Performance. MCQs. Gleim Book. Gleim CD. IMA - Retired IMA - Retired Contains: in a random basis

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1 Performance MCQs Contains: in a random basis Gleim Book Gleim CD IMA - Retired 2005 IMA - Retired 2008 By: Mohamed hengoo to dvd4arab.com members

2 [1] Gleim #: Source: Publisher Using the three-variance method for analyzing factory overhead, which of the following is used to compute the spending variance? Budget Budget Actual Allowance Allowance Factory Based on Based on Overhead Actual Input Standard Input No No No Yes Yes Yes Yes No Yes No Yes Yes [Fact Pattern #1] A company manufactures one product and has a standard cost system. In April the company had the following 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 [2] Gleim #: Source: CIA 594 III-72 (Refers to Fact Pattern #1) The direct materials price variance for April is $240,000 unfavorable. $156,000 favorable. $760,000 unfavorable. $760,000 favorable. [Fact Pattern #2] 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 Copyright 2008 Gleim Publications, Inc. Page 1

3 [3] Gleim #: Source: CMA (Refers to Fact Pattern #2) The standard hours allowed for actual production for the year ended November 30 total 247, , , ,000 [4] Gleim #: Source: Publisher In a responsibility accounting system, a feedback report that focuses on the difference between budgeted amounts and actual amounts is an example of Management by exception. Ignoring other variables for which the budgeted goals were met. Granting rewards to successful managers. Assessing blame. [Fact Pattern #3] Clear Plus, Inc. manufactures and sells boxes of pocket protectors. The static master budget and the actual results for May appear in the opposite column. Actuals Static Budget 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 [5] Gleim #: Source: CMA (Refers to Fact Pattern #3) The operating income for Clear Plus, Inc. using a flexible budget for May is $12,000 $19,200 $18,000 $30,000 Copyright 2008 Gleim Publications, Inc. Page 2

4 [Fact Pattern #4] Jackson Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Jackson has established the following standards for the prime costs of one unit of product. Standard Standard Standard Quantity Price Cost Direct materials 5 pounds $ 3.60/pound $18.00 Direct labor 1.25 hours $12.00/hour $33.00 During May, Jackson purchased 125,000 pounds of direct materials at a total cost of $475,000. The total factory wages for May were $364,000, 90% of which were for direct labor. Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct materials and 28,000 direct labor hours. [6] Gleim #: Source: CMA (Refers to Fact Pattern #4) The direct labor price (rate) variance for May is $7,200 unfavorable. $8,400 favorable. $8,400 unfavorable. $6,000 unfavorable. [7] Gleim #: Source: CIA 582 IV-22 Which of the following is least likely to cause an unfavorable materials quantity (usage) variance? Scheduling of substantial overtime. Machinery that has not been maintained properly. Labor that possesses skills equal to those required by the standards. Materials that do not meet specifications. [8] Gleim #: Source: CIA 592 IV-19 Division Z of a company produces a component that it currently sells to outside customers for $20 per unit. At its current level of production, which is 60% of capacity, Division Z s fixed cost of producing this component is $5 per unit and its variable cost is $12 per unit. Division Y of the same company would like to purchase this component from Division Z for $10. Division Z has enough excess capacity to fill Division Y s requirements. The managers of both divisions are compensated based upon reported profits. Which of the following transfer prices will maximize total company profits and be most equitable to the managers of Division Y and Division Z? $20 per unit. $12 per unit. $18 per unit. $22 per unit. Copyright 2008 Gleim Publications, Inc. Page 3

5 [9] Gleim #: Source: Publisher Using the two-variance method for analyzing overhead, which of the following variances contains both variable and fixed overhead elements? Controllable (Budget) Volume Efficiency Variance Variance Variance Yes Yes Yes Yes No No No No No Yes Yes No [10] Gleim #: Source: CIA 589 IV-16 Division A of a company is currently operating at 50% capacity. It produces a single product and sells all its production to outside customers for $13 per unit. Variable costs are $7 per unit, and fixed costs are $6 per unit at the current production level. Division B, which currently purchases this product from an outside supplier for $12 per unit, would like to purchase the product from Division Division A will operate at 80% capacity to meet outside customers and Division B s demand. What is the minimum price that Division A should charge Division B for this product? $9.60 per unit. $12.00 per unit. $7.00 per unit. $13.00 per unit. [11] Gleim #: Source: Publisher Full-cost price is The price set by charging for variable costs plus a lump sum or an additional markup, but less than full markup. The price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale. The price usually set by an absorption-costing calculation. The price on the open market. [12] Gleim #: Source: CMA (Refers to Fact Pattern #2) Franklin s fixed overhead volume variance for the year is $6,000 unfavorable. $25,000 favorable. $19,000 favorable. $55,000 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 4

6 [Fact Pattern #5] Folsom Fashions sells a line of women s dresses. Folsom s performance report for November follows. 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. Actual Budget Dresses sold 5,000 6,000 Sales $235,000 $300,000 Variable costs (145,000) (180,000) Contribution margin (CM) 90, ,000 Fixed costs (84,000) (80,000) Operating income $ 6,000 $ 40,000 [13] Gleim #: Source: CMA (Refers to Fact Pattern #5) What additional information is needed for Folsom to calculate the dollar impact of a change in market share on operating income for November? Folsom s budgeted market share, the budgeted total market size, and average market selling price. Folsom s budgeted market share and the actual total market size. Folsom s budgeted market share and the budgeted total market size. Folsom s actual market share and the actual total market size. [Fact Pattern #6] The following are the relevant data for calculating sales variances for Fortuna Co., which sells its sole product in two countries: Gallia Helvetica Total Budgeted selling price per unit $6.00 $ Budgeted variable cost per unit (3.00) (7.50) -- Budgeted contribution margin per unit $3.00 $ Budgeted unit sales Budgeted mix percentage 60% 40% 100% Actual units sold Actual selling price per unit $6.00 $ 9.50 NA [14] Gleim #: Source: Publisher (Refers to Fact Pattern #6) The sales volume variance for the two countries is $120 U. $30 F. $150 U. $130 U. Copyright 2008 Gleim Publications, Inc. Page 5

7 [15] Gleim #: Source: CMA A segment of an organization is referred to as a service center if it has Responsibility for developing markets and selling the output of the organization. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply. Authority to provide specialized support to other units within the organization. Responsibility for combining the raw materials, direct labor, and other factors of production into a final output. [Fact Pattern #7] Parkside, Inc. has several divisions that operate as decentralized profit centers. Parkside s Entertainment Division manufactures video arcade equipment using the products of two of Parkside s other divisions. The Plastics Division manufactures plastic components, one type that is made exclusively for the Entertainment Division, while other less complex components are sold to outside markets. The products of the Video Cards Division are sold in a competitive market; however, one video card model is also used by the Entertainment Division. The actual costs per unit used by the Entertainment Division are presented below. Plastic Components Video Cards Direct material $1.25 $2.40 Direct labor Variable overhead Fixed overhead Total cost $5.00 $9.15 The Plastics Division sells its commercial products at full cost plus a 25% markup and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market. The market price of the video card used by the Entertainment Division is $10.98 per unit. [16] Gleim #: Source: CMA (Refers to Fact Pattern #7) Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with the Entertainment Division. This price will Encourage the Entertainment Division to seek an outside source for plastic components. Demotivate the Plastics Division causing mediocre performance. Motivate both divisions as estimated profits are shared. Cause the Plastics Division to reduce the number of commercial plastic components it manufactures. Copyright 2008 Gleim Publications, Inc. Page 6

8 [17] Gleim #: Source: CMA Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of the following items is least likely to appear in a performance report for a manager of one of Rockford s assembly lines? Direct labor. Repairs and maintenance. Materials. Depreciation on the manufacturing facility. [18] Gleim #: Source: Publisher The proposed transfer price is based upon the outlay cost. Outlay cost plus opportunity cost is The retail price. The price set by charging for variable costs plus a lump sum or an additional markup, but less than full markup. The price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale. The price usually set by an absorption-costing calculation. [19] Gleim #: Source: CIA 592 IV-18 The following is a standard cost variance analysis report on direct labor cost for a division of a manufacturing company. Job Actual Hours at Actual Wages Actual Hours at Standard Wages Standard Hours at Standard Wages 213 $ 3,243 $ 3,700 $ 3, ,345 15,675 15, ,754 7,000 6, ,788 18,755 19, ,370 3,470 2,650 Totals $48,500 $48,600 $46,600 What is the total static budget direct labor variance for the division? $100 favorable. $1,900 unfavorable. $1,900 favorable. $100 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 7

9 [20] Gleim #: Source: CMA The most fundamental responsibility center affected by the use of market-based transfer prices is a(n) Investment center. Production center. Profit center. Cost center. [21] Gleim #: Source: Publisher River Company uses a standard-cost accounting system. It applies overhead based on direct labor hours. The following overhead costs and production data are available for March: Standard fixed overhead rate per DLH $1.50 Standard variable overhead rate per DLH $5.00 Budgeted monthly DLH 30,000 Actual DLH worked 28,000 Standard DLH allowed for actual production 27,500 Overall overhead variance -- favorable $2,500 What is the applied factory overhead for March? $137,500 $178,750 $182,000 $176,250 [22] Gleim #: Source: CMA The efficiency variance for either direct labor or materials can be divided into Volume variance and mix variance. Yield variance and mix variance. Spending variance and yield variance. Yield variance and price variance. Copyright 2008 Gleim Publications, Inc. Page 8

10 [23] Gleim #: Source: Publisher The following data relate to Tray Co. s manufacturing operations: Standard direct labor hours per unit 3 Actual direct labor hours 24,500 Number of units produced 8,000 Standard variable overhead per standard direct labor hour $2 Actual variable overhead $46,000 Tray s variable overhead efficiency variance is $0 $3,000 F. $2,000 F. $1,000 U. [24] Gleim #: Source: Publisher The format for internal reports in a responsibility accounting system is prescribed by Generally accepted accounting principles. Management. The American Institute of Certified Public Accountants. The Financial Accounting Standards Board. [25] Gleim #: Source: CMA Which one of the following firms is likely to experience dysfunctional motivation on the part of its managers due to its allocation methods? To allocate depreciation of forklifts used by workers at its central warehouse, Shahlimar Electronics uses predetermined amounts calculated on the basis of the long-term average use of the services provided. Rainier Industrial does not allow its service departments to pass on their cost overruns to the production departments. Tashkent Auto s MIS is operated out of headquarters and serves its various divisions. Tashkent s allocation of the MIS-related costs to its divisions is limited to costs the divisions will incur if they were to outsource their MIS needs. Manhattan Electronics uses the sales revenue of its various divisions to allocate costs connected with the upkeep of its headquarters building. It also uses ROI to evaluate the divisional performances. [26] Gleim #: Source: CMA (Refers to Fact Pattern #5) Folsom s sales price variance for November is $20,000 unfavorable. $15,000 unfavorable. $18,000 unfavorable. $30,000 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 9

11 [27] Gleim #: Source: Publisher (Refers to Fact Pattern #6) The sales quantity variance for the two countries is $156 U. $100 F. $30 F. $56 F. [Fact Pattern #8] Nanjones Company manufactures a line of products distributed nationally through wholesalers. Presented below are planned manufacturing data for the year and actual data for November of the current year. The company applies overhead based on planned machine hours using a predetermined annual rate. Annual Planning Data November Fixed overhead $1,200,000 $100,000 Variable overhead $2,400,000 $220,000 Direct labor hours 48,000 4,000 Machine hours 240,000 22,000 Data for November Direct labor hours (actual) 4,200 Direct labor hours (plan based on output) 4,000 Machine hours (actual) 21,600 Machine hours (plan based on output) 21,000 Fixed overhead $101,200 Variable overhead $214,000 [28] Gleim #: Source: CMA (Refers to Fact Pattern #8) Nanjones fixed overhead volume variance for November was $10,000 favorable. $1,200 unfavorable. $5,000 favorable. $5,000 unfavorable. [29] Gleim #: Source: CMA Managerial performance can be measured in many different ways, including return on investment (ROI) and residual income. A good reason for using residual income instead of ROI is that ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage. Residual income is well understood and often used in the financial press. Goal congruence is more likely to be promoted by using residual income. Residual income can be computed without regard to identifying an investment base. Copyright 2008 Gleim Publications, Inc. Page 10

12 [30] Gleim #: Source: CMA The variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate is the Spending variance. Efficiency variance. Flexible budget variance. Production volume variance. [31] Gleim #: Source: CMA The following information is available for the Mitchelville Products Company for the month of July. Master Budget Actual Units 4,000 3,800 Sales revenue $60,000 $53,200 Variable manufacturing costs 16,000 19,000 Fixed manufacturing costs 15,000 16,000 Variable selling and administrative expense 8,000 7,600 Fixed selling and administrative expense 9,000 10,000 The contribution margin volume variance for the month of July would be $400 unfavorable. $6,800 unfavorable. $200 favorable. $1,800 unfavorable. [Fact Pattern #9] Water Control Systems, Inc. manufactures water pumps and uses a standard cost system. The standard overhead costs per water pump are based on direct labor hours and are as follows: Variable overhead (4 hours at $8 per hour) $32 Fixed overhead (4 hours at $5* per hour) 20 Total overhead cost per unit $52 * Based on a capacity of 100,000 direct labor hours per month. The following 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 four hours. Variable overhead costs were $740,000. Fixed overhead costs were $540,000. Copyright 2008 Gleim Publications, Inc. Page 11

13 [32] Gleim #: Source: CMA (Refers to Fact Pattern #9) Water Control s direct labor efficiency variance for November was $54,000 unfavorable. $108,000 favorable. $60,000 favorable. $120,000 favorable. [33] Gleim #: Source: Publisher Responsibility costs motivate managers of responsibility centers to act in the organization s interest. The attribute that would be least persuasive in deciding to allocate costs to responsibility centers is that they Are helpful in measuring support used by the responsibility center. Are limited to staff services, such as consulting or internal audit. Are used in product pricing. Can be influenced by actions of the center s manager. [34] Gleim #: Source: CMA 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 Zero. Favorable. Unfavorable. The same amount as the direct labor efficiency variance. [35] Gleim #: Source: CMA (Refers to Fact Pattern #9) Water Control s direct labor price variance for November was $148,000 unfavorable. $94,000 unfavorable. $60,000 favorable. $54,000 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 12

14 [36] Gleim #: Source: CIA 1193 IV-19 The Eastern division sells goods internally to the Western division of the same company. The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation. It costs $20 per ton to transport the goods to Western. Eastern s actual market cost per ton to buy the direct materials to make the transferred product is $100. Actual per ton direct labor is $50. Other actual costs of storage and handling are $40. The company president selects a $220 transfer price. This is an example of Cost plus 20% transfer pricing. Market-based transfer pricing. Negotiated transfer pricing. Cost-based transfer pricing. [37] Gleim #: Source: CMA David Rogers, purchasing manager at Fairway Manufacturing Corporation, was able to acquire a large quantity of direct materials from a new supplier at a discounted price. Marion Conner, inventory supervisor, is concerned because the warehouse has become crowded and some things had to be rearranged. Brian Jones, vice president of production, is concerned about the quality of the discounted materials. However, the Engineering Department tested the new materials and indicated that they are of acceptable quality. At the end of the month, Fairway experienced a favorable direct materials usage variance, a favorable direct labor usage variance, and a favorable direct materials price variance. The usage variances were solely the result of a higher yield from the new material. The favorable direct materials price variance is considered the responsibility of the Engineering manager. Purchasing manager. Inventory supervisor. Vice president of production. [Fact Pattern #10] 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%. [38] Gleim #: Source: CMA (Refers to Fact Pattern #10) If the Deed Corporation evaluates managerial performance using return on investment, what will be the preference for taking on the proposed cosmetics line by Edith Carolina and Michael Sanders? Carolina Sanders Accept Reject Reject Reject Accept Accept Reject Accept Copyright 2008 Gleim Publications, Inc. Page 13

15 [39] Gleim #: Source: CIA 1191 IV-18 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. II. III. IV. Corporate administrative costs allocated on the basis of net segment sales. Personnel costs assigned on the basis of the number of employees in each segment. Fixed computer facility costs divided equally among each segment. 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 Corporate administrative costs. Fixed computer facility costs. Variable computer operational costs. Personnel costs. [40] Gleim #: Source: CMA (Refers to Fact Pattern #10) 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? Carolina Sanders Accept Reject Reject Accept Accept Accept Reject Reject [41] Gleim #: Source: CIA 589 IV-15 In a responsibility accounting system, managers are accountable for Variable costs but not for fixed costs. Costs over which they have significant influence. Product costs but not for period costs. Incremental costs. [42] Gleim #: Source: Publisher Which of the following standard costing variances is the most controllable by a production manager? Overhead efficiency. Labor efficiency. Materials usage. Overhead volume. Copyright 2008 Gleim Publications, Inc. Page 14

16 [43] Gleim #: Source: Publisher Data regarding Mill Company s direct materials costs is as follows: Actual unit cost $2.00 Standard unit cost 2.20 Actual quantity purchased and used 28,000 units Standard units of materials per unit of finished goods 3 units Actual output of finished goods 9,000 units What is the direct materials price variance? $5,600 unfavorable. $5,600 favorable. $2,800 favorable. $2,200 unfavorable. [44] Gleim #: Source: CPA 1186 II-21 Tub Co. uses a standard cost system. The following information pertains to direct labor for product B for the month of October: Standard hours allowed for actual production 2,000 Actual rate paid per hour $8.40 Standard rate per hour $8.00 Labor efficiency variance $1,600 U What were the actual hours worked? 1,800 1,810 2,190 2,200 [45] Gleim #: Source: CMA Which one of the following best identifies a profit center? A new car sales division for a large local auto agency. A large toy company. The Information Technology Department of a large consumer products company. The Production Operations Department of a small job-order machine shop company. Copyright 2008 Gleim Publications, Inc. Page 15

17 [46] Gleim #: Source: CMA (Refers to Fact Pattern #5) The effect of the sales quantity variance on Folsom s contribution margin for November is $20,000 unfavorable. $30,000 unfavorable. $15,000 unfavorable. $18,000 unfavorable. [47] Gleim #: Source: CMA Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n) Profit center. Operating unit. Division. Revenue center. [48] Gleim #: Source: CIA 594 III-73 (Refers to Fact Pattern #1) The direct materials efficiency variance for April is $240,000 favorable. $156,000 favorable. $240,000 unfavorable. $760,000 unfavorable. [49] Gleim #: Source: CMA (Refers to Fact Pattern #3) Which one of the following statements concerning Clear Plus, Inc. s actual results for May is correct? The sales price variance is $32,000 favorable. The flexible budget variable cost variance is $10,800 unfavorable. The flexible budget variance is $8,000 favorable. The sales volume variance is $8,000 favorable. Copyright 2008 Gleim Publications, Inc. Page 16

18 [50] Gleim #: Source: CIA 589 IV-14 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? $4,600 favorable. $12,600 unfavorable. $12,000 unfavorable. $5,000 favorable. [Fact Pattern #11] Tamsin Company s standard direct labor rates in effect for the fiscal year ending June 30 and standard hours allowed for the output in April are Standard DL Rate per Hour Standard DLH Allowed for Output Labor class III $ Labor class II Labor class I The wage rates for each labor class increased January 1 under the terms of a new union contract. The standard wage rates were not revised. The actual direct labor hours (DLH) and the actual direct labor rates for April were as follows: Actual Rate Actual DLH Labor class III $ Labor class II Labor class I [51] Gleim #: Source: Publisher (Refers to Fact Pattern #11) What is the direct labor mix variance (rounded) for Tamsin? $66.67 $50.00 $ $ [Fact Pattern #12] Dori Castings, a job-order shop, uses a full-absorption, standard-cost system to account for its production costs. The O/H costs are applied on a direct-labor-hour basis. Copyright 2008 Gleim Publications, Inc. Page 17

19 [52] Gleim #: Source: CMA (Refers to Fact Pattern #12) Dori s choice of a production volume as a denominator for calculating its factory O/H rate has No effect on the fixed factory O/H production volume variance. An effect on the variable factory O/H rate for applying costs to production. No effect on the overall (net) fixed factory O/H variance. No effect on the fixed factory O/H budget variance. [53] Gleim #: Source: CMA Lee Manufacturing uses a standard cost system with overhead applied based upon direct labor hours. The manufacturing budget for the production of 5,000 units for the month of May included the following information: Direct labor (10,000 hours at $15 per hour) $150,000 Variable overhead 30,000 Fixed overhead 80,000 During May, 6,000 units were produced and the fixed overhead budget variance was $2,000 favorable. Fixed overhead during May was Overapplied by $16,000. Underapplied by $16,000. Overapplied by $18,000. Underapplied by $2,000. [54] Gleim #: Source: CMA (Refers to Fact Pattern #7) A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would Encourage the Entertainment Division to purchase video cards from an outside source. Satisfy the Video Cards Division s profit desire by allowing recovery of opportunity costs. Provide no profit incentive for the Video Cards Division to control or reduce costs. Allow evaluation of both divisions on a competitive basis. [55] Gleim #: Source: CMA The flexible budget for the month of May was for 9,000 units with direct materials at $15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of $81,000. Actual output for the month was 8,500 units with $127,500 in direct materials and $77,775 in direct labor expense. The direct labor standard of 45 minutes was maintained throughout the month. Variance analysis of the performance for the month of May shows a(n) Unfavorable direct labor price variance of $1,275. Favorable direct materials usage variance of $7,500. Unfavorable direct labor efficiency variance of $1,275. Favorable direct labor efficiency variance of $1,275. Copyright 2008 Gleim Publications, Inc. Page 18

20 [Fact Pattern #13] An organization that specializes in reviewing and editing technical magazine articles sets the following standards for evaluating the performance of the professional staff: Annual budgeted fixed costs for normal capacity level of 10,000 articles reviewed and edited $600,000 Standard professional hours per 10 articles 200 hours Flexible budget of standard labor costs to process 10,000 articles $10,000,000 The following data apply to the 9,500 articles that were actually reviewed and edited during the current year. Total hours used by professional staff 192,000 hours Flexible costs $9,120,000 Total cost $9,738,000 [56] Gleim #: Source: CMA (Refers to Fact Pattern #13) Using a flexible budget, the total cost planned for the review and editing of 9,500 articles should be $10,100,000 $10,070,000 $10,570,000 $9,500,000 [57] Gleim #: Source: CMA Decentralized firms can delegate authority and yet retain control and monitor managers performance by structuring the organization into responsibility centers. Which one of the following organizational segments is most like an independent business? Revenue center. Investment center. Profit center. Cost center. [58] Gleim #: Source: Publisher To properly motivate divisional management, the divisional ROIs should be Lower in more profitable divisions in which motivation is unnecessary. Equal. Greater in the less profitable divisions to motivate those divisions to achieve higher ROIs. Different based upon strategic goals of the firm. Copyright 2008 Gleim Publications, Inc. Page 19

