material usage. However, purchasing personnel rarely can influence material usage by production workers. C. The quantity variance (also called the efficiency or usage variance) is calculated as: (Standard Quantity for Actual Output - Actual Quantity) * Standard Price. Industrial engineers are involved in designing product and setting the standards of material usage thus, bearing a part of responsibility of efficiency of material usage. Production workers are those who actually convert materials into the finished product and directly responsible for efficiency of material usage. Therefore, both of these parties will have some responsibility for (c) HOCK international, page 18