21 [59] Gleim #: Source: CMA Todco planned to produce 3,000 units of its single product, Teragram, during November. The standard specifications for one unit of Teragram include six pounds of materials at $.30 per pound. Actual production in November was 3,100 units of Teragram. The accountant computed a favorable materials purchase price variance of $380 and an unfavorable materials quantity variance of $120. Based on these variances, one could conclude that More materials were used than were purchased. The actual cost of materials was less than the standard cost. More materials were purchased than were used. The actual usage of materials was less than the standard allowed. [60] Gleim #: Source: CMA Listed below is selected financial information for the Western Division of the Hinzel Company for last year. Account Amount (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 return on investment (ROI) for last year? 22.54% 16.67% 19.79% 34.78% [61] Gleim #: Source: Publisher The following information relates to Cinder Co. s Northeast Division: Sales $600,000 Variable costs 360,000 Traceable fixed costs 60,000 Average invested capital 120,000 Imputed interest rate 8% Cinder s residual income was $230,400 $170,400 $180,000 $189,600 Copyright 2008 Gleim Publications, Inc. Page 20

22 [62] Gleim #: Source: CMA Based on past experience, a company has developed the following budget formula for estimating its shipping expenses. The company s shipments average 12 lbs. per shipment: Shipping costs = $16,000 + ($0.50 lbs. shipped) The planned activity and actual activity regarding orders and shipments for the current month are given in the following schedule: Plan Actual Sales orders Shipments Units shipped 8,000 9,000 Sales $120,000 $144,000 Total pounds shipped 9,600 12,300 The actual shipping costs for the month amounted to $21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be $20,800 $20,680 $22,150 $20,920 [63] Gleim #: Source: CIA 593 IV-14 The sales volume variance is partly a function of the unit contribution margin (UCM). For a single-product company, it is The difference between actual and master budget sales volume, times actual UCM. The difference between flexible budget and master budget sales volume, times actual UCM. The difference between flexible budget and actual sales volume, times master budget UCM. The difference between flexible budget and master budget sales volume, times master budget UCM. [64] Gleim #: Source: CMA Ordinarily, the most appropriate basis on which to evaluate the performance of a division manager is the division s Gross profit. Net revenue minus controllable division costs. Net income minus the division s fixed costs. Contribution margin. Copyright 2008 Gleim Publications, Inc. Page 21

23 [65] Gleim #: Source: CMA Which of these variances is least significant for cost control? Labor price variance. Materials quantity variance. Variable O/H spending variance. Fixed O/H volume variance. [66] Gleim #: Source: Publisher Which of the following is the best example of why an employee may resist modifying his/her performance to meet the goals set by a control system? The employee believes that the control system sets the standard of performance too high. People tend to avoid pleasant situations. The control system establishes a standard of performance that the employee considers relevant to what (s)he regards as their primary job objective. The control system highlights the things that the employee does well. [67] Gleim #: Source: CIA 1186 IV-12 The sales mix variance Will be an unfavorable 5% whenever a 5% decrease occurs in a company s overall sales volume. Equals the difference between the budgeted weighted-average materials unit costs for the actual and planned mixes, times the actual materials input. Will be favorable when a company sells fewer products bearing unit contribution margins higher than average. Measures the effect of the deviation from the budgeted weighted-average contribution margin per unit associated with a change in the quantities of products in the mix. [68] Gleim #: Source: Publisher Franklin Company s gross profit for Year 2 and Year 1 was as follows: Year 2 Year 1 Sales $ 950,400 $ 960,000 Cost of goods sold (556,800) (576,000) Gross profit $ 393,600 $ 384,000 Assuming that Year 2 selling prices were 15% lower than Year 1 selling prices, what was the decrease in gross profit caused by the selling price change? $167,718 $142,560 $144,000 $134,400 Copyright 2008 Gleim Publications, Inc. Page 22

24 [69] Gleim #: Source: CMA Under a standard cost system, direct labor price variances are usually not attributable to The assignment of different skill levels of workers than planned. The use of a single average standard rate. Labor rate predictions. Union contracts approved before the budgeting cycle. [70] Gleim #: Source: CMA Under a standard cost system, the materials price variances are usually the responsibility of the Production manager. Cost accounting manager. Sales manager. Purchasing manager. [Fact Pattern #14] Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of manufacturing one unit of Zeb is as follows: Direct materials pounds at $1.50 per pound $ 90 Direct labor -- 3 hours at $12 per hour 36 Overhead -- 3 hours at $8 per hour 24 Total standard cost per unit $150 The budgeted variable overhead rate is $3 per direct labor hour, and the budgeted fixed overhead is $27,000 per month. During May, Ardmore produced 1,650 units of Zeb compared with a normal capacity of 1,800 units. The actual cost per unit was as follows: Direct materials (purchased and used) pounds at $1.65 per pound $ Direct labor hours at $12 per hour Overhead -- $39,930 per 1,650 units Total actual cost per unit $ [71] Gleim #: Source: CMA (Refers to Fact Pattern #14) Ardmore s direct labor rate variance for May is $4,950 favorable. $0 $1,920 favorable. $4,950 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 23

25 [Fact Pattern #15] A manufacturer of radios purchases components from subcontractors for assembly into complete radios. Each radio requires three units each of Part X, which has a standard cost of $2.90 per unit. During June, the company had the following experience with respect to Part X: Units Purchases ($36,000) 12,000 Consumed in manufacturing 10,000 Radios manufactured 3,000 [72] Gleim #: Source: Publisher (Refers to Fact Pattern #15) During June, the company incurred a materials efficiency variance of $8,700 unfavorable. $2,900 unfavorable. $8,700 favorable. $2,900 favorable. [Fact Pattern #16] Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. Standard Standard Standard Quantity Price Cost Direct materials 8 pounds $1.80 per pound $14.40 Direct labor.25 hour $8.00 per hour 2.00 $16.40 During November, Arrow purchased 160,000 pounds of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of direct materials and 5,000 direct labor hours. [73] Gleim #: Source: CMA (Refers to Fact Pattern #16) The direct materials usage (quantity) variance for November is $17,100 unfavorable. $17,100 favorable. $14,400 unfavorable. $1,100 favorable. Copyright 2008 Gleim Publications, Inc. Page 24

26 [Fact Pattern #17] Funtime, Inc. manufactures video game machines. Market saturation and technological innovations have caused pricing pressures, which have resulted in declining profits. To stem the slide in profits until new products can be introduced, an incentive program has been developed to reward production managers who contribute to an increase in the number of units produced and effect cost reductions. The managers have responded to the pressure of improving manufacturing in several ways. The video game machines are put together by the Assembly Group which requires parts from both the Printed Circuit Boards (PCB) and the Reading Heads (RH) groups. To attain increased production levels, the PCB and RH groups commenced rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used in the production of these parts has been postponed with only emergency repair work being performed to keep production lines moving. The more aggressive Assembly Group production supervisors have pressured maintenance personnel to attend to their machines at the expense of other groups. This has resulted in machine downtime in the PCB and RH groups that, when coupled with demands for accelerated parts delivery by the Assembly Group, has led to more frequent parts rejections and increased friction among departments. Funtime operates under a standard cost system. The standard costs for video game machines are as follows: Standard Cost per Unit Cost Item Quantity Cost Total Direct Materials Housing unit 1 $20 $ 20 Printed circuit boards Reading heads Direct labor hours Assembly group PCB group RH group Variable overhead hours Total standard cost per unit $139 Funtime prepares monthly performance reports based on standard costs. Presented below is the contribution report for May when production and sales both reached 2,200 units. Funtime, Inc. Contribution Report For the Month of May Budget Actual Variance Units 2,000 2, F Revenue $400,000 $440,000 $40,000 F Variable costs Direct materials 180, ,400 40,400 U Direct labor 80,000 93,460 13,460 U Variable overhead 18,000 18, U Total variable costs 278, ,660 54,660 U Contribution margin $122,000 $107,340 $14,660 U Funtime s top management was surprised by the unfavorable contribution to overall corporate profits despite the increased sales in May. Jack Rath, cost accountant, was assigned to identify the reasons for the unfavorable contribution results as well as the individuals or groups responsible. After review, Rath prepared the Usage Report presented below. Funtime, Inc. Usage Report For the Month of May Cost Item Quantity Actual Cost Direct materials Housing units 2,200 units $ 44,000 Printed circuit boards 4,700 units 75,200 Reading heads 9,200 units 101,200 Direct labor Assembly 3,900 hours 31,200 Printed circuit boards 2,400 hours 23,760 Reading heads 3,500 hours 38,500 Variable overhead 9,900 hours 18,800 Total variable cost $332,660 Rath reported that the PCB and RH groups supported the increased production levels but experienced abnormal machine downtime, causing the idling of workers that required the use of overtime to keep up with the accelerated demand for parts. The idle time was charged to direct labor. Rath also reported that the production managers of these two groups resorted to parts rejections, as opposed to testing and modification procedures formerly applied. Rath determined that the Assembly Group met management s objectives by increasing production while using lower than standard hours. Copyright 2008 Gleim Publications, Inc. Page 25

27 [74] Gleim #: Source: Publisher (Refers to Fact Pattern #17) What is Funtime s total direct materials quantity variance? $9,200 favorable. $8,500 favorable. $8,500 unfavorable. $9,200 unfavorable. [Fact Pattern #18] Patie Company uses a standard FIFO, process-cost system to account for its only product, Mituea. Patie has found that direct machine hours (DMH) provide the best estimate of the application of O/H. Four (4) standard direct machine hours are allowed for each unit. Using simple linear regression analysis in the form y = a + b(dmh), given that (a) equals fixed costs and (b) equals variable costs, Patie has developed the following O/H budget for a normal activity level of 100,000 direct machine hours: ITEM (y) a b Supplies $ 0.50 Indirect Labor $ 54, Depreciation -- Plant and Equipment 27,000 Property Taxes and Insurance 32,300 Repairs and Maintenance 14, Utilities 3, Total O/H $132,000 $13.00 Actual fixed O/H incurred was $133,250, and actual variable O/H was $1,225,000. Patie produced 23,500 equivalent units during the year using 98,700 direct machine hours. [75] Gleim #: Source: Publisher (Refers to Fact Pattern #18) What is the total O/H variance? $73,750 favorable. $55,134 favorable. $12,170 unfavorable. $55,134 unfavorable. [76] Gleim #: Source: CMA (Refers to Fact Pattern #8) Nanjones total amount of overhead applied to production for November was $300,000 $320,000 $316,200 $315,000 Copyright 2008 Gleim Publications, Inc. Page 26

28 [77] Gleim #: Source: CMA (Refers to Fact Pattern #9) Water Control s fixed overhead spending variance for November was $70,000 unfavorable. $40,000 unfavorable. $240,000 unfavorable. $460,000 unfavorable. [78] Gleim #: Source: CIA 579 IV-2 Which of the following factors should not be considered when deciding whether to investigate a variance? Magnitude of the variance. Whether the variance is favorable or unfavorable. Trend of the variances over time. Likelihood that an investigation will eliminate future occurrences of the variance. [79] Gleim #: Source: CIA 1185 IV-12 Actual and budgeted information about the sales of a product are presented for June as follows. Actual Budget Units 8,000 10,000 Sales Revenue $92,000 $105,000 The sales price variance for June was $10,500 unfavorable. $8,000 favorable. $10,000 unfavorable. $10,000 favorable. [80] Gleim #: Source: CMA In responsibility accounting, a center s performance is measured by controllable costs. Controllable costs are best described as including Those costs about which the manager is knowledgeable and informed. Direct material and direct labor only. Only discretionary costs. Only those costs that the manager can influence in the current time period. Copyright 2008 Gleim Publications, Inc. Page 27

29 [81] Gleim #: Source: CMA Sample Q3-2 Consider the following information for Richardson Company for the prior year. The company produced 1,000 units and sold 900 units, both as budgeted. There were no beginning or ending work-in-process inventories and no beginning finished goods inventory. Budgeted and actual fixed costs were equal, all variable manufacturing costs were affected by production volume only, and all variable selling costs were affected by sales volume only. Budgeted per unit revenues and costs were as follows: Per unit Sales price $100 Direct materials 30 Direct labor 20 Other variable manufacturing costs 10 Fixed selling costs 5 Variable selling costs 12 Fixed selling costs ($33,600 total) 4 Fixed administrative costs ($1,800 total) 2 The contribution margin earned by Richardson for the prior year was $28,000 $35,000 $25,200 $31,500 [82] Gleim #: Source: Publisher On a balanced scorecard, which of the following would not be an example of a customer satisfaction measure? Market share. Economic value added. Customer retention. Response time. [83] Gleim #: Source: Publisher The market size variance is partly a function of the unit contribution margin (UCM). It equals Budgeted market share percentage (actual market size in units budgeted market size in units) budgeted weighted-average UCM. (Actual market share percentage budgeted market share percentage) actual market size in units budgeted weighted-average UCM. Actual units (budgeted weighted-average UCM for planned mix budgeted weighted-average UCM for actual mix). (Actual units master budget units) budgeted weighted-average UCM for the planned mix. Copyright 2008 Gleim Publications, Inc. Page 28

30 [84] Gleim #: Source: CMA A segment of an organization is referred to as a profit center if it has Authority to make decisions over the most significant costs of operations including the power to choose the sources of supply. 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. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply. Authority to provide specialized support to other units within the organization. [85] Gleim #: Source: CIA 1196 III-94 Companies with decentralized, autonomous divisions that sell their goods and services internally to other divisions of the company as well as externally in competitive markets have to establish transfer prices for the goods and services transferred internally among divisions. Generally, upper management has established such operating criteria for managing the divisions as goal congruence, subunit autonomy, and a sustained high level of management effort. An approach consistent with the above criteria would be to set the transfer price equal to the Additional outlay cost per unit incurred to the point of transfer plus the opportunity cost per unit to the supplying division. Variable cost per unit incurred to the point of transfer. Full cost per unit incurred to the point of transfer plus a percentage markup on the full cost per unit. Additional outlay cost per unit incurred to the point of transfer plus the opportunity cost per unit to the buying division. [86] Gleim #: Source: CIA 594 III-71 Which of the following is not true of responsibility accounting? Managers should only be held accountable for factors over which they have significant influence. The focus of cost center managers will normally be more narrow than that of profit center managers. When a responsibility account system exists, operations of the business are organized into separate areas controlled by individual managers. Every factor that affects a firm s financial performance ultimately is controllable by someone, even if that someone is the person at the top of the firm. [Fact Pattern #19] ChemKing uses a standard costing system in the manufacture of its single product. The 35,000 units of direct materials in inventory were purchased for $105,000, and two units of direct materials are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for materials was $60,000, and the unfavorable quantity variance was $2,500. Copyright 2008 Gleim Publications, Inc. Page 29

31 [87] Gleim #: Source: CMA (Refers to Fact Pattern #19) ChemKing s direct materials price variance for the units used in November was $3,500 unfavorable. $11,000 unfavorable. $2,500 unfavorable. $12,500 unfavorable. [88] Gleim #: Source: CIA 590 IV-15 A manager prepared the following table by which to analyze labor costs for the month: Actual Hours at Actual Hours at Standard Hours at Actual Rate Standard Rate Standard Rate $10,000 $9,800 $8,820 What variance was $980? Labor efficiency variance. Labor spending variance. Labor rate variance. Volume variance. [89] Gleim #: Source: Publisher Pane Company s direct labor costs for April are as follows: Standard direct labor hours 42,000 Actual direct labor hours 41,200 Total direct labor payroll $247,200 Direct labor efficiency variance -- favorable $ 3,840 What is Pane s direct labor rate variance? $50,400 favorable. $49,440 favorable. $49,440 unfavorable. $44,496 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 30

32 [90] Gleim #: Source: CMA An unfavorable direct labor efficiency variance could be caused by a(n) Unfavorable variable overhead spending variance. Unfavorable fixed overhead volume variance. Favorable variable overhead spending variance. Unfavorable direct materials usage variance. [91] Gleim #: Source: CIA 595 III-24 Which of the following management practices involves concentrating on areas that deserve attention and placing less attention on areas operating as expected? Management by exception. Management by objectives. Benchmarking. Responsibility accounting. [92] Gleim #: Source: Publisher A possible short-term problem in controlling overhead costs would be detected by which of the following variances? Both the fixed overhead spending variance and the volume variance. The volume variance but not the fixed overhead spending variance. The spending variance but not the volume variance. Both the variable overhead spending variance and the volume variance. [93] Gleim #: Source: CMA The inventory control supervisor at Wilson Manufacturing Corporation reported that a large quantity of a part purchased for a special order that was never completed remains in stock. The order was not completed because the customer defaulted on the order. The part is not used in any of Wilson s regular products. After consulting with Wilson s engineers, the vice president of production approved the substitution of the purchased part for a regular part in a new product. Wilson s engineers indicated that the purchased part could be substituted providing it was modified. The units manufactured using the substituted part required additional direct labor hours resulting in an unfavorable direct labor efficiency variance in the Production Department. The unfavorable direct labor efficiency variance resulting from the substitution of the purchased part in inventory is best assigned to the Production manager. Vice president of production. Inventory supervisor. Sales manager. Copyright 2008 Gleim Publications, Inc. Page 31

33 [94] Gleim #: Source: Publisher The sales quantity variance is partly a function of the unit contribution margin (UCM). It equals (Actual market share percentage-budgeted market share percentage) actual market size in units budgeted weighted-average UCM. Budgeted market share percentage (actual market size in units budgeted market size in units) budgeted weighted-average UCM. Actual units (budgeted weighted-average UCM for planned mix budgeted weighted-average UCM for actual mix). (Actual units master budget units) budgeted weighted-average UCM for the planned mix. [95] Gleim #: Source: CIA 595 III-96 Which of the following techniques would be best for evaluating the management performance of a department that is operated as a cost center? Return on investment ratio. Payback method. Variance analysis. Return on assets ratio. [96] Gleim #: Source: Publisher (Refers to Fact Pattern #17) What is Funtime s total direct materials price variance? $13,900 unfavorable. $346,500 unfavorable. $346,500 favorable. $13,900 favorable. [97] Gleim #: Source: CMA (Refers to Fact Pattern #14) Ardmore s direct materials price variance for May is $14,355 favorable. $14,850 unfavorable. $14,850 favorable. $14,355 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 32

34 [98] Gleim #: Source: CMA (Refers to Fact Pattern #4) The direct materials usage (quantity) variance for May is $7,200 unfavorable. $5,850 unfavorable. $7,200 favorable. $7,600 favorable. [99] Gleim #: Source: CMA Baltimore Products has an estimated practical capacity of 90,000 machine hours, and each unit requires two machine hours. The following data apply to a recent accounting period: Actual variable overhead $240,000 Actual fixed overhead $442,000 Actual machine hours worked 88,000 Actual finished units produced 42,000 Budgeted variable overhead at 90,000 machine hours $200,000 Budgeted fixed overhead $450,000 Of the following factors, Baltimore s production volume variance is most likely to have been caused by A newly imposed initiative to reduce finished goods inventory levels. Temporary employment of workers with lower skill levels than originally anticipated. Acceptance of an unexpected sales order. A wage hike granted to a production supervisor. [100] Gleim #: Source: CMA If a manufacturing company uses responsibility accounting, which one of the following items is least likely to appear in a performance report for a manager of an assembly line? Equipment depreciation. Materials. Repairs and maintenance. Supervisory salaries. Copyright 2008 Gleim Publications, Inc. Page 33

35 [101] Gleim #: Source: CMA REB Service Co. is a computer service center. For the month, REB had the following operating statistics: Sales $450,000 Operating income 25,000 Net profit after taxes 8,000 Total assets 500,000 Shareholders equity 200,000 Cost of capital 6% Based on the above information, which one of the following statements is true? REB has a Residual income of $(22,000). Residual income of $(5,000). Return on investment of 4%. Return on investment of 1.6%. [102] Gleim #: Source: CMA 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 Unfavorable. Indeterminable because it is not related to the labor efficiency variance. Favorable. The same amount as the labor efficiency variance. [103] Gleim #: Source: CMA A firm earning a profit can increase its return on investment by Increasing sales revenues and operating expenses by the same percentage. Increasing sales revenue and operating expenses by the same dollar amount. Increasing investment and operating expenses by the same dollar amount. Decreasing sales revenues and operating expenses by the same percentage. [104] Gleim #: Source: CMA (Refers to Fact Pattern #4) The direct labor usage (efficiency) variance for May is $5,850 unfavorable. $5,850 favorable. $6,000 unfavorable. $6,000 favorable. Copyright 2008 Gleim Publications, Inc. Page 34

36 [105] Gleim #: Source: Publisher Which department is typically responsible for a materials price variance? Production. Sales. Engineering. Purchasing. [106] Gleim #: Source: CIA 1192 IV-22 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 Responsibility accounting. Contribution margin reporting. Segment reporting. Absorption cost accounting. [107] Gleim #: Source: Publisher The proposed transfer price is a cost-plus price. Variable-cost-plus price is The price otherwise paid by an outsider, recorded by the selling division but not the buying division. The price set by charging for variable costs plus a lump sum or an additional markup, but less than full markup. The price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale. The price on the open market. [108] Gleim #: Source: CMA A manufacturing firm planned to manufacture and sell 100,000 units of product during the year at a variable cost per unit of $4.00 and a fixed cost per unit of $2.00. The firm fell short of its goal and only manufactured 80,000 units at a total incurred cost of $515,000. The firm s manufacturing cost variance was $5,000 unfavorable. $35,000 unfavorable. $85,000 favorable. $5,000 favorable. Copyright 2008 Gleim Publications, Inc. Page 35

37 [109] Gleim #: Source: CMA (Refers to Fact Pattern #2) The fixed overhead applied to Franklin s production for the year is $575,000 $600,000 $484,200 $594,000 [110] Gleim #: Source: Publisher Cara Williams, a supervisor, controls her department s costs. The following data relate to her department for the month of June: Variable factory overhead Budgeted based on actual input $100,000 Actual 106,250 Fixed factory overhead Budgeted $31,250 Actual 33,750 What was the department s total spending variance for June? $2,500 U. $3,750 F. $6,250 U. $8,750 U. [111] Gleim #: Source: CMA (Refers to Fact Pattern #16) The direct labor usage (efficiency) variance for November is $2,200 favorable. $1,800 unfavorable. $2,000 unfavorable. $2,000 favorable. Copyright 2008 Gleim Publications, Inc. Page 36

38 [112] Gleim #: Source: Publisher Common costs are Indirect costs. Controllable costs. Current costs. Direct costs. [113] Gleim #: Source: CMA Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is false? The use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash flow models. The use of ROI can make it undesirable for a skillful manager to take on troubleshooting assignments such as those involving turning around unprofitable divisions. When the average age of assets differs substantially across segments of a business, the use of ROI may not be appropriate. ROI relies on financial measures that are capable of being independently verified, while other forms of performance measures are subject to manipulation. [114] Gleim #: Source: CMA (Refers to Fact Pattern #12) A production volume variance will exist for Dori in a month when Actual direct labor hours differ from standard allowed direct labor hours. The fixed factory O/H applied on the basis of standard allowed direct labor hours differs from actual fixed factory O/H. Production volume differs from sales volume. The fixed factory O/H applied on the basis of standard allowed direct labor hours differs from the budgeted fixed factory O/H. [115] Gleim #: Source: Publisher (Refers to Fact Pattern #18) What is the standard O/H rate? $1.32 per DMH $13.00 per DMH. $14.32 per DMH. $13.76 per DMH. Copyright 2008 Gleim Publications, Inc. Page 37

39 [116] Gleim #: Source: CMA DigitalTech uses an accounting system that charges costs to the manager who has the authority to make decisions incurring the costs. For example, if a sales manager authorizes a rush order that results in additional manufacturing costs, these additional costs are charged to the sales manager. This type of accounting system is known as Responsibility accounting. Contribution accounting. Transfer-pricing accounting. Functional accounting. [117] Gleim #: Source: CMA A successful responsibility accounting reporting system is dependent upon Identification of the management level at which all costs are controllable. The correct allocation of controllable variable costs. A reasonable separation of costs into their fixed and variable components since fixed costs are not controllable and must be eliminated from the responsibility report. The proper delegation of responsibility and authority. [118] Gleim #: Source: Publisher The labor mix and labor yield variances together equal the Labor rate variance. Labor efficiency variance. Sum of the labor efficiency and overhead efficiency variances. Total labor variance. [119] Gleim #: Source: CMA If overhead is applied on the basis of units of output, the variable overhead efficiency variance will be Zero. Favorable, if output exceeds the budgeted level. Unfavorable, if output is less than the budgeted level. A function of the direct labor efficiency variance. Copyright 2008 Gleim Publications, Inc. Page 38

40 [120] Gleim #: Source: Publisher Daniel Corporation s direct labor costs for June were as follows: Actual direct labor hours 32,000 Standard direct labor hours 33,600 Direct labor rate variance -- favorable $6,720 Standard direct labor rate per hour $5.04 Compute Daniel s total direct labor payroll for the month of June. $154,880 $154,560 $168,000 $167,680 [121] Gleim #: Source: Publisher Samuel Company provided the following data for June production activity. Samuel uses a two-way analysis of overhead variances. Actual variable factory overhead incurred $294,000 Variable factory overhead rate per DLH $6.00 Standard DLH allowed 49,500 Actual DLH 48,000 The budget (controllable) variance for June, assuming that budgeted fixed overhead costs equal actual fixed costs, is $3,000 favorable. $9,000 favorable. $6,000 unfavorable. $9,000 unfavorable. [122] Gleim #: Source: Publisher The sales mix variance is partly a function of the unit contribution margin (UCM). It equals (Actual market share percentage budgeted market share percentage) actual market size in units budgeted weighted-average UCM. (Actual units master budget units) budgeted weighted-average UCM for planned mix. Budgeted market share percentage (actual market size in units budgeted market size in units) budgeted weighted-average UCM. Actual units (budgeted weighted-average UCM for planned mix budgeted weighted-average UCM for actual mix). Copyright 2008 Gleim Publications, Inc. Page 39

41 [123] Gleim #: Source: CMA A favorable materials price variance coupled with an unfavorable materials usage variance most likely results from Product mix production changes. The purchase of lower than standard quality materials. Machine efficiency problems. The purchase and use of higher-than-standard quality materials. [124] Gleim #: Source: CMA One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income Divided by the current year s capital expenditures plus cost of capital. Divided by fixed assets. Divided by total assets. Minus imputed interest charged for invested capital. [125] Gleim #: Source: CMA A segment of an organization is referred to as an investment center if it has Authority to provide specialized support to other units within the organization. Authority to make decisions over the most significant costs of operations including the power to choose the sources of supply. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and sources of supply. 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. [126] Gleim #: Source: CMA In a standard cost system, the investigation of an unfavorable materials usage variance should begin with the Purchasing manager only. Production manager or the purchasing manager. Plant controller only. Production manager only. Copyright 2008 Gleim Publications, Inc. Page 40

42 [127] Gleim #: Source: Publisher Normal Company produced 600 units of one of its products last year. The standard for labor hours allowed was 2 hours per unit at a standard rate of $6 per hour. Actual hours worked amounted to 1,230 hours. The labor rate variance was $246 unfavorable, and the labor efficiency variance was $180 unfavorable. What was the actual direct labor cost for the period? $7,626 $7,380 $7,200 $7,134 [128] Gleim #: Source: CMA A difference between standard costs used for cost control and the budgeted costs of the same manufacturing effort Can exist because standard costs represent what costs should be, whereas budgeted costs are expected actual costs. Can exist because budgeted costs are historical costs, whereas standard costs are based on engineering studies. Can exist because budgeted costs include some slack, whereas standard costs do not. Can exist because standard costs include some slack, whereas budgeted costs do not. [129] Gleim #: Source: CMA The fixed overhead volume variance is the Measure of production inefficiency. Potential cost reduction that can be achieved from better cost control. Amount of the underapplied or overapplied fixed overhead costs. Measure of the lost profits from the lack of sales volume. [130] Gleim #: Source: Publisher Motivation is The sharing of goals by supervisors and subordinates. The extent to which individuals have the authority to make decisions. The desire and the commitment to achieve a specific goal. The extent of the attempt to accomplish a specific goal. [131] Gleim #: Source: CMA The balanced scorecard provides an action plan for achieving competitive success by focusing management attention on critical success factors. Which one of the following is not one of the perspectives on the business into which critical success factors are commonly grouped in the balanced scorecard? Financial performance. Employee innovation and learning. Competitor business strategies. Internal business processes. Copyright 2008 Gleim Publications, Inc. Page 41

43 [132] Gleim #: Source: CMA Characteristics of a responsibility accounting system include all of the following except that Responsibility for performance according to budget must be linked to the appropriate authority. Each level of management is responsible for its department s operations and employees. Cost centers are responsible for revenues as well as common costs. The system should encourage employee involvement and participation. [133] Gleim #: Source: Publisher On a balanced scorecard, which is more of an internal process measure than an external-based measure? Profitability. Cycle time. Customer satisfaction. Market share. [134] Gleim #: Source: CMA (Refers to Fact Pattern #5) Folsom s variable cost flexible budget variance for November is $5,000 unfavorable. $4,000 unfavorable. $5,000 favorable. $4,000 favorable. [135] Gleim #: Source: CMA (Refers to Fact Pattern #14) Ardmore s total direct materials quantity variance for May is $4,950 unfavorable. $4,950 favorable. $14,355 favorable. $14,355 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 42

44 [136] Gleim #: Source: CIA 1187 II-10 When items are transferred from stores to production, an accountant debits work-in-process and credits materials accounts. During production, a materials quantity variance may occur. The materials quantity variance is debited for an unfavorable variance and credited for a favorable variance. The intent of variance entries is to provide Accountability for materials lost during production. Information for use in controlling the cost of production. A means of safeguarding assets in the custody of the system. Compliance with GAAP. [Fact Pattern #20] Mack Fuels produces a gasoline additive. The standard costs and input for a 500-liter batch of the additive are presented below. Standard Standard Input Quantity Cost Chemical in Liters per Liter Total Cost Echol 200 $.200 $ Protex Benz CT Totals 600 $ The quantities purchased and used during the current period are shown below. A total of 140 batches were made during the current period. Quantity Total Quantity Purchased Purchase Used Chemical (Liters) Price (Liters) Echol 25,000 $ 5,365 26,600 Protex 13,000 6,240 12,880 Benz 40,000 5,840 37,800 CT-40 7,500 2,220 7,140 Totals 85,500 $19,665 84,420 [137] Gleim #: Source: Publisher (Refers to Fact Pattern #20) What is Mack s direct materials yield variance for this operation? $ favorable. $ favorable. $94.50 unfavorable. $ favorable. [138] Gleim #: Source: Publisher Using the balanced scorecard approach, an organization evaluates managerial performance based on Multiple financial measures only. A single ultimate measure of operating results, such as residual income. Multiple nonfinancial measures only. Multiple financial and nonfinancial measures. Copyright 2008 Gleim Publications, Inc. Page 43

45 [139] Gleim #: Source: Publisher Which of the following types of responsibility centers include controllable revenues in their performance reports? Cost Investment Profit Centers Centers Centers No No No Yes Yes Yes No Yes Yes Yes No No [140] Gleim #: Source: Publisher Periodic internal reports used for performance evaluation purposes and based on a responsibility accounting system should not include Allocated fixed overhead. Variances between actual and budgeted controllable costs. An organization chart. A distinction between controllable and noncontrollable costs. [141] Gleim #: Source: Publisher Bell Co. manufactures a single product with a standard direct labor cost of 2 hours at $10.00 per hour. During November, 1,500 units were produced requiring 3,200 hours at $10.25 per hour. What was the unfavorable direct labor efficiency variance? $2,000 $1,250 $2,050 $1,200 [142] Gleim #: Source: CMA Micro Manufacturers uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that requires the incurrence of additional manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as Reciprocal allocation. Functional accounting. Contribution accounting. Profitability accounting. Copyright 2008 Gleim Publications, Inc. Page 44

46 [143] Gleim #: Source: CMA Which one of the following variances is of least significance from a behavioral control perspective? Fixed overhead volume variance resulting from management s decision midway through the fiscal year to reduce its budgeted output by 20%. Favorable direct labor rate variance resulting from an inability to hire experienced workers to replace retiring workers. Unfavorable direct labor efficiency variance amounting to 10% more than the budgeted hours for the output attained. Unfavorable direct materials quantity variance amounting to 20% of the quantity allowed for the output attained. [144] Gleim #: Source: Publisher Using the two-variance method for analyzing factory overhead, which of the following is used to compute the controllable (budget) variance? A budget allowance based on actual input but not a budget allowance based on standard input. A budget allowance based on standard input and a budget allowance based on applied fixed overhead. A budget allowance based on standard input but not a budget allowance based on actual input. Both a budget allowance based on actual input and a budget allowance based on standard input. [145] Gleim #: Source: CIA 594 III-40 Which of the following is not true about international transfer prices for a multinational firm? Allows firms to correctly price products in each country in which it operates. Allows the firm to evaluate each division. Provides each division with a profit-making orientation. Allows firms to attempt to minimize worldwide taxes. [146] Gleim #: Source: CMA (Refers to Fact Pattern #5) Folsom s fixed cost variance for November is $4,000 unfavorable. $4,000 favorable. $5,000 unfavorable. $5,000 favorable. Copyright 2008 Gleim Publications, Inc. Page 45

47 [147] Gleim #: Source: Publisher Coleman Company compiled the following information: Actual factory overhead $22,500 Fixed overhead expenses, actual $10,800 Fixed overhead expenses, budgeted $10,500 Actual hours 5,250 Standard hours 5,700 Variable overhead rate per DLH $3.80 What is the spending variance assuming Coleman uses a three-way analysis of overhead? $7,950 favorable. $9,660 unfavorable. $8,250 favorable. $7,950 unfavorable. [148] Gleim #: Source: CMA The segment margin of the Wire Division of Lerner Corporation should not include Net sales of the Wire Division. Fixed selling expenses of the Wire Division. Variable selling expenses of the Wire Division. The Wire Division s fair share of the salary of Lerner Corporation s president. [149] Gleim #: Source: CIA 1193 IV-18 One department of an organization, Final Assembly, is purchasing subcomponents from another department, Materials Fabrication. The price that will be charged to Final Assembly by Materials Fabrication is to be determined. Outside market prices for the subcomponents are available. Which of the following is the most correct statement regarding a market-based transfer price? Market transfer prices provide an incentive to use otherwise idle capacity. Corporate politics is more of a factor in a market-based transfer price than with other methods. Marginal production cost transfer prices provide incentives to use otherwise idle capacity. Overall long term competitiveness is enhanced with a market-based transfer price. [150] Gleim #: Source: CMA Under a standard cost system, the materials efficiency variances are the responsibility of Sales and industrial engineering. Purchasing and sales. Production and industrial engineering. Purchasing and industrial engineering. Copyright 2008 Gleim Publications, Inc. Page 46

48 [151] Gleim #: Source: CMA (Refers to Fact Pattern #19) ChemKing s standard price for one unit of direct materials is $2.00 $5.00 $3.00 $2.50 [152] Gleim #: Source: CMA After investing in a new project, a company discovered that its residual income remained unchanged. Which one of the following must be true about the new project? The return on investment of the new project must have been less than the firm s cost of capital. The net present value of the new project must have been negative. The net present value of the new project must have been positive. The return on investment of the new project must have been equal to the firm s cost of capital. [153] Gleim #: Source: CIA 587 IV-15 Overtime conditions and pay were recently set by the human resources department. The production department has just received a request for a rush order from the sales department. The production department protests that additional overtime costs will be incurred as a result of the order. The sales department argues that the order is from an important customer. The production department processes the order. To control costs, which department should never be charged with the overtime costs generated as a result of the rush order? Production department. Human resources department. Sales department. Shared by production department and sales department. [154] Gleim #: Source: CMA The least complex segment or area of responsibility for which costs are allocated is a(n) Cost center. Profit center. Investment center. Contribution center. Copyright 2008 Gleim Publications, Inc. Page 47

49 [155] Gleim #: Source: Publisher Fleece Company uses a standard-costing system in relation to its manufacture of scarves. Each finished scarf contains 1.5 yards of direct materials. However, a 25% direct materials spoilage, which is calculated based on input quantities, occurs during the manufacturing process. The cost of the direct materials is $2.00 per yard. The standard direct materials cost per unit of finished product is $4.00 $3.00 $2.25 $3.75 [156] Gleim #: Source: Publisher The materials yield variance equals (Inputs allowed inputs used) (budgeted specific materials prices budgeted weighted-average materials price). (Inputs allowed inputs used) (budgeted specific labor rate budgeted weighted-average labor rate). (Inputs allowed inputs used) budgeted average materials price. (Inputs allowed inputs used) budgeted weighted-average labor rate. [157] Gleim #: Source: Publisher To monitor total cost, total revenue, and net profit based upon production levels, a manager should use Standard costing but not flexible budgeting. Static budgeting but not standard costing. Static budgeting and standard costing. Both flexible budgeting and standard costing. [158] Gleim #: Source: CMA Sample Q3-11 Garland Company uses a standard cost system. The standard for each finished unit of product allows for 3 pounds of plastic at $0.72 per pound. During December, Garland bought 4,500 pounds of plastic at $0.75 per pound, and used 4,100 pounds in the production of 1,300 finished units of product. What is the materials purchase price variance for the month of December? $117 unfavorable. $150 unfavorable. $135 unfavorable. $123 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 48

50 [159] Gleim #: Source: CMA (Refers to Fact Pattern #7) Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at $8.70 per unit. The Video Cards Division, having excess capacity, agrees to lower its transfer price to $8.70 per unit. This action would Subvert the profit goals of the Video Cards Division while optimizing the profit goals of the Entertainment Division. Allow evaluation of both divisions on the same basis. Optimize the overall profit goals of Parkside, Inc. Optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside, Inc. [160] Gleim #: Source: CMA When using a contribution margin format for internal reporting purposes, the major distinction between segment manager performance and segment performance is Direct fixed costs controllable by the segment manager. Unallocated fixed costs. Direct variable costs of producing the product. Direct fixed costs controllable by others. [161] Gleim #: Source: Publisher (Refers to Fact Pattern #17) What is Funtime s variable overhead spending variance? $1,800 unfavorable. $1,800 favorable. $1,000 favorable. $1,000 unfavorable. [162] Gleim #: Source: Publisher The materials mix variance equals (Inputs allowed inputs used) (budgeted specific materials prices budgeted weighted-average materials price). (Inputs allowed inputs used) budgeted weighted-average materials price. (Inputs allowed inputs used) (actual specific materials prices budgeted weighted-average materials price). (Inputs allowed inputs used) budgeted weighted-average labor rate. Copyright 2008 Gleim Publications, Inc. Page 49

51 [163] Gleim #: Source: Publisher (Refers to Fact Pattern #17) What is Funtime s variable overhead efficiency variance? $9,900 unfavorable. $9,900 favorable. $900 unfavorable. $0 [164] Gleim #: Source: CMA Teaneck, Inc. sells two products, Product E and Product F, and had the following data for last month: Product E Product F Budget Actual Budget Actual Unit sales 5,500 6,000 4,500 6,000 Unit contribution margin $4.50 $4.80 $10.00 $10.50 The company s sales mix variance is $17,250 favorable. $3,300 favorable. $3,420 favorable. $18,150 favorable. [165] Gleim #: Source: Publisher Charlie s Service Co. is a service center. For the month of June, Charlie s had the following operating statistics: Sales $750,000 Operating income 25,000 Net profit after taxes 8,000 Total assets available 500,000 Shareholders equity 200,000 Cost of capital 6% Charlie s has a Residual income of $(20,000). Residual income of $(5,000). Return on investment of 3.33%. Return on investment of 6%. Copyright 2008 Gleim Publications, Inc. Page 50

52 [166] Gleim #: Source: CMA 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 Performance of the workers using the material. Sales volume of the product. Actions of the purchasing department. Design of the product. [167] Gleim #: Source: CMA (Refers to Fact Pattern #8) The predetermined overhead application rate for Nanjones Company is $25.00 $10.00 $15.00 $5.00 [Fact Pattern #21] 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 (Actual output achieved budgeted rate) Variable overhead 90,000 Applied (Standard input allowed for actual output achieved budgeted rate) Fixed overhead 125,000 Variable overhead spending variance 2,000F Production volume variance 5,000U [168] Gleim #: Source: CMA (Refers to Fact Pattern #21) Tiny Tykes fixed overhead efficiency variance is $3,000 favorable. $3,000 unfavorable. $5,000 favorable. Never a meaningful variance. Copyright 2008 Gleim Publications, Inc. Page 51

53 [169] Gleim #: Source: CMA (Refers to Fact Pattern #2) Franklin s fixed overhead spending variance for the year is $25,000 unfavorable. $19,000 favorable. $25,000 favorable. $5,750 favorable. [170] Gleim #: Source: CMA (Refers to Fact Pattern #12) The amount of fixed factory O/H that Dori will apply to finished production is the Standard allowed direct labor hours for the actual units of finished output times the standard fixed factory O/H rate per direct labor hour. Actual fixed factory O/H cost per direct labor hour times the standard allowed direct labor hours. Standard units of output for the actual direct labor hours worked times the standard fixed factory O/H rate per unit of output. Actual direct labor hours times the standard fixed factory O/H rate per direct labor hour. [171] Gleim #: Source: CIA 1190 IV-18 The following exhibit reflects a summary of performance for a single item of a retail store s inventory for April. Flexible Static Actual Budget Flexible (Master) Results Variances Budget Budget Sales (units) 11, ,000 12,000 Revenue (sales) $208,000 $12,000 U $220,000 $240,000 Variable costs 121,000 11,000 U 110, ,000 Contribution Margin $ 87,000 $23,000 U $110,000 $120,000 Fixed costs 72, ,000 72,000 Operating Income $ 15,000 $23,000 U $ 38,000 $ 48,000 The sales volume variance is $1,000 F. $10,000 U. $12,000 U. $11,000 F. Copyright 2008 Gleim Publications, Inc. Page 52

54 [172] Gleim #: Source: CMA (Refers to Fact Pattern #13) The labor efficiency variance for the year is $380,000 favorable. $238,000 unfavorable. $500,000 favorable. $100,000 unfavorable. [173] Gleim #: Source: Publisher The following forecasted information is available for a manufacturing division for next year: Category Amount (thousands) Working capital $ 1,800 Revenue 30,000 Plant and equipment 17,200 To establish a standard of performance for the division s manager using the residual income approach, four scenarios are being considered. Imputed Interest Target Residual Income 1 15% $2,000, % 1,500, % 1,250, % 2,500,000 Which scenario assumes the lowest maximum cost? Scenario 1. Scenario 3. Scenario 4. Scenario 2. [174] Gleim #: Source: Publisher Transfer pricing should encourage goal congruence and managerial effort. In a decentralized organization, it should also encourage autonomous decision making. Managerial effort is the Extent of the attempt to accomplish a specific goal. Desire and the commitment to achieve a specific goal. Sharing of goals by supervisors and subordinates. Extent to which individuals have the authority to make decisions. Copyright 2008 Gleim Publications, Inc. Page 53

55 [175] Gleim #: Source: Publisher When calculating variances from standard costs, the difference between budgeted fixed overhead and the amount applied yields a Price variance. Mix variance. Combined price-quantity variance. Volume variance. [176] Gleim #: Source: Publisher In evaluating an investment center, top management should concentrate on Net income. Dollar sales. Profit percentages. Return on investment. [177] Gleim #: Source: CMA The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the Average return on investment that has been earned by the company over a particular period. Target return on investment set by management. Marginal after-tax cost of new equity capital. Historical weighted average cost of capital for the company. [178] Gleim #: Source: Publisher Which type of variance will reflect overtime premiums when the overall volume of work is greater than expected? Overhead. Labor efficiency. Yield. Materials quantity. [179] Gleim #: Source: CMA In a highly decentralized organization, the best option for measuring the performance of subunits is the establishment of Marketing centers. Cost centers. Product centers. Revenue centers. Copyright 2008 Gleim Publications, Inc. Page 54

56 [Fact Pattern #22] Mountain View Hospital (MVH) has adopted a standard cost accounting system for evaluation and control of nursing labor. Diagnosis Related Groups (DRGs), instituted by the U.S. government for health insurance reimbursement, are used as the output measure in the standard cost system. A DRG is a patient classification scheme in which hospitals are regarded as multiproduct firms with inpatient treatment procedures related to the numbers and types of patient ailments treated. MVH has developed standard nursing times for the treatment of each DRG classification, and nursing labor hours are assumed to vary with the number of DRGs treated within a time period. The nursing unit on the fourth floor treats patients with four DRG classifications. The unit is staffed with registered nurses (RNs), licensed practical nurses (LPNs), and aides. The standard nursing hours and salary rates and actual numbers of patients for the month of May were as follows. DRG No. of Standard Hours per DRG Total Standard Hours Classification Patients RN LPN Aide RN LPN Aide ,500 1,000 1, ,340 1, ,400 1, , ,400 7,920 4,620 4,510 Standard Hourly Rates RN $12.00 LPN 8.00 Aide 6.00 The results of operations during May for the fourth floor nursing unit are presented below: RN LPN Aide Actual hours 8,150 4,300 4,400 Actual salary $100,245 $35,260 $25,300 Actual hourly rate $12.30 $8.20 $5.75 Because MVH does not have data to calculate variances by DRG, it uses a flexible budgeting approach to calculate labor variances for each reporting period by labor classification (RN, LPN, Aide). Labor mix and labor yield variances are also calculated because one labor input can be substituted for another. The variances are used by nursing supervisors and hospital administration to evaluate the performance of nurses. [180] Gleim #: Source: Publisher (Refers to Fact Pattern #22) What is the direct labor static budget variance? $1,745 favorable. $1,745 unfavorable. $2,205 favorable. $2,205 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 55

57 [181] Gleim #: Source: CIA 1191 IV-19 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 Variable manufacturing division production cost plus allocated fixed factory overhead. Variable manufacturing division production cost plus variable selling and administrative cost. The market price at which the retail division could purchase padding. Variable manufacturing division production cost. [182] Gleim #: Source: CMA 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? $25,690,000 $10,800,000 $25,150,000 $9,000,000 [183] Gleim #: Source: CMA A favorable materials price variance coupled with an unfavorable material usage variance would most likely result from Labor efficiency problems. The purchase and use of higher than standard quality material. The purchase and use of lower than standard quality material. Labor mix problems. Copyright 2008 Gleim Publications, Inc. Page 56

58 [184] Gleim #: Source: Publisher (Refers to Fact Pattern #11) What is the direct labor yield variance (rounded) for Tamsin? $515 $500 $820 $320 [185] Gleim #: Source: CMA (Refers to Fact Pattern #21) If the budgeted rate for applying variable overhead was $20 per direct labor hour, how efficient or inefficient was Tiny Tykes Corporation in terms of using direct labor hours as an activity base? 400 direct labor hours efficient. 100 direct labor hours inefficient. 400 direct labor hours inefficient. 100 direct labor hours efficient. [186] Gleim #: Source: Publisher In which of the following variances is the standard unit cost used in the calculations? The direct labor price variance but not the direct labor efficiency variance. The direct labor efficiency variance but not the direct labor rate variance. The direct materials usage variance but not the direct materials price variance. Both the direct materials usage variance and the direct materials price variance. [187] Gleim #: Source: CMA (Refers to Fact Pattern #9) Water Control s variable overhead spending variance for November was $60,000 favorable. $12,000 favorable. $48,000 unfavorable. $40,000 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 57

59 [188] Gleim #: Source: CMA The basic objective of the residual income approach to performance measurement and evaluation is to have a division maximize its Income in excess of a desired minimum return. Cash flows. Return on investment rate. Imputed interest rate charge. [189] Gleim #: Source: CIA 1188 IV-23 The price that one division of a company charges another division for goods or services provided is called the Market price. Transfer price. Outlay price. Distress price. [190] Gleim #: Source: CMA (Refers to Fact Pattern #19) ChemKing s units of direct materials used to produce November output totaled 23,000 units. 25,000 units. 12,000 units. 12,500 units. [191] Gleim #: Source: Publisher Anderson Company prepared the following information using a flexible budget system. Percentage of total capacity 75% 90% Direct labor hours 30,000 36,000 Variable factory overhead $52,500 $63,000 Fixed factory overhead $144,000 $144,000 Total factory overhead rate per DLH $6.55 $5.75 Anderson operated at 75% of capacity during the year. However, Anderson applied factory overhead based on 90% of capacity. If actual factory overhead was equal to the factory overhead budgeted for 75% of capacity, what is the amount of overhead variance for the year? $24,000 overabsorbed. $28,500 underabsorbed. $24,000 underabsorbed. $28,500 overabsorbed. Copyright 2008 Gleim Publications, Inc. Page 58

60 [192] Gleim #: Source: CMA 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 through the year. During September, 15,750 units were produced and production supervisory salaries incurred were $28,000. A performance report for September should reflect a budget variance of $350 Unfavorable. $1,000 Favorable. $1,000 Unfavorable. $350 Favorable. [193] Gleim #: Source: CMA An appropriate transfer price between two divisions of The Stark Company can be determined from the following data: Fabricating Division: Market price of subassembly $50 Variable cost of subassembly $20 Excess capacity (in units) 1,000 Assembling Division: Number of units needed 900 What is the natural bargaining range for the two divisions? Between $50 and $70. Any amount less than $50. Between $20 and $50. $50 is the only acceptable price. [194] Gleim #: Source: CMA Tower Company planned to produce 3,000 units of its single product, Titactium, during November. The standard specifications for one unit of Titactium include 6 pounds of materials at $.30 per pound. Actual production in November was 3,100 units of Titactium. The accountant computed a favorable direct materials purchase price variance of $380 and an unfavorable direct materials quantity variance of $120. Based on these variances, one could conclude that The actual usage of materials was less than the standard allowed. The actual cost of materials was less than the standard cost. More materials were purchased than were used. More materials were used than were purchased. Copyright 2008 Gleim Publications, Inc. Page 59

61 [195] Gleim #: Source: CMA The basic purpose of a responsibility accounting system is Variance analysis. Authority. Motivation. Budgeting. [196] Gleim #: Source: CMA In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable flexible-budget revenue variance. The variance was calculated by comparing the actual results with the flexible budget. This variance can be wholly explained by Changes in unit selling prices. The total sales volume variance. The total static budget variance. The total flexible budget variance. [197] Gleim #: Source: Publisher Which one of the following will not improve return on investment if other factors are constant? Increasing selling prices. Increasing sales volume while holding fixed expenses constant. None of the answers is correct. Decreasing expenses or assets. [198] Gleim #: Source: CMA (Refers to Fact Pattern #2) Franklin s variable overhead efficiency variance for the year is $33,000 unfavorable. $33,000 favorable. $66,000 unfavorable. $35,520 favorable. [199] Gleim #: Source: CMA The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is Master budget increment. Sales mix variance. Static budget variance. Sales volume variance. Copyright 2008 Gleim Publications, Inc. Page 60

62 [200] Gleim #: Source: Publisher (Refers to Fact Pattern #22) What is the labor yield variance? $460 favorable. $1,733 favorable. $1,908 favorable. $1,866 favorable. [201] Gleim #: Source: CIA 595 III-95 Making segment disclosures is an advantage to a company because it Provides competitors with comparative information on the company s performance. Eliminates the interdependence of segments. Facilitates evaluation of company management by providing data on particular segments. Masks the effect of intersegment transfers. [202] Gleim #: Source: CMA (Refers to Fact Pattern #8) Nanjones variable overhead spending variance for November was $6,000 favorable. $14,000 unfavorable. $6,000 unfavorable. $2,000 favorable. [203] Gleim #: Source: CMA The production volume variance is due to Efficient or inefficient use of variable overhead. Difference from the planned level of the base used for overhead allocation and the actual level achieved. Excessive application of direct labor hours over the standard amounts for the output level actually achieved. Inefficient or efficient use of direct labor hours. Copyright 2008 Gleim Publications, Inc. Page 61

63 [204] Gleim #: Source: Publisher Lake s direct labor costs for the month of May are as follows: Standard direct labor hours allowed 12,500 Actual direct labor rate $8.25 Actual direct labor hours 10,000 Direct labor rate variance -- favorable $5,600 What was Lake s standard direct labor rate in May? $8.81 $8.25 $7.80 $7.69 [205] Gleim #: Source: CMA The purpose of identifying manufacturing variances and assigning their responsibility to a person/department should be to Trace the variances to finished goods so that the inventory can be properly valued at year-end. Use the knowledge about the variances to promote learning and continuous improvement in the manufacturing operations. Determine the proper cost of the products produced so that selling prices can be adjusted accordingly. Pinpoint fault for operating problems in the organization. [206] Gleim #: Source: CMA The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the Sales volume variance. Flexible budget variance. Production volume variance. Standard cost variance. [207] Gleim #: Source: CMA 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? Division inventories when division management exercises control over the inventory levels. Division accounts payable when division management exercises control over the amount of short-term credit used. Land being held by the division as a site for a new plant. Fixed assets employed in division operations. Copyright 2008 Gleim Publications, Inc. Page 62

64 [208] Gleim #: Source: CMA A fixed overhead volume variance based on standard direct labor hours measures Deviation from the normal, or denominator, level of direct labor hours. Deviation from standard direct labor hour capacity. Fixed overhead efficiency. Fixed overhead use. Copyright 2008 Gleim Publications, Inc. Page 63

65 [Fact Pattern #23] Funtime, Inc. manufactures video game machines. Market saturation and technological innovations have caused pricing pressures, which have resulted in declining profits. To stem the slide in profits until new products can be introduced, an incentive program has been developed to reward production managers who contribute to an increase in the number of units produced and effect cost reductions. The managers have responded to the pressure of improving manufacturing in several ways. The video game machines are put together by the Assembly Group which requires parts from both the Printed Circuit Boards (PCB) and the Reading Heads (RH) groups. To attain increased production levels, the PCB and RH groups commenced rejecting parts that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used in the production of these parts has been postponed with only emergency repair work being performed to keep production lines moving. The more aggressive Assembly Group production supervisors have pressured maintenance personnel to attend to their machines at the expense of other groups. This has resulted in machine downtime in the PCB and RH groups that, when coupled with demands for accelerated parts delivery by the Assembly Group, has led to more frequent parts rejections and increased friction among departments. Funtime operates under a standard cost system. The standard costs for video game machines are as follows: Standard Cost per Unit Cost Item Quantity Cost Total Direct Materials Housing unit 1 $20 $ 20 Printed circuit boards Reading heads Direct labor hours Assembly group PCB group RH group Variable overhead hours Total standard cost per unit $139 Funtime prepares monthly performance reports based on standard costs. Presented below is the contribution report for May when production and sales both reached 2,200 units. Funtime, Inc. Contribution Report For the Month of May Budget Actual Variance Units 2,000 2, F Revenue $400,000 $440,000 $40,000 F Variable costs Direct materials 180, ,400 40,400 U Direct labor 80,000 93,460 13,460 U Variable overhead 18,000 18, U Total variable costs 278, ,660 54,660 U Contribution margin $122,000 $107,340 $14,660 U Funtime s top management was surprised by the unfavorable contribution to overall corporate profits despite the increased sales in May. Jack Rath, cost accountant, was assigned to identify the reasons for the unfavorable contribution results as well as the individuals or groups responsible. After review, Rath prepared the Usage Report presented below. Funtime, Inc. Usage Report For the Month of May Cost Item Quantity Actual Cost Direct materials Housing units 2,200 units $ 44,000 Printed circuit boards 4,700 units 75,200 Reading heads 9,200 units 101,200 Direct labor Assembly 3,900 hours 31,200 Printed circuit boards 2,400 hours 23,760 Reading heads 3,500 hours 38,500 Variable overhead 9,900 hours 18,800 Total variable cost $332,660 Rath reported that the PCB and RH groups supported the increased production levels but experienced abnormal machine downtime, causing the idling of workers that required the use of overtime to keep up with the accelerated demand for parts. The idle time was charged to direct labor. Rath also reported that the production managers of these two groups resorted to parts rejections, as opposed to testing and modification procedures formerly applied. Rath determined that the Assembly Group met management s objectives by increasing production while using lower than standard hours. Copyright 2008 Gleim Publications, Inc. Page 64

66 [209] Gleim #: Source: Publisher (Refers to Fact Pattern #23) What is Funtime s contribution margin volume variance? $14,660 unfavorable. $12,200 favorable. $9,800 favorable. $9,800 unfavorable. [210] Gleim #: Source: Publisher (Refers to Fact Pattern #20) What is Mack s direct materials mix variance for this operation? $ favorable. $294 favorable. $94.50 unfavorable. $ favorable. [211] Gleim #: Source: CMA (Refers to Fact Pattern #16) The direct labor price (rate) variance for November is $2,090 favorable. $2,000 unfavorable. $1,900 unfavorable. $2,200 favorable. [Fact Pattern #24] One of the items produced by a manufacturer of lawn and garden tools is a chain saw. The direct labor standard for assembling and testing a chain saw is 2.5 hours at $8 per hour. Budgeted production for October was 1,200 units. Actual production during the month was 1,000 units, and direct labor cost was $27,840 for 3,200 hours. [212] Gleim #: Source: CIA 1189 IV-18 (Refers to Fact Pattern #24) Using a two-variance system, what is the direct labor efficiency variance? $2,240 unfavorable. $5,600 unfavorable. $6,090 favorable. $5,600 favorable. Copyright 2008 Gleim Publications, Inc. Page 65

67 [213] Gleim #: Source: Publisher (Refers to Fact Pattern #22) What is the labor mix variance? $3,539 unfavorable. $1,348 unfavorable. $1,348 favorable. $3,539 favorable. [Fact Pattern #25] The controller for Durham Skates is reviewing the production cost report for July. An analysis of direct materials costs reflects an unfavorable flexible budget variance of $25. The plant manager believes this is excellent performance on a flexible budget for 5,000 units of direct materials. However, the production supervisor is not pleased with this result because she claims to have saved $1,200 in materials cost on actual production using 4,900 units of direct materials. The standard materials cost is $12 per unit. Actual materials used for the month amounted to $60,025. [214] Gleim #: Source: CMA (Refers to Fact Pattern #25) If Durham s direct materials variance is investigated further, it will reflect a price variance of $1,225 unfavorable. Zero. $2,500 favorable. $1,200 favorable. [215] Gleim #: Source: CIA Return on investment (ROI) is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue, cost, investment) into a single measure. Under which one of the following combinations of actions regarding a segment s revenues, costs, and investment would a segment s ROI always increase? Revenues Costs Assets Increase Increase Increase Increase Decrease Increase Increase Decrease Decrease Decrease Decrease Decrease Copyright 2008 Gleim Publications, Inc. Page 66

68 [216] Gleim #: Source: CMA (Refers to Fact Pattern #14) Ardmore s flexible budget overhead variance for May is $3,270 unfavorable. $1,920 unfavorable. $3,270 favorable. $1,920 favorable. [217] Gleim #: Source: CIA 1191 IV-15 The total budgeted direct labor cost of a company for the month was set at $75,000 when 5,000 units were planned to be produced. The following standard cost, stated in terms of direct labor hours (DLH), was used to develop the budget for direct labor cost: 1.25 DLH $12.00/DLH = $15.00/unit produced The actual operating results for the month were as follows: Actual units produced 5,200 Actual direct labor hours worked 6,600 Actual direct labor cost $77,220 The direct labor efficiency variance for the month would be $1,200 unfavorable. $2,220 unfavorable. $4,200 unfavorable. $3,000 unfavorable. [218] Gleim #: Source: CMA (Refers to Fact Pattern #8) Nanjones amount of over- or underapplied variable manufacturing overhead for November was $6,000 overapplied. $4,000 underapplied. $20,000 overapplied. $6,000 underapplied. Copyright 2008 Gleim Publications, Inc. Page 67

69 [219] Gleim #: Source: Publisher Harris Co. s income statement for profit center No. 12 for August includes Contribution margin $84,000 Manager s salary 24,000 Depreciation on accommodations 9,600 Allocated corporate expenses 6,000 The profit center s manager is most likely able to control which of the following? $68,400 $60,000 $44,400 $84,000 [220] Gleim #: Source: CIA 1191 IV-17 The receipt of raw materials used in the manufacture of products and the shipping of finished goods to customers is under the control of the warehouse supervisor. The warehouse supervisor s time is spent approximately 60% on receiving activities and 40% on shipping activities. Separate staffs are employed for the receiving and shipping operations. The labor-related costs for the warehousing function are as follows: Warehouse supervisor s salary $ 40,000 Receiving clerks wages 75,000 Shipping clerks wages 55,000 Employee benefit costs (30% of wage and salary costs) 51,000 $221,000 The company employs a responsibility accounting system for performance reporting purposes. The costs are classified on the report as period or product costs. The total labor-related costs that would be listed on the responsibility accounting performance report as product costs under the control of the warehouse supervisor for the warehousing function would be $128,700 $130,000 $97,500 $169,000 [221] Gleim #: Source: CIA 1190 IV-21 When comparing the residual income of several investment centers, the validity of comparisons may be destroyed by None of the answers is correct. Peculiarities of each investment center. Common amounts of invested capital for each investment center. Consistent use of an imputed interest rate. Copyright 2008 Gleim Publications, Inc. Page 68

70 [222] Gleim #: Source: CIA 594 III-74 (Refers to Fact Pattern #1) The direct labor rate variance for April is $40,000 unfavorable. $156,000 favorable. $240,000 favorable. $156,000 unfavorable. [223] Gleim #: Source: Publisher Bolt Co. uses a standard-cost system. Bolt s direct labor information for July is as follows: Standard hours allowed for actual production 3,000 Actual rate paid per hour $9.35 Standard rate per hour $8.50 Labor efficiency variance $1,870 U The actual hours worked equaled 3,200 2,800 2,780 3,220 [224] Gleim #: Source: Publisher (Refers to Fact Pattern #15) The amount that will be shown on a static budget for Part X usage during the month of June is $27,000 $36,000 $29,000 $26,100 [225] Gleim #: Source: CMA For a company that produces more than one product, the sales volume variance can be divided into which two of the following additional variances? Sales price variance and flexible budget variance. Sales mix variance and sales price variance. Sales mix variance and production volume variance. Sales quantity variance and sales mix variance. Copyright 2008 Gleim Publications, Inc. Page 69

71 [226] Gleim #: Source: CMA Sample Q3-1 Coach Corporation is considering which capacity measure is appropriate to use as the denominator level of activity when applying fixed overhead to units produced. Assume that Coach selects direct labor hours as the cost driver and the following additional data are available from the prior year: Hours Standard direct labor hours for normal capacity 200,000 Standard direct labor hours allowed for units produced in the prior year 210,000 Standard direct labor hours for the master budget capacity 220,000 Which of the following capacity measures for the denominator-level of activity would have resulted in an unfavorable volume variance? Neither normal capacity nor master budget capacity. Both normal capacity and master budget capacity. Normal capacity only. Master budget capacity only. [227] Gleim #: Source: CMA Which one of the following variances is most controllable by the production control supervisor? Variable overhead spending variance. Fixed overhead budget variance. Materials usage variance. Materials price variance. [228] Gleim #: Source: CMA The imputed interest rate used in the residual income approach to performance evaluation can best be described as the Average return on investments for the company over the last several years. Historical weighted-average cost of capital for the company. Target return on investment set by the company s management. Average lending rate for the year being evaluated. Copyright 2008 Gleim Publications, Inc. Page 70

72 [Fact Pattern #26] Blaster, Inc., a manufacturer of portable radios, purchases the components from subcontractors to use to assemble into a complete radio. Each radio requires three units each of Part XBEZ52, which has a standard cost of $1.45 per unit. During May, Blaster experienced the following with respect to Part XBEZ52. Units Purchases ($18,000) 12,000 Consumed in manufacturing 10,000 Radios manufactured 3,000 [229] Gleim #: Source: CMA (Refers to Fact Pattern #26) During May, Blaster, Inc. incurred a purchase price variance of $450 unfavorable. $500 favorable. $600 unfavorable. $450 favorable. [230] Gleim #: Source: Publisher Margolos, Inc. ends the month with a volume variance of $6,360 unfavorable. If budgeted fixed O/H was $480,000, O/H was applied on the basis of 32,000 budgeted machine hours, and budgeted variable O/H was $170,000, what were the actual number of machine hours (AH) for the month? 31,576 32,425 32,318 32,000 [231] Gleim #: Source: CMA The Stonebrook Company uses a performance reporting system that reflects the company s decentralization of decision making. The departmental performance reports show actual costs incurred during the period against budgeted costs. Any variances from the budget are assigned to the individual department manager who controls the costs. Stonebrook is using a type of system called Activity-based budgeting. Transfer-pricing accounting. Responsibility accounting. Flexible budgeting. Copyright 2008 Gleim Publications, Inc. Page 71

73 [232] Gleim #: Source: CMA Residual income is a better measure for performance evaluation of an investment center manager than return on investment because The arguments about the implicit cost of interest are eliminated. Only the gross book value of assets needs to be calculated. The problems associated with measuring the asset base are eliminated. Desirable investment decisions will not be neglected by high-return divisions. [233] Gleim #: Source: CIA 594 III-44 A firm prepared a segmented income statement that included the following data for its suburban marketing segment: Fixed costs controllable by the suburban marketing segment manager $150,000 Fixed suburban marketing costs controllable by corporate management 250,000 Fixed manufacturing costs allocated to the suburban marketing segment 110,000 Variable manufacturing costs 200,000 Variable selling costs 100,000 Variable administrative costs 130,000 Net sales 950,000 The best measure of the economic performance of the suburban marketing segment is: $370,000 $120,000 $520,000 $10,000 [234] Gleim #: Source: CMA Sherman 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. Sherman is using a type of system called Contribution accounting. Flexible budgeting. Cost-benefit accounting. Responsibility accounting. Copyright 2008 Gleim Publications, Inc. Page 72

74 [235] Gleim #: Source: CMA (Refers to Fact Pattern #25) Durham s actual average cost per unit for materials was $12.01 $12.25 $12.00 $12.24 [236] Gleim #: Source: Publisher Watson Company uses a predetermined factory overhead application rate based on direct labor cost. Watson s budgeted factory overhead was $756,000 based on a budgeted volume of 60,000 direct labor hours, at a standard direct labor rate of $7.20 per hour. Actual factory overhead amounted to $775,000 with actual direct labor cost of $450,000 for the year ended December 31. How much was Watson s overapplied factory overhead? $12,500 $19,000 $18,000 $37,000 [237] Gleim #: Source: CIA 1190 IV-20 A limitation of transfer prices based on actual cost is that they Can lead to suboptimal decisions for the company as a whole. Lack clarity and administrative convenience. Must be adjusted by some markup. Charge inefficiencies to the department that is transferring the goods. [238] Gleim #: Source: CMA The segment margin of an investment center after deducting the imputed interest on the assets used by the investment center is known as Return on assets. Return on investment. Residual income. Operating income. Copyright 2008 Gleim Publications, Inc. Page 73

75 [239] Gleim #: Source: Publisher The market share variance is partly a function of the unit contribution margin (UCM). It equals Actual units (budgeted weighted-average UCM for planned mix budgeted weighted-average UCM for actual mix). Budgeted market share percentage (actual market size in units budgeted market size in units) budgeted weighted-average UCM. (Actual units master budget units) budgeted weighted-average UCM for the planned mix. (Actual market share percentage budgeted market share percentage) actual market size in units budgeted weighted-average UCM. [240] Gleim #: Source: CMA The Hersh 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 Hersh Company is using a type of system called Flexible budgeting. Contribution accounting. Cost-benefit accounting. Responsibility accounting. [241] Gleim #: Source: Publisher Wheeler Company uses a standard-cost system. Wheeler prepared the following budget using normal capacity for the month of May: Direct labor hours 36,000 Variable factory overhead $72,000 Fixed factory overhead $162,000 Actual results were as follows: Direct labor hours worked 33,000 Total factory overhead $220,500 Standard DLH allowed for capacity attained 31,500 What is the budget (controllable) variance for May using the two-way analysis of overhead variances? $7,500 unfavorable. $7,500 favorable. $13,500 unfavorable. $4,500 favorable. Copyright 2008 Gleim Publications, Inc. Page 74

76 [242] Gleim #: Source: Publisher (Refers to Fact Pattern #6) The sales mix variance for the two countries is $150 F. $26 U. $56 F. $156 U. [243] Gleim #: Source: CMA (Refers to Fact Pattern #2) Franklin s variable overhead spending variance for the year is $19,800 favorable. $20,000 favorable. $20,000 unfavorable. $22,000 unfavorable. [244] Gleim #: Source: CMA Fairmount, Inc. uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher-than-normal manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as Reciprocal allocation. Functional accounting. Responsibility accounting. Transfer price accounting. [245] Gleim #: Source: Publisher Variable-cost-plus price is The price on the open market. The price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale. The price set by charging for variable costs plus a lump sum or an additional markup, but less than full markup. The price usually set by an absorption costing calculation. Copyright 2008 Gleim Publications, Inc. Page 75

77 [246] Gleim #: Source: CMA In theory, the optimal method for establishing a transfer price is Incremental cost. Budgeted cost with or without a markup. Flexible budget cost. Market price. [247] Gleim #: Source: Publisher Managers are most likely to accept allocations of common costs based on Ability to bear. Cause and effect. Fairness. Benefits received. [248] Gleim #: Source: Publisher Goal congruence is The desire and the commitment to achieve a specific goal. The sharing of goals by supervisors and subordinates. The extent to which individuals have the authority to make decisions. The extent of the attempt to accomplish a specific goal. [249] Gleim #: Source: CIA 1189 IV-17 (Refers to Fact Pattern #24) Using a two-variance system, what was the direct labor rate variance for October? $2,240 favorable. $5,600 unfavorable. $2,240 unfavorable. $3,840 favorable. [250] Gleim #: Source: CMA (Refers to Fact Pattern #26) During May, Blaster, Inc. incurred a materials efficiency variance of $1,450 unfavorable. $4,350 favorable. $1,450 favorable. $4,350 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 76

78 [251] Gleim #: Source: Publisher The labor yield variance equals (Inputs allowed inputs used) budgeted weighted-average labor rate. (Inputs allowed inputs used) (budgeted specific labor rate budgeted weighted-average labor rate). (Inputs allowed inputs used) budgeted weighted-average materials price. (Inputs allowed inputs used) (budgeted specific materials prices budgeted weighted-average materials price). [252] Gleim #: Source: Publisher Outlay cost plus opportunity cost is The price usually set by an absorption-costing calculation. The price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale. The retail price. The price set by charging for variable costs plus a lump sum or an additional markup, but less than full markup. [253] Gleim #: Source: CMA (Refers to Fact Pattern #9) Water Control s variable overhead efficiency variance for November was $48,000 unfavorable. $96,000 unfavorable. $200,000 unfavorable. $60,000 favorable. [254] Gleim #: Source: Publisher (Refers to Fact Pattern #18) How much O/H should be applied to production? $1,358,250 $1,413,384 $1,432,000 $1,346,080 [255] Gleim #: Source: CMA (Refers to Fact Pattern #13) The fixed cost spending variance for the year is $18,000 unfavorable. $18,000 favorable. $48,000 unfavorable. $30,000 favorable. Copyright 2008 Gleim Publications, Inc. Page 77

79 [256] Gleim #: Source: Publisher A large corporation allocates the costs of its headquarters staff to its decentralized divisions. The best reason for this allocation is to Discourage any use of central support services. Remind divisional managers that common costs exist. More accurately measure divisional operating results. Improve divisional management s morale. Copyright 2008 Gleim Publications, Inc. Page 78

80 [1] Gleim #: Source: Publisher Answer (A) is incorrect because A budget allowance based on actual input and the actual factory overhead are used in the computation of the spending variance. A budget allowance based on standard input is used to calculate the efficiency variance in a three-way analysis. Answer (B) is correct. In three-way analysis, the spending variance is the difference between actual total overhead and the sum of the budgeted (lump-sum) fixed overhead and the variable overhead budgeted for the actual input at the standard rate. It combines the variable overhead spending and the fixed overhead budget (spending) variances used in four-way analysis. Answer (C) is incorrect because A budget allowance based on actual input and the actual factory overhead are used in the computation of the spending variance. A budget allowance based on standard input is used to calculate the efficiency variance in a three-way analysis. Answer (D) is incorrect because A budget allowance based on actual input and the actual factory overhead are used in the computation of the spending variance. A budget allowance based on standard input is used to calculate the efficiency variance in a three-way analysis. [2] Gleim #: Source: CIA 594 III-72 Answer (A) is incorrect because The direct materials efficiency variance is $240,000. Answer (B) is incorrect because The direct labor rate variance is $156,000. Answer (C) is correct. The direct materials price variance equals the actual quantity used in production times the standard price minus the actual price. The variance is $760,000 unfavorable [190,000 ($24 $28)]. The variance is unfavorable because the actual price exceeded the standard price. Answer (D) is incorrect because The variance is unfavorable. [3] Gleim #: Source: CMA Answer (A) is incorrect because Total standard hours allowed equal actual production multiplied times the standard hours allowed per unit. Answer (B) is incorrect because The total standard hours allowed at a production level of 200,000 units is 400,000. Answer (C) is correct. Two standard hours are allowed for each unit of production. Given actual production of 198,000 units, total standard hours allowed equal 396,000 (2 198,000). Answer (D) is incorrect because Total standard hours allowed equal actual production multiplied times the standard hours allowed per unit. Copyright 2008 Gleim Publications, Inc. Page 1

81 [4] Gleim #: Source: Publisher Answer (A) is correct. A responsibility accounting system should have certain controls that provide for feedback reports indicating deviations from expectations. Management may then focus on those deviations (exceptions) for either reinforcement or correction. Answer (B) is incorrect because Feedback reports concentrate on deviations, but not to the total exclusion of other budgeted variables. Answer (C) is incorrect because The responsibility accounting system should not be used exclusively to give rewards. Answer (D) is incorrect because The responsibility accounting system should not be used exclusively to assess blame. [5] Gleim #: Source: CMA Answer (A) is incorrect because Assuming that all costs are variable results in $12,000. Answer (B) is incorrect because The amount of $19,200 is based on actual variable costs. Answer (C) is correct. A flexible budget is prepared after the budget period has ended and actual sales and costs are known. Assuming that unit sales price ($100,000 10,000 units = $10) and variable costs of sales ($60,000 10,000 unit = $6) and total fixed costs ($30,000) do not change, a flexible budget may be prepared for the actual sales level (12,000 units). Hence, the budgeted contribution margin (sales variable costs of sales) equals $48,000 [(12,000 units $10) (12,000 units $6)]. The operating income is therefore $18,000 ($48,000 CM $30,000 FC). Answer (D) is incorrect because The amount of $30,000 is based on actual sales revenues. [6] Gleim #: Source: CMA Answer (A) is incorrect because The variance is favorable. The actual labor rate was less than the standard rate. Answer (B) is correct. The direct labor rate variance equals the actual quantity of hours worked times the difference between the standard and actual labor rates. Total direct labor cost was $327,600 ($364,000 90%), and the actual unit direct labor cost was $11.70 ($327,600 28,000 hours). Thus, the variance is $8,400 favorable [28,000 hours ($12.00 $11.70)]. Answer (C) is incorrect because The variance is favorable. The actual labor rate was less than the standard rate. Answer (D) is incorrect because The labor efficiency variance is $6,000, not the labor rate variance. Copyright 2008 Gleim Publications, Inc. Page 2

82 [7] Gleim #: Source: CIA 582 IV-22 Answer (A) is incorrect because Scheduling of substantial overtime can lead to reduced quality and the need for more material to produce units to replace those units of unacceptable quality. Answer (B) is incorrect because Machinery that has not been maintained properly is more likely to ruin units of production and therefore require more materials to complete production. Answer (C) is correct. An efficiency, or usage, variance for materials occurs when usage differs from the standard. Unfavorable variances occur when actual usage is greater than standard. Labor whose skill is commensurate with materials usage standards should achieve standard materials usage; that is, little or no variance should arise. Answer (D) is incorrect because If materials do not meet specifications, more will be used and an unfavorable quantity (usage) variance will result. [8] Gleim #: Source: CIA 592 IV-19 Answer (A) is incorrect because At $20 per unit, Division Y may be indifferent as to whether it purchases internally or externally. Buying from an outside source for $20 per unit is contrary to the company s interests given idle capacity available for the component s manufacture and an incremental unit cost of $20. Answer (B) is incorrect because The amount of $12 per unit merely allows Division Z to recover its unit variable cost. Answer (C) is correct. A unit price of $18 is less than Division Y s cost of purchase from an outside supplier but exceeds Division Z s production cost. Accordingly, both Y and Z benefit. Answer (D) is incorrect because At $22 per unit, Division Y would have incentive to purchase from an external supplier (i.e., market price is $20). [9] Gleim #: Source: Publisher Answer (A) is incorrect because The volume variance consists of fixed overhead only, and the efficiency variance, which consists of variable overhead only, is not isolated in two-way analysis. Answer (B) is correct. In two-way analysis, the total overhead variance (fixed + variable) is composed of the volume variance (total fixed overhead cost budgeted fixed overhead applied based on standard input allowed for the actual output) and the controllable (budget) variance (the difference between the total actual overhead and the volume variance). Consequently, the controllable (budget) variance contains both fixed and variable elements. Answer (C) is incorrect because The volume variance consists of fixed overhead only, and the efficiency variance, which consists of variable overhead only, is not isolated in two-way analysis. Answer (D) is incorrect because The volume variance consists of fixed overhead only. Copyright 2008 Gleim Publications, Inc. Page 3

83 [10] Gleim #: Source: CIA 589 IV-16 Answer (A) is incorrect because The minimum that should be charged is $7.00. Since Division A has idle capacity, the minimum transfer price should recover variable costs ($7.00). Answer (B) is incorrect because Division A should not include any fixed costs in their transfer price because Division A has idle capacity. Answer (C) is correct. From the seller s perspective, the price should reflect at least its incremental cash outflow (outlay cost) plus the contribution from an outside sale (opportunity cost). Because A has idle capacity, the opportunity cost is $0. Thus, the minimum price Division A should charge Division B is $7.00. Answer (D) is incorrect because Since Division A has idle capacity, the minimum transfer price should recover Division A s variable (outlay) costs. [11] Gleim #: Source: Publisher Answer (A) is incorrect because The variable-cost-plus price is the price set by charging for variable costs plus a lump sum or an additional markup, but less than full markup. Answer (B) is incorrect because The outlay cost plus opportunity cost is the price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale. Answer (C) is correct. Full-cost price is the price usually set by an absorption-costing calculation and includes materials, labor, and a full allocation of manufacturing overhead. This full-cost price may lead to dysfunctional behavior by the supplying and receiving divisions, e.g., purchasing from outside sources at a slightly lower price that is substantially above the variable costs of internal production. Answer (D) is incorrect because The market price is the price on the open market. Copyright 2008 Gleim Publications, Inc. Page 4

84 [12] Gleim #: Source: CMA Answer (A) is correct. The fixed overhead volume variance results when production varies from the denominator amount. The denominator amount is the level of production used to determine the standard cost per unit. Because production was expected to be 200,000 units (the denominator level), but actual production was only 198,000 units, an unfavorable volume variance of 2,000 units occurred. Thus, 2,000 units were not charged with $3 per unit of overhead, and the volume variance in dollars was $6,000U (2,000 units $3). This underapplication of fixed overhead is unfavorable because it indicates an underuse of facilities; that is, activity was less than budgeted. Unlike other variances, this variance does not measure deviations from expected costs but rather the departure from the expected use of productive capacity. Answer (B) is incorrect because The fixed overhead volume variance is unfavorable because actual activity is less than budgeted. Answer (C) is incorrect because The fixed overhead volume variance is unfavorable because actual activity is less than budgeted. Answer (D) is incorrect because The fixed overhead volume variance equals the difference between the budgeted fixed factory overhead and the product of the budgeted application rate and the standard input allowed for the actual output. [13] Gleim #: Source: CMA Answer (A) is incorrect because Folsom will need to know the actual total market size. Answer (B) is correct. A change in market share reflects a change in relative competitiveness. To isolate the effect on operating income of an increase or a decrease in market share, the company must know its budgeted and actual market shares, the actual size of the market for November, and the budgeted weighted-average unit contribution margin. Such computations may help Folsom to determine whether its decline in sales resulted from a loss of competitiveness or a shrinkage of the market. Answer (C) is incorrect because Folsom will need to know the actual total market size. Answer (D) is incorrect because Folsom will need to know the budgeted market share. [14] Gleim #: Source: Publisher Answer (A) is incorrect because The sales volume variance for sales in Gallia is $120 U. Answer (B) is correct. The sales volume variance in Gallia is $120 U [$3.00 budgeted UCM (260 actual units sold 300 budgeted unit sales)]. The sales volume variance in Helvetica is $150 F [$2.50 budgeted UCM (260 actual units sold 200 budgeted unit sales)]. Thus, the two-country sales volume variance is $30 F ($150 F $120 U). Answer (C) is incorrect because The sales volume variance for sales in Helvetica is $150 F. Answer (D) is incorrect because The two-country sales price variance is $130 U. Copyright 2008 Gleim Publications, Inc. Page 5

85 [15] Gleim #: Source: CMA Answer (A) is incorrect because A service center has no responsibility for developing markets or selling. Answer (B) is incorrect because A profit center can choose its markets and sources of supply. Answer (C) is correct. A service center exists primarily and sometimes solely to provide specialized support to other units within the organization. Service centers are usually operated as cost centers. Answer (D) is incorrect because A production center is engaged in manufacturing. [16] Gleim #: Source: CMA Answer (A) is incorrect because The market price charged by outside sources is higher than the negotiated price. Answer (B) is incorrect because Given idle capacity, selling at any amount in excess of variable cost should motivate the selling division. Answer (C) is correct. Given that the Plastics Division (the seller) has excess capacity, transfers within the company entail no opportunity cost. Accordingly, the transfer at the negotiated price will improve the performance measures of the transferor. Purchasing internally at below the market price also benefits the transferee, so the motivational purpose of transfer pricing is achieved. The goal congruence purpose is also achieved because the internal transaction benefits the company. Answer (D) is incorrect because This arrangement creates no disincentive for the selling division. It will make a profit on every unit transferred. [17] Gleim #: Source: CMA Answer (A) is incorrect because Direct labor is controllable by the production manager. Answer (B) is incorrect because Repairs and maintenance are controllable by the production manager. Answer (C) is incorrect because Materials are controllable by the production manager. Answer (D) is correct. A well-designed responsibility accounting system establishes responsibility centers within an organization. In a responsibility accounting system, managerial performance should be evaluated only on the basis of those factors directly regulated (or at least capable of being significantly influenced) by the manager. Thus, a manager of an assembly line is responsible for direct labor, materials, repairs and maintenance, and supervisory salaries. The manager is not responsible for depreciation on the manufacturing facility. (S)he is not in a position to control or influence capital budgeting decisions. Copyright 2008 Gleim Publications, Inc. Page 6

86 [18] Gleim #: Source: Publisher Answer (A) is incorrect because The retail price is the definition of the market price, assuming an arm s-length transaction. Answer (B) is incorrect because The variable-cost-plus price is the price set by charging for variable costs plus a lump sum or an additional markup, but less than full markup. Answer (C) is correct. At this price, the supplying division is indifferent as to whether it sells internally or externally. Outlay cost plus opportunity cost therefore represents a minimum acceptable price for a seller. However, no transfer price formula is appropriate in all circumstances. Answer (D) is incorrect because Full cost is the price usually set by an absorption-costing calculation. [19] Gleim #: Source: CIA 592 IV-18 Answer (A) is incorrect because The direct labor rate variance is $100 F ($48,500 $48,600). Answer (B) is correct. The total static budget direct labor variance equals the difference between total actual direct labor cost and standard direct labor cost (standard hours standard rate). It combines the direct labor rate and efficiency variances. For this company, the variance is $1,900 U ($46,600 standard wages at standard hours $48,500 actual wages at actual hours). Answer (C) is incorrect because The total labor variance is unfavorable. Answer (D) is incorrect because The total labor variance is $1,900 U. [20] Gleim #: Source: CMA Answer (A) is incorrect because An investment center is not as fundamental as a profit center. Answer (B) is incorrect because A production center may be a cost center, a profit center, or even an investment center. Transfer prices are not used in a cost center. Transfer prices are used to compute profitability, but a cost center is responsible only for cost control. Answer (C) is correct. Transfer prices are often used by profit centers and investment centers. Profit centers are the more fundamental of these two centers because investment centers are responsible not only for revenues and costs but also for invested capital. Answer (D) is incorrect because Transfer prices are not used in a cost center. Copyright 2008 Gleim Publications, Inc. Page 7

87 [21] Gleim #: Source: Publisher Answer (A) is incorrect because Standard variable overhead applied equals $137,500. Answer (B) is correct. The applied factory overhead equals the standard input allowed for actual output multiplied by the total standard overhead rate per hour. 27,500 ($5.00 VOH + $1.50 FOH) = $178,750 Answer (C) is incorrect because The amount of $182,000 is based on the actual DLH worked. Answer (D) is incorrect because Subtracting the $2,500 overhead variance results in $176,250. [22] Gleim #: Source: CMA Answer (A) is incorrect because A volume variance is based on fixed costs, and an efficiency variance is based on variable costs. Answer (B) is correct. A direct labor or materials efficiency variance is calculated by multiplying the difference between standard and actual usage times the standard cost per unit of input. The efficiency variances can be divided into yield and mix variances. These variances are calculated only when the production process involves combining several materials or classes of labor in varying proportions (when substitutions are allowable in combining resources). Answer (C) is incorrect because A spending variance is not the same as an efficiency variance. Answer (D) is incorrect because A price variance is not the same as an efficiency variance. [23] Gleim #: Source: Publisher Answer (A) is incorrect because An unfavorable variable overhead efficiency variance exists. Answer (B) is incorrect because The difference between actual variable overhead and the product of the standard rate and the actual input (the variable overhead spending variance) is $3,000. This variance is favorable. Answer (C) is incorrect because The total variable overhead variance (actual overhead minus the overhead rate applied to the standard hours) is $2,000. Answer (D) is correct. The variable overhead efficiency variance equals the standard variable overhead rate times the difference between the actual input and the standard input allowed for the actual output. The standard rate for variable overhead is $2 per direct labor hour. Actual direct labor hours are 24,500. Standard labor hours are 24,000 (8,000 units 3 hours per unit). Thus, the variable overhead efficiency variance is $1,000 [2 (24,500 24,000)]. The variance is unfavorable because actual hours exceeded standard hours. Copyright 2008 Gleim Publications, Inc. Page 8

88 [24] Gleim #: Source: Publisher Answer (A) is incorrect because Generally accepted accounting principles concern external financial reporting, not internal reporting. Answer (B) is correct. The responsibility for internal reports is management s. Management may direct the accountant to provide a report in any format deemed suitable for the decision process. The accountant should work closely with management to make these reports an effective communication device regarding the firm and its decisions. Answer (C) is incorrect because The American Institute of Certified Public Accountants is concerned with external financial reporting, not internal reporting. Answer (D) is incorrect because The Financial Accounting Standards Board is concerned with external financial reporting, not internal reporting. [25] Gleim #: Source: CMA Answer (A) is incorrect because Allocating depreciation on the basis of long-term average use is a reasonable basis of allocation. This basis is controllable by the division managers and reflects a causal relationship. Answer (B) is incorrect because A service department s cost overruns may not be attributable to any activities of production departments. Answer (C) is incorrect because Market-based allocations of costs of services are reasonable applications of the cause-andeffect principle. Answer (D) is correct. Managerial performance ordinarily should be evaluated only on the basis of those factors controllable by the manager. If a manager is allocated costs that (s)he cannot control, dysfunctional motivation can result. In the case of allocations, a cause-and-effect basis should be used. Allocating the costs of upkeep on a headquarters building on the basis of sales revenue is arbitrary because cost may have no relationship to divisional sales revenues. Consequently, divisional ROI is reduced by a cost over which a division manager has no control. Furthermore, the divisions with the greatest sales are penalized by receiving the greatest allocation. Copyright 2008 Gleim Publications, Inc. Page 9

89 [26] Gleim #: Source: CMA Answer (A) is incorrect because The sales quantity variance is $20,000. Answer (B) is correct. The sales price variance is the actual number of units sold (5,000), times the difference between budgeted selling price ($300,000 6,000) and actual selling price ($235,000 5,000). $50 - $47 x 5,000 = $15,000 U Answer (C) is incorrect because The difference between actual and budgeted unit sales times the actual unit CM equals $18,000. Answer (D) is incorrect because The difference between the actual and budgeted contribution margins is $30,000. [27] Gleim #: Source: Publisher Answer (A) is incorrect because The sales mix variance in Gallia is $156 U. Answer (B) is incorrect because The combined sales price and sales volume variance is $100 F. Answer (C) is incorrect because The two-country sales volume variance is $30 F. Answer (D) is correct. The sales quantity variance in Gallia is $36 F {[(520 actual total units sold.6 budgeted percentage) 300 budgeted unit sales] $3 budgeted UCM}. The sales quantity variance in Helvetica is $20 F {[(520 actual total units sold.4 budgeted percentage) 200 budgeted unit sales] $2.50 budgeted UCM}. Thus, the multiple-country sales quantity variance is $56 F ($36 F + $20 F). [28] Gleim #: Source: CMA Answer (A) is incorrect because The amount of $10,000 is based on 22,000 planned machine hours. Answer (B) is incorrect because The variance was favorable. Answer (C) is correct. The fixed overhead volume (production volume or idle capacity) variance is the difference between budgeted fixed costs and the product of the standard fixed overhead cost per unit of input and the standard units of input allowed for the actual output. Budgeted fixed costs for the month were $100,000. The standard cost of actual output was $105,000 [21,000 machine hours planned for actual output ($1,200,000 planned annual FOH 240,000 planned annual machine hours) FOH application rate]. Hence, the fixed overhead volume variance was $5,000 favorable. It was favorable because the budget for fixed overhead was less than the amount applied to jobs. An overapplication of fixed overhead suggests that output exceeded expectations. Answer (D) is incorrect because The variance was favorable. Copyright 2008 Gleim Publications, Inc. Page 10

90 [29] Gleim #: Source: CMA Answer (A) is incorrect because Both measures consider the same items. Answer (B) is incorrect because ROI and residual income calculations generally require the use of unpublished financial information. Answer (C) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. The rate used is usually the weighted average cost of capital. Residual income may be preferable to ROI because an entity will benefit from expansion as long as residual income is earned. Using only ROI, managers might be tempted to reject expansion that lowered ROI, even though residual income would increase. Thus, the residual income method promotes the congruence of a manager s goals with those of the overall entity. Actions that tend to benefit the company will also tend to improve the measure of the manager s performance. Answer (D) is incorrect because An investment base is need to calculate residual income. [30] Gleim #: Source: CMA Answer (A) is incorrect because The fixed overhead spending variance is the difference between actual fixed costs and budgeted costs. Answer (B) is incorrect because The efficiency variance is applicable to variable overhead. Answer (C) is incorrect because The flexible budget variance is the difference between actual and budgeted amounts in a flexible budget. Answer (D) is correct. A denominator level of activity must be used to establish the standard cost (application rate) for fixed overhead. The production volume variance is the difference between budgeted fixed costs and the standard cost per unit of input times the standard units of input allowed for the actual production. Copyright 2008 Gleim Publications, Inc. Page 11

91 [31] Gleim #: Source: CMA Answer (A) is incorrect because The difference between budgeted and actual variable selling and administrative costs is $400. Answer (B) is incorrect because The difference between budgeted and actual revenue is $6,800. Answer (C) is incorrect because The difference between budgeted and actual units is 200 units. Answer (D) is correct. The volume variance isolates the effect of selling more or less units than budgeted. It equals budgeted unit contribution margin (UCM) times the difference between budgeted and actual units sold. Given expected sales of 4,000 units and revenue of $60,000, unit price is $15. Variable costs are $16,000 for manufacturing and $8,000 for selling, and unit variable cost is $6 ($24,000 4,000 units). The UCM is $9 ($15 $6). Since actual sales were 200 units less than budgeted (4,000 3,800), the lost contribution margin was $1,800 (200 $9). This variance is unfavorable because actual sales were less than budgeted. [32] Gleim #: Source: CMA Answer (A) is correct. The direct labor efficiency variance equals the difference between standard and actual hours times the standard rate. Hence, the variance is $54,000 unfavorable {[(22,000 units 4 standard hours per unit) 94,000 hours] $9}. The variance is unfavorable because the actual hours exceeded the standard hours. Answer (B) is incorrect because The variance of $108,000 favorable is based on the difference between standard and capacity hours. Answer (C) is incorrect because The variance of $60,000 favorable is based on the actual rate and the difference between actual hours and capacity. Answer (D) is incorrect because The variance of $120,000 favorable is based on the actual rate and the difference between standard hours and capacity. Copyright 2008 Gleim Publications, Inc. Page 12

92 [33] Gleim #: Source: Publisher Answer (A) is incorrect because It provides justification for allocating cost to responsibility centers. Answer (B) is correct. Responsibility costs are designed to motivate managers of a responsibility center to act in the best interest of the organization. Therefore, the costs should be allocated only if they (1) can be influenced by the actions of the center s management, (2) are helpful in measuring support given to the responsibility center, (3) improve comparability, or (4) are used in product pricing. Whether the costs are from staff, line, or other services has no bearing on whether they should be allocated. Furthermore, some organizations encourage the use of services such as consulting or internal audit by not charging their costs to responsibility centers. See SMA 4B, Allocation of Service and Administrative Cost. Answer (C) is incorrect because It provides justification for allocating cost to responsibility centers. Answer (D) is incorrect because It provides justification for allocating cost to responsibility centers. [34] Gleim #: Source: CMA Answer (A) is incorrect because Both efficiency variances are based on the same number of hours worked. Thus, if one is unfavorable, the other will also be unfavorable. Answer (B) is incorrect because Both efficiency variances are based on the same number of hours worked. Thus, if one is unfavorable, the other will also be unfavorable. Answer (C) is correct. If variable overhead is applied to production on the basis of direct labor hours, both the variable overhead efficiency variance and the direct labor efficiency variance will be calculated on the basis of the same number of hours. If the direct labor efficiency variance is unfavorable, the overhead efficiency variance will also be unfavorable because both variances are based on the difference between standard and actual direct labor hours worked. Answer (D) is incorrect because The amount of the variances will be different depending on the amount of the costs anticipated and actually paid. [35] Gleim #: Source: CMA Answer (A) is incorrect because The total direct labor variance is $148,000 unfavorable. Answer (B) is correct. The direct labor price variance equals actual labor hours times the difference between standard and actual labor rates. The actual direct labor cost was $940,000 for 94,000 hours, or $10 per hour. The standard rate was $9 per hour. Thus, the variance is $94,000 unfavorable [94,000 hours ($9 $10)]. Answer (C) is incorrect because The actual rate times the difference between capacity and actual hours equals $60,000 favorable. Answer (D) is incorrect because The direct labor efficiency variance is $54,000 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 13

93 [36] Gleim #: Source: CIA 1193 IV-19 Answer (A) is incorrect because Cost plus 20% would be $252 ($ ). Answer (B) is correct. A transfer price is the price charged by one segment of an organization for a product or service supplied to another segment of the same organization. The three basic criteria that the transfer pricing system in a decentralized company should satisfy are to (1) provide information allowing central management to evaluate divisions with respect to total company profit and each division s contribution to profit, (2) stimulate each manager s efficiency without losing each division s autonomy, and (3) motivate each divisional manager to achieve his/her own profit goal in a manner contributing to the company s success. Because the $220 transfer price selected is based on the quoted external price (market), it is an example of market-based transfer pricing. Answer (C) is incorrect because No negotiations took place. Answer (D) is incorrect because The cost-based price would be $210 ($100 + $50 + $40 + $20). [37] Gleim #: Source: CMA Answer (A) is incorrect because The engineering manager is concerned only with the quality of the materials. Answer (B) is correct. A direct materials price variance is the actual quantity used times the difference between the standard and actual prices. It is normally considered the responsibility of the purchasing manager because no one else has an opportunity to influence the price. In this case, the purchasing manager obtained the discount that led to the favorable price variance. Answer (C) is incorrect because An inventory supervisor has no influence over the price paid for materials. Answer (D) is incorrect because The vice president receives the materials without knowing the price. [38] Gleim #: Source: CMA Answer (A) is correct. A company with an 8% ROI threshold should obviously accept a project yielding 12% because the company s overall ROI would increase. The manager being evaluated on the basis of ROI who is already earning 14% will be unwilling to accept a 12% return on a new project because the overall ROI for the division would decline slightly. This absence of goal congruence suggests a weakness in ROI-based performance evaluation. Answer (B) is incorrect because Carolina would accept a project yielding a return greater than 8%, and Sanders would reject a return yielding less than 14%. Answer (C) is incorrect because Carolina would accept a project yielding a return greater than 8%, and Sanders would reject a return yielding less than 14%. Answer (D) is incorrect because Carolina would accept a project yielding a return greater than 8%, and Sanders would reject a return yielding less than 14%. Copyright 2008 Gleim Publications, Inc. Page 14

94 [39] Gleim #: Source: CIA 1191 IV-18 Answer (A) is incorrect because Corporate administrative costs should be excluded from the performance report. The segments have no control over their incurrence or the allocation basis. The allocation depends upon the segment sales (controllable) as well as the sales of other segments (uncontrollable). Answer (B) is incorrect because The segments have no control over fixed computer facility costs, and the equal assignment is arbitrary and bears no relation to usage. Answer (C) is correct. The variable computer cost can be included. The segments are charged for actual usage, which is under each segment s control. The predetermined standard rate is set at the beginning of the year and is known by the segment managers. Moreover, the efficiencies and inefficiencies of the computer department are not passed on to the segments. Both procedures promote a degree of control by the segments. Answer (D) is incorrect because The segments have no control over the incurrence of personnel costs or the method of assignment, which depends upon the number of employees in the segment (controllable) in proportion to the total number of employees in all segments (not controllable). [40] Gleim #: Source: CMA Answer (A) is incorrect because Both Sanders and Carolina would accept the project. Answer (B) is incorrect because Both Sanders and Carolina would accept the project. Answer (C) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. The rate is usually the weighted-average cost of capital. Some entities prefer to measure managerial performance in terms of the amount of residual income rather than the percentage ROI. The principle is that the entity is expected to benefit from expansion as long as residual income is earned. Using a percentage ROI approach, expansion might be rejected if it lowered ROI, even though residual income would increase. Using residual income, both Carolina and Sanders would accept the new project because residual income will increase if a 12% return is earned when the target ROI is only 8%. Answer (D) is incorrect because Both Sanders and Carolina would accept the project. Copyright 2008 Gleim Publications, Inc. Page 15

95 [41] Gleim #: Source: CIA 589 IV-15 Answer (A) is incorrect because All variable costs may not be controllable, but some, if not all, fixed costs might be controllable. Answer (B) is correct. The most desirable measure for evaluating a departmental manager is one that holds the manager responsible for the revenues and expenses (s)he can control. Controllability is the basic concept of responsibility accounting. Answer (C) is incorrect because Not all budgeted costs are controllable by managers. Answer (D) is incorrect because All product costs may not be controllable, but some, if not all, period costs might be controllable. [42] Gleim #: Source: Publisher Answer (A) is incorrect because Overhead variances are by definition affected by activities outside the production area. Answer (B) is incorrect because The efficiency of employees affects the labor efficiency variance. Answer (C) is correct. The materials usage variance is typically influenced most by activities within the production department. It is the variance most controllable by a production manager. Answer (D) is incorrect because The overhead volume variance measures the effect of not operating at the budgeted activity level. It is the least controllable by a production manager. [43] Gleim #: Source: Publisher Answer (A) is incorrect because The direct materials price variance is found by multiplying the actual quantity (28,000) times the difference between the AP ($2.00) and the SP ($2.20). Answer (B) is correct. The direct materials price variance is found by multiplying the difference between the actual price (AP) of direct materials and the standard price (SP) per unit by the actual quantity (AQ). AQ (AP SP) = MPV 28,000 ($2.00 $2.20) = $5,600 favorable Answer (C) is incorrect because The direct materials price variance is found by multiplying the actual quantity (28,000) times the difference between the AP ($2.00) and the SP ($2.20). Answer (D) is incorrect because The usage variance is $2,200 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 16

96 [44] Gleim #: Source: CPA 1186 II-21 Answer (A) is incorrect because The 200-hour difference between AH and SH should be added to, not subtracted from, the standard hours allowed. Answer (B) is incorrect because The difference between AH and SH must be determined using the standard rate per hour. The efficiency variance was also incorrectly treated as favorable and subtracted from the SH. Answer (C) is incorrect because The difference between AH and SH must be determined using the standard rate per hour. Answer (D) is correct. The standard hours allowed equaled 2,000, and the labor efficiency variance was $1,600 unfavorable; i.e., actual hours exceeded standard hours. The labor efficiency variance equals the standard rate ($8 per hour) times the excess hours. Given that the variance is $1,600, 200 excess hours ($1,600 $8) must have been worked. Thus, 2,200 actual hours (2,000 standard excess) were worked. [45] Gleim #: Source: CMA Answer (A) is correct. Management of a profit center is responsible for revenues and expenses but not invested capital. Of the four responsibility centers listed, a new car sales division for a large local auto agency is the only one that fits this description. Answer (B) is incorrect because A company taken as a whole is an investment center. Answer (C) is incorrect because An information technology department of a larger organization is a cost center. Answer (D) is incorrect because The production operations department of a machine shop company is a revenue center. [46] Gleim #: Source: CMA Answer (A) is correct. The sales quantity variance is the difference between the actual and budgeted units, times the budgeted unit CM. Answer (B) is incorrect because The difference between the actual and budgeted contribution margins is $30,000. Answer (C) is incorrect because The sales price variance is $15,000. Answer (D) is incorrect because The difference between actual and budgeted unit sales times the actual unit CM equals $18,000. Copyright 2008 Gleim Publications, Inc. Page 17

97 [47] Gleim #: Source: CMA Answer (A) is correct. A profit center is responsible for both revenues and costs, whereas a cost center is responsible only for costs. Answer (B) is incorrect because An operating unit can be organized as any type of center. Answer (C) is incorrect because A division can be any type of responsibility center. Answer (D) is incorrect because A revenue center is responsible only for revenues, not costs. [48] Gleim #: Source: CIA 594 III-73 Answer (A) is correct. The direct materials efficiency variance equals the standard quantity minus the actual quantity, times standard price. The variance is $240,000 favorable {[(10 20,000) 190,000] $24}. The variance is favorable because the actual quantity was less than the standard quantity allowed for the actual output. Answer (B) is incorrect because The direct labor rate variance is $156,000 favorable. Answer (C) is incorrect because The variance is favorable. Answer (D) is incorrect because The direct materials price variance is $760,000. [49] Gleim #: Source: CMA Answer (A) is incorrect because The sales price variance is $12,000 [$132,000 actual sales (12,000 units sold $10)]. Answer (B) is incorrect because The total projected variable costs at the actual sales level equal $72,000 (12,000 units $6). Thus, the variable cost variance is $1,200 favorable ($72,000 $70,800 actual). Answer (C) is incorrect because The flexible budget variance is $11,200 favorable ($29,200 actual operating income $18,000 flexible budget operating income). Answer (D) is correct. The sales volume variance is the change in contribution margin caused by the difference between the actual and budgeted volume. It equals the budgeted unit contribution margin times the difference between actual and expected volume, or $8,000 [(12,000 10,000) ($10 $6)]. The sales volume variance is favorable because actual sales exceeded budgeted sales. Copyright 2008 Gleim Publications, Inc. Page 18

98 [50] Gleim #: Source: CIA 589 IV-14 Answer (A) is incorrect because The budgeted selling price and budgeted variable cost must be used to determine the sales quantity variance, not the actual selling price and actual variable cost. Answer (B) is incorrect because The sales quantity variance is found by multiplying the 2,000 unit difference between actual and budgeted sales by the $2.50 budgeted contribution margin. Answer (C) is incorrect because The budgeted variable cost must be subtracted from the selling price before multiplying by the 2,000 difference in units actually sold from budgeted sales. Answer (D) is correct. The sales quantity variance is the difference between the actual volume and the budgeted volume in units, times the budgeted weighted-average contribution margin for all units. = (Actual Volume Budgeted Volume) (Selling Price Unit Variable Cost) = (42,000 40,000) ($6 $3.50) = $5,000 F [51] Gleim #: Source: Publisher Answer (A) is incorrect because The variance for labor class III only is $66.67 [($8 $6.67) (550 DLH 500 DLH)]. Answer (B) is incorrect because The variance for labor class II only is $50.00 [($7 $6.67) (650 DLH 500 DLH)]. Answer (C) is correct. The direct labor mix variance is the actual labor inputs, times the difference between the budgeted weighted-average rates for the actual and planned mixes. The budgeted weighted-average rate for the planned mix is $6.67 {[(500 $8) + (500 $7) + (500 $5)] 1,500 standard DLH}. The budgeted weighted-average rate for the actual mix is $6.873 [(550 $8) + (650 $7) + (375 $5) 1,575 actual DLH]. Thus, the direct labor mix variance is $320 [($ ) 1,575]. Answer (D) is incorrect because The direct labor yield variance is $500. Copyright 2008 Gleim Publications, Inc. Page 19

99 [52] Gleim #: Source: CMA Answer (A) is incorrect because The fixed factory O/H production volume variance is the difference between budgeted fixed O/H and fixed O/H applied based on the predetermined rate. Answer (B) is incorrect because By definition, the total variable factory O/H varies with the activity level, but total fixed O/H and unit variable O/H do not. Answer (C) is incorrect because The overall (net) fixed factory O/H variance is the difference between the actual fixed O/H and the fixed O/H applied based on the predetermined rate. Answer (D) is correct. The use of a production volume as the denominator in calculating the factory O/H rate has no effect on the fixed factory O/H budget variance. This variance is the difference between actual fixed costs and budgeted (lump sum) fixed costs. [53] Gleim #: Source: CMA Answer (A) is incorrect because The production-volume variance is $16,000 overapplied. Answer (B) is incorrect because Reversing the proper order of subtraction results in $16,000 underapplied. Answer (C) is correct. First, the actual production level for the month was 6,000 units of output. Second, the standard number of labor hours consumed per unit of output is 2 (10,000 budgeted direct labor hours 5,000 budgeted units output). Third, since fixed overhead for the month was budgeted at $80,000 and it is to be applied in proportion to 10,000 budgeted direct labor hours, the application rate is $8 per direct labor hour ($80,000 10,000). Thus, the amount of fixed overhead applied for the month was $96,000 = (6,000 $8 2). The fixed overhead budget variance was $2,000 favorable, which means the actual fixed overhead incurred for the month was $78,000 ($80,000 $2,000). Thus, fixed overhead was overapplied by $18,000 ($96,000 $78,000). Answer (D) is incorrect because Misinterpreting the $2,000 favorable budget (spending) variance results in $2,000 underapplied. [54] Gleim #: Source: CMA Answer (A) is incorrect because A full-cost transfer is favorable to the buyer. It is lower than the market price. Answer (B) is incorrect because Transfers at full cost do not allow for a seller s profit. Answer (C) is correct. A transfer price is the amount one segment of an organization charges another segment for a product. The selling division should be allowed to recover its incremental cost plus the opportunity cost of the transfer. Hence, in a competitive market, the seller should be able to charge the market price. Using full cost as a transfer price provides no incentive to the seller to control production costs. Answer (D) is incorrect because Evaluating the seller is difficult if it can pass along all costs to the buyer. Copyright 2008 Gleim Publications, Inc. Page 20

100 [55] Gleim #: Source: CMA Answer (A) is correct. The static budget for direct materials is $127,500 (8,500 units $15). Thus, no variance arose with respect to direct materials. Because direct labor for 9,000 units was budgeted at $81,000, the unit direct labor cost is $9. Thus, the direct labor budget for 8,500 units is $76,500, and the total direct labor variance is $1,275 ($77,775 $76,500). Because the actual cost is greater than the budgeted amounts, the $1,275 variance is unfavorable. Given that the actual time per unit (45 minutes) was the same as that budgeted, no direct labor efficiency variance was incurred. Hence, the entire $1,275 unfavorable variance must be attributable to the direct labor rate (or price) variance. Answer (B) is incorrect because No direct materials variance occurred. The actual cost was equal to the budgeted cost for direct materials. Answer (C) is incorrect because No direct labor efficiency variance occurred. Budgeted hours were identical to actual hours for 8,500 units. Answer (D) is incorrect because No direct labor efficiency variance occurred. Budgeted hours were identical to actual hours for 8,500 units. [56] Gleim #: Source: CMA Answer (A) is correct. The flexible budget provides for a cost of $1,000 per article ($10,000,000 10,000 articles). Each article should require 20 hours of labor (200 hours 10 articles). Thus, the standard labor rate is $50 per hour ($1, hours), and total standard variable labor cost is $9,500,000 (9,500 articles 20 hours $50 per hour). Accordingly, total expected costs are $10,100,000 ($9,500,000 + $600,000 FC). Answer (B) is incorrect because This is calculated by incorrectly adjusting the fixed costs downward for production. Answer (C) is incorrect because Labor costs will decline as production declines, but fixed costs will not. This is incorrectly calculated by adding the standard labor costs for 10,000 articles to a reduced fixed cost calculated for 9,500 articles. Answer (D) is incorrect because Variable labor costs only equal $9,500,000. Copyright 2008 Gleim Publications, Inc. Page 21

101 [57] Gleim #: Source: CMA Answer (A) is incorrect because A revenue center is responsible only for revenue generation, not for costs or capital investment. Answer (B) is correct. An investment center is the organizational type most like an independent business because it is responsible for its own revenues, costs incurred, and capital invested. The other types of centers do not incorporate all three elements. Answer (C) is incorrect because A profit center is responsible for revenues and costs but not for invested capital. Answer (D) is incorrect because A cost center is evaluated only on the basis of costs incurred. It is not responsible for revenues or invested capital. [58] Gleim #: Source: Publisher Answer (A) is incorrect because Lower divisional ROIs in more profitable divisions in which motivation is unnecessary would likely suboptimize divisional performance. Answer (B) is incorrect because Equal goals should not be set owing to differences in competitive environment, the strategic goals of the firm, and risk. Answer (C) is incorrect because Using greater divisional ROIs in the less profitable divisions to motivate those divisions to achieve higher ROIs would not necessarily improve divisional performance. Answer (D) is correct. Each division within a firm should have an ROI based on the strategic goals of the firm consistent with its competitive environment. [59] Gleim #: Source: CMA Answer (A) is incorrect because The quantity of materials purchased cannot be determined from the information given. Answer (B) is correct. A favorable price variance indicates that the materials were purchased at a price less than standard. The unfavorable quantity variance indicates that the quantity of materials used for actual production exceeded the standard quantity for the good units produced. Answer (C) is incorrect because The quantity of materials purchased cannot be determined from the information given. Answer (D) is incorrect because The actual usage was greater than standard. Copyright 2008 Gleim Publications, Inc. Page 22

102 [60] Gleim #: Source: CMA Answer (A) is incorrect because This percentage fails to include average working capital in total assets. Answer (B) is correct. An investment center is responsible for revenues, expenses, and invested capital. Given average plant and equipment of $1,775 and average working capital of $625, the average total assets is $2,400. Operating profit is $400 ($4,000 sales $3,525 cost of goods sold $75 general expenses). ROI equals business unit profit divided by average total assets. The Western Division s is therefore 16.67% ($400 $2,400). Answer (C) is incorrect because This percentage results from not subtracting general and administrative expenses in the calculation of business unit profit. Answer (D) is incorrect because This percentage results from subtracting working capital from plant and equipment in calculating average total assets. [61] Gleim #: Source: Publisher Answer (A) is incorrect because The traceable fixed costs must be deducted. Answer (B) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. Accordingly, Cinder s residual income is $170,400 [($600,000 sales $360,000 variable costs $60,000 traceable fixed costs) ($120,000 average invested capital 8%)]. Answer (C) is incorrect because The imputed interest charge of $9,600 ($120,000 8%) must be deducted. Answer (D) is incorrect because The imputed interest charge of $9,600 should be subtracted from, not added to, operating income. [62] Gleim #: Source: CMA Answer (A) is incorrect because The amount of $20,800 is based on planned pounds shipped of 9,600, not actual pounds shipped of 12,300. Answer (B) is incorrect because The amount of $20,680 is based on the actual number of sales orders, rather than on pounds shipped. Answer (C) is correct. The flexible budget formula is Shipping costs = $16,000 + ($.50 lbs. shipped) Therefore, to determine the flexible budget amount, multiply the actual pounds shipped (12,300) times the standard cost ($.50) to arrive at a total expected variable cost of $6,150. Adding the variable cost to $16,000 of fixed cost produces a budget total of $22,150. Answer (D) is incorrect because The amount of $20,920 is based on the number of shipments, not the number of pounds shipped. Copyright 2008 Gleim Publications, Inc. Page 23

103 [63] Gleim #: Source: CIA 593 IV-14 Answer (A) is incorrect because Budgeted, not actual, UCM is used to calculate this variance. Answer (B) is incorrect because Budgeted, not actual, UCM is used to calculate this variance. Answer (C) is incorrect because The flexible budget volume is the actual volume, resulting in a zero variance. Answer (D) is correct. For a single-product company, the sales volume variance is the difference between the actual and budgeted sales quantities times the budgeted UCM. If the company sells two or more products, the difference between the actual and budgeted product mixes must be considered. In that case, the sales volume variance equals the difference between (1) actual total unit sales times the budgeted weighted-average UCM for the actual mix and (2) budgeted total unit sales times the budgeted weighted-average UCM for the planned mix. [64] Gleim #: Source: CMA Answer (A) is incorrect because Not everything included in the calculation of gross profit is controllable by the manager. Answer (B) is correct. Managerial performance should be evaluated on the basis of those factors controllable by the manager. Managers may control revenues, costs, and/or investment in resources. A well-designed responsibility accounting system establishes responsibility centers within the organization. Answer (C) is incorrect because Net income is computed after deducting fixed costs. Answer (D) is incorrect because Contribution margin ignores the fixed costs of production; managers may control some fixed costs. [65] Gleim #: Source: CMA Answer (A) is incorrect because A labor price variance reflects a difference between the actual price of labor and the budgeted price of labor, which is useful information for cost control. Answer (B) is incorrect because The materials quantity variance is the difference between budgeted and actual materials used during production. This is an important variance for cost control. Answer (C) is incorrect because The difference between actual variable O/H and the product of the actual input and the budgeted variable O/H rate is useful information for cost control. Answer (D) is correct. The fixed O/H volume variance occurs when actual activity levels differ from anticipated levels. It is an excellent example of cost allocation as opposed to cost control. Unlike other variances, the volume variance does not directly reflect a difference between actual and budgeted expenditures. The economic substance of this variance lies in the costs or benefits of capacity usage or nonusage. For example, idle capacity results in the loss of the contribution margin from units not produced and sold. Copyright 2008 Gleim Publications, Inc. Page 24

104 [66] Gleim #: Source: Publisher Answer (A) is correct. The success of a control system is determined by its effectiveness in motivating people to modify their performance. The goals of a control system may be met with resistance if they are not accepted by the employee. For example, an employee may resist changing his/her performance when (s)he believes that the stated standard of performance is set too high. Answer (B) is incorrect because People tend to avoid unpleasant situations. Answer (C) is incorrect because The goals of a control system will most likely not be accepted by an employee when the established standards of performance are considered irrelevant to the accomplishment of what an employee regards as the primary job objective. Answer (D) is incorrect because Employee resistance is most likely to occur when a control procedure highlights the things an employee does poorly, thus damaging his/her self-esteem. [67] Gleim #: Source: CIA 1186 IV-12 Answer (A) is incorrect because The sales mix variance is unaffected by a change in overall sales volume, assuming the proportions of products sold remain constant. However, an unfavorable sales quantity variance will arise given a 5% decrease in overall sales volume because a 5% decrease in contribution margin will occur. This variance is computed by holding the sales mix, budgeted prices, and budgeted costs constant. It measures the change in contribution margin caused by a change in overall volume. Answer (B) is incorrect because This equation defines the materials mix variance. Answer (C) is incorrect because The variance will be unfavorable. Answer (D) is correct. The sales mix variance is a sum of variances. For each product in the mix, the difference between units sold and expected to be sold is multiplied by the difference between the budgeted UCM for the product and the budgeted weighted-average UCM for all products. The results of these computations are then added to determine the mix variance. This variance measures the effect of the change in the weighted-average UCM associated with the changes in the quantities of items in the mix. The sales mix variance is favorable when more units with a higher than average UCM are sold or when fewer units with a lower than average UCM are sold. Copyright 2008 Gleim Publications, Inc. Page 25

105 [68] Gleim #: Source: Publisher Answer (A) is correct. Given a 15% decrease in prices, Year 2 sales were 85% of Year 2 sales at Year 1 prices. Hence, Year 2 sales at Year 1 prices equal $1,118,118 ($950,400 85%). Sales and gross profit were $167,718 ($1,118,118 $950,400) lower because of the decrease in prices. Answer (B) is incorrect because Year 2 sales minus 85% of Year 2 sales equals $142,560. Answer (C) is incorrect because The amount of $144,000 equals 15% of Year 1 sales. Answer (D) is incorrect because Year 2 sales minus 85% of Year 1 sales equals $134,400. [69] Gleim #: Source: CMA Answer (A) is incorrect because Assigning higher paid (and higher skilled) workers to jobs not requiring such skills leads to an unfavorable variance. Answer (B) is incorrect because Using a single average standard rate may lead to variances if some workers are paid more than others and the proportions of hours worked differ from estimates. Answer (C) is incorrect because Predictions about labor rates may have been inaccurate. Answer (D) is correct. The direct labor price (rate) variance is the actual hours worked times the difference between the standard rate and the actual rate paid. This difference may be attributable to (1) a change in labor rates since the establishment of the standards, (2) using a single average standard rate despite different rates earned among different employees, (3) assigning higher-paid workers to jobs estimated to require lower-paid workers (or vice versa), or (4) paying hourly rates, but basing standards on piecework rates (or vice versa). The difference should not be caused by a union contract approved before the budgeting cycle because such rates would have been incorporated into the standards. [70] Gleim #: Source: CMA Answer (A) is incorrect because The production manager has no control over the price paid for materials. Answer (B) is incorrect because The cost accounting manager has no control over the price paid for materials. Answer (C) is incorrect because The sales manager has no control over the price paid for materials. Answer (D) is correct. The materials price variance is the difference between the standard price and the actual price paid for materials. This variance is usually the responsibility of the purchasing department. Thus, the purchasing manager has an incentive to obtain the best price possible. Copyright 2008 Gleim Publications, Inc. Page 26

106 [71] Gleim #: Source: CMA Answer (A) is incorrect because The amount of the direct materials quantity variance is $4,950. Answer (B) is correct. The direct labor rate variance equals the actual hours used times the difference between the standard and actual rates. Consequently, the direct labor rate variance is zero [1,650 units 3.1 actual hours ($12 per hour standard rate $12 per hour actual rate)]. Answer (C) is incorrect because The amount of the flexible budget overhead variance is $1,920. Answer (D) is incorrect because The amount of the direct materials quantity variance is $4,950. [72] Gleim #: Source: Publisher Answer (A) is incorrect because The quantity variance is based on the quantity used during the period (10,000), not the quantity purchased (12,000). Answer (B) is correct. At the given production level, 9,000 components (3,000 3) are needed. However, 10,000 were used. Consequently, the materials efficiency (quantity or usage) variance was $2,900 unfavorable {(SQ AQ) SP = [(10,000 9,000) $2.90 standard cost per component]}. Answer (C) is incorrect because The quantity variance is based on the quantity used during the period (10,000), not the quantity purchased (12,000). Answer (D) is incorrect because The variance was unfavorable. The actual quantity used was greater than the quantity budgeted. [73] Gleim #: Source: CMA Answer (A) is incorrect because The direct materials quantity variance is favorable because the actual quantity used is less than the standard quantity. Answer (B) is correct. The direct materials quantity variance equals the standard price ($1.80 per pound) times the difference between the actual and standard quantities. The actual quantity used was 142,500 pounds. The standard quantity is 8 pounds per unit of product. Given that 19,000 units were produced, the standard quantity for the actual output was 152,000 pounds (8 lbs. 19,000 units). Hence, the direct materials quantity variance is $17,100 [(152, ,500) $1.80]. Since the actual quantity used was less than the standard quantity, the variance is favorable. Answer (C) is incorrect because The direct materials quantity variance is favorable because the actual quantity used is less than the standard quantity. Answer (D) is incorrect because The direct materials quantity variance equals the standard price multiplied times the difference between the actual and standard quantities. Copyright 2008 Gleim Publications, Inc. Page 27

107 [74] Gleim #: Source: Publisher Answer (A) is incorrect because Multiplying by the actual price and reversing the order of subtraction results in $9,200 favorable. Answer (B) is incorrect because Reversing the order of subtraction results in $8,500 favorable. Answer (C) is correct. The total direct materials quantity variance is found by multiplying the difference between the standard quantity and actual quantity by the standard price. Standard quantities are calculated by multiplying the actual units by the standard quantity per unit. The standard quantities are 2,200 parts (2,200 1) for housing units, 4,400 parts (2,200 2) for printed circuit boards, and 8,800 parts (2,200 4) for reading heads. Thus, the total direct materials quantity variance is Housing units: (2,200 2,200) $20 = $ 0 Printed circuit boards: (4,400 4,700) $15 = 4,500 U Reading heads: (8,800 9,200) $10 = 4,000 U $8,500 U Answer (D) is incorrect because Multiplying by the actual price results in $9,200 unfavorable. [75] Gleim #: Source: Publisher Answer (A) is incorrect because The variance of $73,750 favorable assumes that standard input for the actual output was 100,000 DMH and that overhead applied was therefore $1,432,000. Answer (B) is incorrect because The applied O/H is $1,346,080, which is based on the budgeted DMH for the equivalent units of production, not on the actual DMH. Furthermore, because the actual O/H is greater than the O/H applied, the underapplied O/H results in an unfavorable variance. Answer (C) is correct. The total O/H variance is the over- or underapplied O/H, that is, the difference between applied O/H and the actual O/H. The applied O/H was determined to be $1,346,080. The actual O/H is $1,358,250 ($133,250 + $1,225,000). Consequently, the amount of underapplied O/H is $12,170 U ($1,358,250 $1,346,080). Answer (D) is incorrect because The applied O/H is $1,346,080, which is based on the budgeted DMH for the equivalent units of production, not on the actual DMH. Copyright 2008 Gleim Publications, Inc. Page 28

108 [76] Gleim #: Source: CMA Answer (A) is incorrect because The amount of $300,000 is based on planned direct labor hours at $75 per hour. Answer (B) is incorrect because The total overhead applied was $315,000 based on 21,000 hours at $15 per hour. Answer (C) is incorrect because The total overhead applied was $315,000 based on 21,000 hours at $15 per hour. Answer (D) is correct. Overhead is applied on the basis of planned machine hours. The predetermined overhead application rate is $15 [($1,200,000 FOH + $2,400,000 VOH) 240,000 machine hours]. Thus, total overhead applied was $315,000 (21,000 planned machine hours based on output $15). [77] Gleim #: Source: CMA Answer (A) is incorrect because The difference between actual fixed overhead and the product of the standard rate and the actual direct labor hours is $70,000 unfavorable. Answer (B) is correct. The fixed overhead spending (budget) variance is the difference between budgeted and actual fixed overhead. Actual fixed overhead was $540,000. Budgeted fixed overhead was $5 per hour based on a capacity of 100,000 direct labor hours per month, or $500,000. Because these costs are fixed, the budgeted fixed overhead is the same at any level of production. Hence, the variance is $40,000 unfavorable ($500,000 $540,000). Answer (C) is incorrect because The difference between actual variable overhead and budgeted fixed overhead is $240,000 unfavorable. Answer (D) is incorrect because The volume variance is $460,000 unfavorable. [78] Gleim #: Source: CIA 579 IV-2 Answer (A) is incorrect because Only significant variances should be investigated. Also, the benefits of each step in the entire standard-cost process must be cost effective. Benefits should exceed costs. Answer (B) is correct. A variance shows a deviation of actual results from the expected or budgeted results. All significant variances should be investigated, whether favorable or unfavorable. Answer (C) is incorrect because The trend of variances over time should be considered. A negative variance that has been getting progressively smaller may not need investigating, whereas a variance that is increasing should be investigated promptly. Answer (D) is incorrect because The objective of variance investigation is pinpointing responsibility and taking corrective action toward eliminating variances. Copyright 2008 Gleim Publications, Inc. Page 29

109 [79] Gleim #: Source: CIA 1185 IV-12 Answer (A) is incorrect because The sales price variance is the difference between the $11.50 actual sales price ($92,000 8,000) and the $10.50 budgeted sales price ($105,000 10,000), times the 8,000 units sold. Answer (B) is correct. The sales price variance is the difference between actual price and budgeted price, times actual units. Actual price was $11.50 ($92,000 8,000). Budgeted price was $10.50 ($105,000 10,000). Sales price variance is therefore $8,000 [8,000 actual units ($11.50 $10.50)]. The variance is favorable because actual sales price was greater than budgeted sales price. Answer (C) is incorrect because The sales price variance is the difference between the $11.50 actual sales price ($92,000 8,000) and the $10.50 budgeted sales price ($105,000 10,000), times the 8,000 units sold. Answer (D) is incorrect because The sales price variance is based on the actual units sold rather than the budgeted sales. [80] Gleim #: Source: CMA Answer (A) is incorrect because Controllable costs are those over which a manager has control; the manager may be informed or know about costs that (s)he cannot directly regulate or influence. Answer (B) is incorrect because Many overhead costs are also controllable. Answer (C) is incorrect because Controllable costs need not be discretionary. Discretionary costs are characterized by uncertainty about the relationship between input and the value of the related output; they may or may not be controllable. Answer (D) is correct. Control is the process of making certain that plans are achieving the desired objectives. A controllable cost is one that is influenced by a specific responsible manager at a given level of production within a given time span. For example, fixed costs are often not controllable in the short run. [81] Gleim #: Source: CMA Sample Q3-2 Answer (A) is incorrect because The amount of $28,000 results from assuming the sale of 1,000 units. Answer (B) is incorrect because The amount of $35,000 results from assuming a UCM of $35 and sales of 1,000 units. Answer (C) is correct. The CM equals revenues minus all variable costs expensed. Given no WIP and no beginning finished goods, the CM was $25,200 [900 units ($100 $30 $20 $10 $12)]. The variable costs of producing the units not sold are included in ending inventory rather than in the CM. The fixed costs are also excluded from computation of the CM. Answer (D) is incorrect because The amount of $31,500 results from assuming a UCM of $35. This computation includes fixed unit selling costs of $5 but excludes the $12 per unit variable selling costs. Copyright 2008 Gleim Publications, Inc. Page 30

110 [82] Gleim #: Source: Publisher Answer (A) is incorrect because Market share is a customer satisfaction measure. Answer (B) is correct. Customer satisfaction measures include market share, retention, response time, delivery performance, number of defects, and lead time. Economic value added, or EVA, is a profitability measure. Answer (C) is incorrect because Customer retention is a customer satisfaction measure. Answer (D) is incorrect because Response time is a customer satisfaction measure. [83] Gleim #: Source: Publisher Answer (A) is correct. The components of the sales quantity variance are the market size variance and the market share variance. The market size variance gives an indication of the change in contribution margin caused by a change in the market size. The market size and market share variances are relevant to industries in which total level of sales and market share are known, e.g., the automobile industry. The market size variance measures the effect of changes in an industry s sales on an individual company, and the market share variance analyzes the impact of a change in market share. Answer (B) is incorrect because This equation defines the market share variance. Answer (C) is incorrect because This equation defines the sales mix variance. Answer (D) is incorrect because This equation defines the sales quantity variance. [84] Gleim #: Source: CMA Answer (A) is incorrect because A cost center manager has control over all significant costs but not of revenues or investments. Answer (B) is incorrect because An investment center, not a profit center, has control over invested capital. Answer (C) is correct. A profit center is responsible for both revenues and expenses. For example, the perfume department in a department store is a profit center. The manager of a profit center usually has the authority to make decisions affecting the major determinants of profit, including the power to choose markets (revenue sources) and suppliers (costs). Answer (D) is incorrect because A service center supports other organizational units. Copyright 2008 Gleim Publications, Inc. Page 31

111 [85] Gleim #: Source: CIA 1196 III-94 Answer (A) is correct. The outlay costs represent cash outflows related to the production and transfer of goods/services. The opportunity costs are the maximum contribution forgone by the supplying division if the goods/services are sold internally. An opportunity cost will exist if the supplier has no idle capacity and an external market exists. Thus, this guideline should promote goal congruence (actions of the divisional manager benefit the company and the division), a sustained high level of managerial effort (exertion toward a goal), and subunit autonomy (freedom in decision making). The guideline will vary depending on whether an external market exists and whether the supplier has idle capacity. Answer (B) is incorrect because If the supplying division recovers only its variable production costs, it becomes a cost center for internal transfers. The supplying division will earn no return on internal sales, which could lead to suboptimization. Answer (C) is incorrect because The full cost may not represent the outlay cost incurred to the point of transfer, and a markup is an arbitrary percentage. The result may be suboptimization. For example, the buyer may purchase at a lower price from an outside supplier even though the price exceeds the company s outlay cost. Answer (D) is incorrect because The opportunity cost of the buying division is irrelevant. [86] Gleim #: Source: CIA 594 III-71 Answer (A) is incorrect because Responsibility accounting holds managers responsible only for what they can control. Answer (B) is incorrect because A cost center manager is concerned with costs only, whereas a profit center manager is concerned with costs and revenues. Answer (C) is incorrect because This is the essence of responsibility accounting. Each manager is held accountable for factors under his/her control. Answer (D) is correct. Responsibility accounting stresses that managers are responsible only for factors under their control. For this purpose, the operations of the business are organized into responsibility centers. Costs are classified as controllable and uncontrollable. This implies that some revenues and costs can be changed through effective management. Management may then focus on deviations for either reinforcement or correction. Thus, the statement that every factor is ultimately controllable by someone is not a premise of responsibility accounting. Copyright 2008 Gleim Publications, Inc. Page 32

112 [87] Gleim #: Source: CMA Answer (A) is incorrect because The price variance is $12,500, or $.50 per unit. Answer (B) is incorrect because The price variance is $12,500, or $.50 per unit. Answer (C) is incorrect because The direct materials quantity variance is $2,500 unfavorable. Answer (D) is correct. Actual usage and the standard price were 25,000 units and $2.50, respectively. Actual price was $3.00 ($105,000 total cost 35,000 units purchased). Consequently, the direct materials price variance is $12,500 unfavorable {AQ (SP AP) = [25,000 units ($2.50 $3.00)]}. [88] Gleim #: Source: CIA 590 IV-15 Answer (A) is correct. The labor efficiency variance is $980 ($9,800 $8,820). It is the difference between actual and standard hours multiplied by the standard labor rate. Answer (B) is incorrect because The term spending variance is usually applied to overhead variances. Answer (C) is incorrect because The labor rate variance is $200. It is the difference between the actual and standard rates time the actual hours. Answer (D) is incorrect because The volume variance is the difference between budgeted fixed overhead and the amount applied based on the standard input allowed for the actual output. [89] Gleim #: Source: Publisher Answer (A) is incorrect because Multiplying $1.20 by standard hours (42,000) results in $50,400. Answer (B) is incorrect because The variance is unfavorable. Answer (C) is correct. The direct labor rate variance is determined by multiplying the actual hours worked by the difference between the standard and actual rates. The standard rate equals the direct labor efficiency variance divided by the difference between the standard and actual hours. The actual rate equals the total direct labor payroll divided by the actual hours. $3,840 (41,200 42,000) = $ 4.80 SR $247,200 41,200 = 6.00 AR $ 1.20 diff. 41,200 AH DL rate variance = $ 49,440 U Answer (D) is incorrect because The amount of $44,496 was determined using an actual rate of $5.88. Copyright 2008 Gleim Publications, Inc. Page 33

113 [90] Gleim #: Source: CMA Answer (A) is incorrect because The variable overhead spending variance may be affected by, but does not affect, a direct labor efficiency variance. It equals the difference between actual variable overhead, which includes indirect but not direct labor, and the variable overhead applied based on the standard rate and the actual activity level, which may or may not be measured in direct labor hours. Thus, the effect of an unfavorable direct labor efficiency variance is to decrease an unfavorable variable overhead spending variance or to increase a favorable variable overhead spending variance. Answer (B) is incorrect because The fixed overhead volume variance does not affect, and is not affected by, a direct labor efficiency variance. It equals the difference between budgeted fixed overhead and the fixed overhead applied based on the standard rate and the standard input (e.g., direct labor) allowed for the actual output. Answer (C) is incorrect because The variable overhead spending variance may be affected by, but does not affect, a direct labor efficiency variance. It equals the difference between actual variable overhead, which includes indirect but not direct labor, and the variable overhead applied based on the standard rate and the actual activity level, which may or may not be measured in direct labor hours. Thus, the effect of an unfavorable direct labor efficiency variance is to decrease an unfavorable variable overhead spending variance or to increase a favorable variable overhead spending variance. Answer (D) is correct. An unfavorable direct labor efficiency variance indicates that actual hours exceeded standard hours. Too many hours may have been used because of inefficiency on the part of employees, excessive coffee breaks, machine down-time, inadequate materials, or materials of poor quality that required excessive rework. An unfavorable direct materials usage variance might be related to an unfavorable labor efficiency variance. Working on a greater quantity of direct materials may require more direct labor time. [91] Gleim #: Source: CIA 595 III-24 Answer (A) is correct. Management by exception gives significant attention only to those areas in which material deviations from expectations occur. Consequently, management focuses resources where the greatest returns from supervisory effort may be achieved. Answer (B) is incorrect because In MBO, a manager and his/her subordinates jointly formulate the subordinates objectives and the plans for attaining them. Answer (C) is incorrect because Benchmarking is the practice of identifying, studying, and building upon the best practices in the industry or in the world. Answer (D) is incorrect because In a responsibility accounting system, managers are evaluated only on the basis of factors they control. Copyright 2008 Gleim Publications, Inc. Page 34

114 [92] Gleim #: Source: Publisher Answer (A) is incorrect because The spending variance, not the volume variance, is useful in detecting short-term problems in the control of overhead costs. Answer (B) is incorrect because The spending variance, not the volume variance, is useful in detecting short-term problems in the control of overhead costs. Answer (C) is correct. The volume variance is the difference between total budgeted fixed overhead and total fixed overhead absorbed (applied). It is a measure of the use of capacity, not of the difference between budgeted and actual costs. However, the spending variance is the difference between actual overhead incurred and the flexible budget amount for the actual input. In four-way analysis of overhead variances, the spending variance is divided into fixed and variable components. Consequently, the components of the spending variance, not the volume variance, are useful in detecting shortterm problems in the control of overhead costs. Answer (D) is incorrect because The spending variance, not the volume variance, is useful in detecting short-term problems in the control of overhead costs. [93] Gleim #: Source: CMA Answer (A) is incorrect because The production manager did not make the substitution decision. Answer (B) is correct. An unfavorable direct labor efficiency variance is normally charged to the production manager, the person with the most control over the amount and kinds of direct labor used. However, that individual is not responsible. (S)he was told to use the nonconforming part that required extra labor time. Thus, the variance should be charged to the vice president of production, the individual who most influenced the incurrence of the cost. Answer (C) is incorrect because The inventory supervisor did not make the substitution decision. Answer (D) is incorrect because The sales manager did not make the substitution decision. [94] Gleim #: Source: Publisher Answer (A) is incorrect because This equation defines the market share variance. Answer (B) is incorrect because This equation defines the market size variance. Answer (C) is incorrect because This equation defines the sales mix variance. Answer (D) is correct. The sales volume variance equals the difference between the flexible budget contribution margin for the actual volume and that included in the master budget. Its components are the sales quantity and sales mix variances. The sales quantity variance focuses on the firm s aggregate results. It assumes a constant product mix and an average contribution margin for the composite unit. It equals the difference between actual and budgeted unit total sales, times the budgeted weighted-average UCM for the planned mix. Copyright 2008 Gleim Publications, Inc. Page 35

115 [95] Gleim #: Source: CIA 595 III-96 Answer (A) is incorrect because Return on investment cannot be computed for a cost center. The manager is not responsible for revenue (return) or the assets available. Answer (B) is incorrect because The payback method is a means of evaluating alternative investment proposals. Answer (C) is correct. A cost center is a responsibility center that is responsible for costs only. Of the alternatives given, variance analysis is the only one that can be used in a cost center. Variance analysis involves comparing actual costs with predicted or standard costs. Answer (D) is incorrect because Return on assets cannot be computed for a cost center. The manager is not responsible for revenue (return) or the assets available. [96] Gleim #: Source: Publisher Answer (A) is correct. The total direct materials price variance is found by multiplying the difference between the standard price and the actual price by the actual quantity. The actual price is calculated by dividing actual cost by actual quantity. Thus, the actual prices are $20 per unit ($44,000 2,200) for housing units, $16 per unit ($75,200 4,700) for printed circuit boards, and $11 per unit ($101,200 9,200) for reading heads. Thus, total direct materials price variance is Housing units: 2,200 ($20 $20) = $ 0 Printed circuit boards: 4,700 ($15 $16) = 4,700 U Reading heads: 9,200 ($10 $11) = 9,200 U $13,900 U Answer (B) is incorrect because Using the standard cost per unit for each direct material results in $346,500 unfavorable. Answer (C) is incorrect because Using the standard cost per unit for each direct material and reversing the order of subtraction results in $346,500 favorable. Answer (D) is incorrect because The price variance is unfavorable when the actual price is greater than the standard price. Copyright 2008 Gleim Publications, Inc. Page 36

116 [97] Gleim #: Source: CMA Answer (A) is incorrect because The price variance is unfavorable. The actual price is greater than the standard price. Answer (B) is incorrect because The variance of $14,850 is based on the standard unit quantity, not the actual quantity. Answer (C) is incorrect because The variance of $14,850 is based on the standard unit quantity, not the actual quantity. Answer (D) is correct. The direct materials price variance equals the actual quantity used times the difference between the standard and actual price per unit. Thus, the unfavorable direct materials price variance is $14,355 [1,650 units 58 actual pounds ($1.50 standard price $1.65 actual price)]. [98] Gleim #: Source: CMA Answer (A) is incorrect because The variance is favorable. Answer (B) is incorrect because The variance is favorable. Actual usage was less than the standard. Answer (C) is correct. This variance equals the standard unit cost times the difference between the actual quantity used and the standard quantity for good production. Consequently, the variance is $7,200 favorable {[(5 pounds 22,000 units) 108,000 pounds used] $3.60}. Answer (D) is incorrect because The variance is calculated by multiplying the quantity difference times the standard unit cost of $3.60, not the actual unit cost. [99] Gleim #: Source: CMA Answer (A) is correct. Fixed overhead was budgeted based on a practical capacity of 90,000 machine hours. Because the actual hours used were 88,000, fixed overhead was underapplied, and an unfavorable production-volume variance resulted. The only one of the four actions that would result in fewer machine hours than were budgeted being consumed is the initiative to reduce finished goods inventory levels. Answer (B) is incorrect because Worker wages are a variable cost and would thus affect the variable, not the fixed, overhead variance. Answer (C) is incorrect because An unexpected sales order would result in more machine hours than were budgeted, not fewer. In other words, an unexpected order would result in a variable volume variance. Answer (D) is incorrect because A wage hike to a production supervisor is a variable cost and would thus affect the variable, not the fixed, variance. Copyright 2008 Gleim Publications, Inc. Page 37

117 [100] Gleim #: Source: CMA Answer (A) is correct. Responsibility accounting holds managers responsible only for factors under their control. The depreciation of equipment will probably not appear on the performance report of an assembly-line manager because the manager usually has no control over the investment in the equipment. Answer (B) is incorrect because The manager of an assembly line is likely to be responsible for the materials, which is to some degree controllable by the manager. Answer (C) is incorrect because The manager of an assembly line is likely to be responsible for the repairs and maintenance, which is to some degree controllable by the manager. Answer (D) is incorrect because The manager of an assembly line is likely to be responsible for the salaries of supervisors, which is to some degree controllable by the manager. [101] Gleim #: Source: CMA Answer (A) is incorrect because The amount of $(22,000) equals the difference between net profit after taxes and targeted income. Answer (B) is correct. Return on investment is commonly calculated by dividing business unit profit by total assets available. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. The rate used is ordinarily the weighted-average cost of capital. Because REB has assets of $500,000 and a cost of capital of 6%, it must earn $30,000 on those assets to cover the cost of capital. Given that operating income was only $25,000, it had a negative residual income of $5,000. Answer (C) is incorrect because Although the firm s return on equity investment was 4%, its return on all funds invested was 5% ($25,000 pretax operating income $500,000). Answer (D) is incorrect because ROI is commonly based on before-tax income. [102] Gleim #: Source: CMA Answer (A) is correct. The calculation of the variable overhead efficiency variance is similar to that of the direct labor efficiency variance in that both measure the effect of the difference between actual and standard hours. Assuming overhead is applied on the basis of direct labor hours, both variance calculations will be based on the same number of hours. Thus, if the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will also be unfavorable. Answer (B) is incorrect because The efficiency variances are directly correlated. Answer (C) is incorrect because The efficiency variances are directly correlated. Answer (D) is incorrect because The amount of the variance is dependent upon the actual costs incurred. Copyright 2008 Gleim Publications, Inc. Page 38

118 [103] Gleim #: Source: CMA Answer (A) is correct. ROI equals business unit profit divided by average total assets. If a company is already profitable, increasing sales and expenses by the same percentage will increase ROI. For example, if a company has sales of $100 and expenses of $80, its operating income is $20. Given average total assets of $100, ROI is 20% ($20 $100). If sales and expenses both increase 10% to $110 and $88, respectively, operating income increases to $22. ROI will then be 22% ($22 $100). Answer (B) is incorrect because Increasing sales and expenses by the same dollar amount will not change income or ROI. Answer (C) is incorrect because Increasing investment and operating expenses by the same dollar amount will lower ROI. The higher investment increases the denominator, and the increased expenses reduce the numerator. Answer (D) is incorrect because Decreasing revenues and expenses by the same percentage will reduce income and lower ROI. [104] Gleim #: Source: CMA Answer (A) is incorrect because The labor efficiency variance is calculated using the standard labor rate, not the actual labor rate. Answer (B) is incorrect because The variance is unfavorable. More hours were worked than allowed by the standards. Answer (C) is correct. The direct labor efficiency variance equals the standard unit cost times the difference between actual hours and standard hours. Accordingly, the variance is $6,000 unfavorable {[28,000 hours (1.25 hours 22,000 units)] $12}. Answer (D) is incorrect because The variance is unfavorable. [105] Gleim #: Source: Publisher Answer (A) is incorrect because Production is responsible for materials usage. Answer (B) is incorrect because Sales has responsibility for marketing, not purchasing. Answer (C) is incorrect because Engineering is responsible for design, engineering, and quality standards. Answer (D) is correct. Responsibility for variances should bear some relationship to the decision and control processes used. Materials price prices should be the responsibility of purchasing management. Copyright 2008 Gleim Publications, Inc. Page 39

119 [106] Gleim #: Source: CIA 1192 IV-22 Answer (A) is correct. Responsibility accounting stresses that managers should only be held responsible for factors under their control. To achieve this objective, the operations of the business are broken down into responsibility centers. Costs are classified as controllable and noncontrollable to assign responsibility. The assignment of responsibility implies that some revenues and costs can be changed through effective management. A responsibility accounting system should have certain controls that provide for feedback reports indicating deviations from expectations. Management may then focus on those deviations for either reinforcement or correction. Answer (B) is incorrect because Contribution margin reporting separates costs by behavior; variable costs are listed first followed by fixed costs. Some responsibility accounting systems use a contribution margin reporting format, but contribution margin reporting alone can include costs not controllable by a manager. Answer (C) is incorrect because Segment reporting is preparation of performance reports by reportable segments. Segment reports often include allocated costs that are not controllable by managers. Answer (D) is incorrect because Absorption cost accounting is characterized by its treatment of fixed manufacturing overhead as a product cost. [107] Gleim #: Source: Publisher Answer (A) is incorrect because Different prices recorded by the buying and selling divisions is characteristic of a dualpricing policy. Answer (B) is correct. The variable-cost-plus price is the price set by charging for variable cost plus either a lump sum or an additional markup but less than the full markup price. This permits top management to enter the decision process and dictate that a division transfer at variable cost plus some appropriate amount. Answer (C) is incorrect because Outlay cost plus opportunity cost is the price representing the cash outflows of the supplying division plus the contribution to the supplying division from an outside sale. Answer (D) is incorrect because The price on the open market is the definition of the market price. Copyright 2008 Gleim Publications, Inc. Page 40

120 [108] Gleim #: Source: CMA Answer (A) is incorrect because The variance is favorable. Answer (B) is incorrect because The variance is favorable. Answer (C) is incorrect because The amount of $85,000 favorable is based on a production level of 100,000 units. Answer (D) is correct. The company planned to produce 100,000 units at $6 each ($4 variable + $2 fixed cost), or a total of $600,000, consisting of $400,000 of variable costs and $200,000 of fixed costs. Total production was only 80,000 units at a total cost of $515,000. The flexible budget for a production level of 80,000 units includes variable costs of $320,000 (80,000 units $4). Fixed costs would remain at $200,000. Thus, the total flexible budget costs are $520,000. Given that actual costs were only $515,000, the variance is $5,000 favorable. [109] Gleim #: Source: CMA Answer (A) is incorrect because The actual fixed overhead for the year is $575,000. Answer (B) is incorrect because The budgeted fixed overhead at an estimated production of 200,000 units is $600,000. Answer (C) is incorrect because The fixed overhead applied equals the budgeted fixed overhead rate multiplied times the actual units of production. Answer (D) is correct. Fixed overhead is applied at the rate of $3 per unit. The amount applied given actual production is $594,000 ($3 198,000 units). [110] Gleim #: Source: Publisher Answer (A) is incorrect because The difference between the actual and budgeted fixed overhead is $2,500. Answer (B) is incorrect because The difference between the fixed and variable components of the variance is $3,750. Answer (C) is incorrect because The difference between the actual and budgeted variable overhead is $6,250. Answer (D) is correct. The spending variance is the difference between the actual total overhead and the sum of budgeted fixed overhead and the variable overhead budgeted for the actual input. The total actual overhead is $140,000 ($106,250 + $33,750). The sum of budgeted fixed overhead and variable overhead budgeted for the actual input is $131,250 ($100,000 + $31,250). Thus, the total spending variance is $8,750 ($140,000 $131,250). The variance is unfavorable because the actual overhead exceeds the budgeted overhead. Copyright 2008 Gleim Publications, Inc. Page 41

121 [111] Gleim #: Source: CMA Answer (A) is incorrect because The direct labor efficiency variance equals the standard labor rate times the difference between actual and standard hours. Answer (B) is incorrect because The direct labor efficiency variance equals the standard labor rate times the difference between actual and standard hours. Answer (C) is correct. The direct labor efficiency variance equals the standard labor rate times the difference between actual and standard hours. Because each unit requires.25 hours of labor, the standard hours allowed for November would have been 4,750 (.25 19,000 units of output). Accordingly, the variance is $2,000 [(4,750 standard hrs. 5,000 actual hrs.) $8.00 standard rate]. This variance is unfavorable because the actual hours exceeded the standard hours. Answer (D) is incorrect because The direct labor efficiency variance equals the standard labor rate times the difference between actual and standard hours. [112] Gleim #: Source: Publisher Answer (A) is correct. Common costs are the cost of products, activities, facilities, services, or operations shared by two or more cost objects. They are indirect costs because they cannot be traced to a particular cost object in an economically feasible manner. Hence, they must be allocated. Answer (B) is incorrect because Controllable costs can be influenced by a particular manager. Answer (C) is incorrect because Current cost is an attribute used to measure assets. Answer (D) is incorrect because Direct costs can be traced to a particular cost object in an economically feasible manner. [113] Gleim #: Source: CMA Answer (A) is incorrect because Managers may reject projects that are profitable (a return greater than the cost of capital), but would decrease ROI. For example, the managers of a segment with a 15% ROI may not want to invest in a new project with a 10% ROI, even though the cost of capital might be only 8%. Answer (B) is incorrect because The use of ROI does not reflect the relative difficulty of tasks undertaken by managers. Answer (C) is incorrect because ROI can be misleading when the quality of the investment base differs among segments. Answer (D) is correct. Return on investment is the key performance measure in an investment center. ROI is a rate computed by dividing a business unit s profits by its average total assets. ROI is therefore subject to the numerous possible manipulations of the income and investment amounts. For example, a manager may choose not to invest in a project that will yield less than the desired rate of return, or (s)he may defer necessary expenses. Copyright 2008 Gleim Publications, Inc. Page 42

122 [114] Gleim #: Source: CMA Answer (A) is incorrect because The difference between actual direct labor hours and standard direct labor hours allowed is the basis of the variable O/H efficiency variance. Answer (B) is incorrect because The difference between fixed factory O/H applied on the basis of standard allowed direct labor hours and the budgeted fixed factory O/H defines the total fixed O/H variance. Answer (C) is incorrect because Sales volume is irrelevant. Answer (D) is correct. A fixed O/H production volume variance is the difference between the budgeted fixed factory O/H and the O/H applied based on a predetermined rate and standard direct labor hours allowed for the actual output. [115] Gleim #: Source: Publisher Answer (A) is incorrect because The fixed O/H rate per machine hour is $1.32 per DMH. The standard O/H rate per machine hour includes the variable rate per DMH. Answer (B) is incorrect because The variable O/H rate per machine hour is $13.00 per DMH. The standard O/H rate also includes the fixed O/H rate. Answer (C) is correct. The total O/H equation is y = $132,000 + $13(DMH) This equation is derived by summing individual O/H items. The fixed portion needs to be converted to a rate by dividing it by normal capacity. Thus, the fixed O/H rate is $1.32 ($132, ,000). To calculate the total O/H rate, the fixed rate is added to the variable rate. Hence, the total O/H rate per DMH is $14.32 ($ $13.00). Answer (D) is incorrect because The actual total O/H rate (total actual cost actual hours) is $13.76 per DMH. Copyright 2008 Gleim Publications, Inc. Page 43

123 [116] Gleim #: Source: CMA Answer (A) is correct. A well-designed responsibility accounting system establishes responsibility centers within an organization. Managerial performance should be evaluated only on the basis of those factors controllable by the manager. Managers may control revenues, costs, and/or investment activities. The responsibility system should induce management performance that adheres to overall company objectives. Charging the costs of a rush order to the sales manager who authorized the job creates an incentive for that individual to minimize such costs. Answer (B) is incorrect because Contribution accounting emphasizes variable costs and their relationship with revenues, but disassociates fixed costs from the departments responsible. Answer (C) is incorrect because A transfer-pricing system charges one segment of an organization for goods and services that are provided by another segment within the organization. Answer (D) is incorrect because Functional accounting accumulates costs and assets for each service provided or function performed, without necessarily assigning responsibility for such costs. [117] Gleim #: Source: CMA Answer (A) is incorrect because Knowledge about the incurrence of a cost rather than controllability may in practice be an appropriate basis for delegation of responsibility. Answer (B) is incorrect because Fixed costs may also be controllable, and some costs not controllable may need to be assigned. Answer (C) is incorrect because Fixed costs can be controllable. Answer (D) is correct. Managerial performance should ideally be evaluated only on the basis of those factors controllable by the manager. Managers may control revenues, costs, and/or investments in resources. However, controllability is not an absolute. More than one manager may be able to influence a cost, and managers may be accountable for some costs they do not control. In practice, given the difficulties of determining the locus of controllability, responsibility may be assigned on the basis of knowledge about the incurrence of a cost rather than the ability to control it. Accordingly, a successful system is dependent upon the proper delegation of responsibility and the commensurate authority. Copyright 2008 Gleim Publications, Inc. Page 44

124 [118] Gleim #: Source: Publisher Answer (A) is incorrect because The labor rate variance is the variance of price of the labor. Answer (B) is correct. Labor mix and labor yield variances are the components of the total labor efficiency variance. For example, if the labor yield variance was $500 U and the labor mix variance was $320 U, the total labor efficiency variance would be $820 U. Answer (C) is incorrect because The efficiency variance is not labor variances. Answer (D) is incorrect because The total labor variance equals the labor efficiency and the labor rate variances. [119] Gleim #: Source: CMA Answer (A) is correct. The variable overhead efficiency variance equals the product of the variable overhead application rate and the difference between the standard input for the actual output and the actual input. Hence, the variance will be zero if variable overhead is applied on the basis of units of output because the difference between actual and standard input cannot be recognized. Answer (B) is incorrect because The variance will be zero. Answer (C) is incorrect because The variance will be zero. Answer (D) is incorrect because The correlation between the variable overhead and direct labor efficiency variances occurs only when overhead is applied on the basis of direct labor. [120] Gleim #: Source: Publisher Answer (A) is incorrect because The total $6,720 DL rate variance, not the DL rate variance per standard hour times the actual DL hours, should be subtracted in the calculation. Answer (B) is correct. When the actual direct labor rate is unknown, the total direct labor payroll can be found by multiplying the actual hours by the standard rate, then subtracting the favorable labor variance. (32,000 $5.04) $6,720 = $154,560 Answer (C) is incorrect because The $6,720 DL rate variance is favorable, and should therefore be subtracted from, not added to, the standard payroll for the hours worked. Answer (D) is incorrect because The total $6,720 DL rate variance, not the DL rate variance per standard hour times the actual DL hours, should be used in calculating the payroll. Furthermore, a favorable DL rate variance should be subtracted from, not added to, the standard DL costs allowed for hours worked. Copyright 2008 Gleim Publications, Inc. Page 45

125 [121] Gleim #: Source: Publisher Answer (A) is correct. Two-variance analysis considers only budget (controllable) and volume variances. When actual and budgeted fixed overhead are equal, the budget (controllable) variance equals the difference between actual variable overhead and standard hours allowed times the variable overhead rate per hour. Thus, the variance is $3,000 favorable [(49,500 $6) $294,000]. A favorable variance results when actual is less than standard. Answer (B) is incorrect because The difference between standard and actual DLH, times the variable overhead rate per hour, is $9,000. Answer (C) is incorrect because Using actual DLH results in $6,000. Answer (D) is incorrect because The difference between standard and actual DLH, times the variable overhead rate per hour, is $9,000. [122] Gleim #: Source: Publisher Answer (A) is incorrect because This equation defines the market share variance. Answer (B) is incorrect because This equation defines the sales quantity variance. Answer (C) is incorrect because This equation defines the market size variance. Answer (D) is correct. The sales mix variance may be viewed as a sum of variances. For each product in the mix, the difference between actual units sold and its budgeted percentage of the actual total unit sales is multiplied by the budgeted UCM for the product. The results are added to determine the mix variance. An alternative is to multiply total actual units sold by the difference between the budgeted weighted-average UCM for the planned mix and that for the actual mix. [123] Gleim #: Source: CMA Answer (A) is incorrect because A change in product mix does not explain the price variance. Answer (B) is correct. A favorable materials price variance is the result of paying less than the standard price for materials. An unfavorable materials usage variance is the result of using an excessive quantity of materials. If a purchasing manager were to buy substandard materials to achieve a favorable price variance, an unfavorable quantity variance could result from using an excessive amount of poor quality materials. Answer (C) is incorrect because Machine efficiency problems do not explain the price variance. Answer (D) is incorrect because Materials of higher-than-standard quality are more likely to cause an unfavorable price variance and a favorable quantity variance. Copyright 2008 Gleim Publications, Inc. Page 46

126 [124] Gleim #: Source: CMA Answer (A) is incorrect because ROI is based on all assets, not just current investment expenditures. Answer (B) is incorrect because The denominator would not be limited to fixed assets. Answer (C) is correct. ROI is calculated by dividing a business unit s operating income by average total assets. It is a key performance measure of an investment center. Total assets available is the measure that assumes the manager will use all assets without regard to financing. Answer (D) is incorrect because The calculation of ROI does not adjust for imputed interest on invested capital. [125] Gleim #: Source: CMA Answer (A) is incorrect because A service center supports other organizational units. Answer (B) is incorrect because An investment center also has authority over revenues and invested capital. Answer (C) is incorrect because An investment center has authority not only over costs and revenues, but also capital invested. Answer (D) is correct. An investment center is responsible for revenues, expenses, and invested capital. Return on investment is usually the key performance measure of an investment center. [126] Gleim #: Source: CMA Answer (A) is incorrect because Both the purchasing manager and the production manager could be at fault. Answer (B) is correct. An unfavorable materials quantity variance is usually caused by waste, shrinkage, or theft. Alternatively, an unfavorable variance could be attributable to the purchasing department s not buying the proper quality of materials in an attempt to achieve a favorable material price variance. Thus, either the production manager or the purchasing manager could be responsible for a material usage variance. Answer (C) is incorrect because The plant controller is at too high a level for an investigation of a materials usage variance. Answer (D) is incorrect because Both the purchasing manager and the production manager could be at fault. Copyright 2008 Gleim Publications, Inc. Page 47

127 [127] Gleim #: Source: Publisher Answer (A) is correct. The standard direct labor cost for 1,230 actual hours at $6 per hour equals $7,380. The rate variance of $246 was unfavorable, which means that the actual cost was $246 higher than the standard cost, or $7,626 ($7,380 + $246). Answer (B) is incorrect because The standard cost for actual hours is $7,380. It does not adjust for the unfavorable rate variance. Answer (C) is incorrect because The amount of $7,200 is based on the efficiency variance rather than the rate variance. Answer (D) is incorrect because The amount of $7,134 assumes a favorable rate variance. [128] Gleim #: Source: CMA Answer (A) is correct. In the long run, these costs should be the same. In the short run, however, they may differ because standard costs represent what costs should be, whereas budgeted costs are expected actual costs. Budgeted costs may vary widely from standard costs in certain months, but, for an annual budget period, the amounts should be similar. Answer (B) is incorrect because Standard costs are not necessarily determined by engineering studies. Answer (C) is incorrect because Standard costs are usually based on currently attainable standards applicable when a process is under control. They are set without regard to variances or slack. Answer (D) is incorrect because Budgeted costs include expected deviations from the standards. [129] Gleim #: Source: CMA Answer (A) is incorrect because The volume variance concerns output levels rather than the efficiency of production. Answer (B) is incorrect because The fixed overhead volume variance is calculated on the assumption that fixed costs are constant. Answer (C) is correct. The fixed overhead volume variance is the difference between budgeted fixed costs and actual overhead applied, which equals the budgeted fixed overhead rate times the standard input allowed for the actual output. It is solely a measure of capacity usage and does not signify that fixed costs were more or less than budgeted. Answer (D) is incorrect because The fixed overhead volume variance concerns the application of fixed cost to product and does not encompass revenue or sales concepts in any way. Copyright 2008 Gleim Publications, Inc. Page 48

128 [130] Gleim #: Source: Publisher Answer (A) is incorrect because Goal congruence is the sharing of goals by supervisors and subordinates. Answer (B) is incorrect because Autonomy is the extent to which individuals have the authority to make decisions. Answer (C) is correct. Motivation is the desire to attain a specific goal (goal congruence) and the commitment to accomplish the goal (managerial effort). Managerial motivation is therefore a combination of managerial effort and goal congruence. Answer (D) is incorrect because Managerial effort is the extent of the attempt to accomplish a specific goal. [131] Gleim #: Source: CMA Answer (A) is incorrect because Financial performance measures are among the tools used in a typical balanced scorecard. Answer (B) is incorrect because Employee innovation and learning is one of the perspectives on the business commonly used in a balanced scorecard. Answer (C) is correct. A typical balanced scorecard classifies critical success factors and measures into one of four perspectives on the business: financial, customer satisfaction, internal business processes, and learning and growth. Answer (D) is incorrect because A typical balanced scorecard contains critical success factors and measures focused on internal business processes. [132] Gleim #: Source: CMA Answer (A) is incorrect because Linking authority to responsibility through the budget is a sound principle of responsibility accounting. Answer (B) is incorrect because Responsibility accounting is based on each level of management being responsible for its department s operations and employees. Answer (C) is correct. Management of a cost center is, by definition, only responsible for costs. To make management answerable for revenues as well undercuts the purpose of sound responsibility accounting. Answer (D) is incorrect because Any well-designed responsibility accounting system should encourage employee involvement and participation. Copyright 2008 Gleim Publications, Inc. Page 49

129 [133] Gleim #: Source: Publisher Answer (A) is incorrect because Profitability is a measure that includes external considerations. Answer (B) is correct. Cycle time is the manufacturing time to complete an order. Thus, cycle time is strictly related to internal processes. Profitability is a combination of internal and external considerations. Customer satisfaction and market share are related to how customers perceive a product and how competitors react. Answer (C) is incorrect because Customer satisfaction is a measure that includes external considerations. Answer (D) is incorrect because Market share is a measure that includes external considerations. [134] Gleim #: Source: CMA Answer (A) is incorrect because The variance is favorable. Answer (B) is incorrect because The amount of the fixed cost variance is $4,000. Answer (C) is correct. The variable cost flexible budget variance is equal to the difference between actual variable costs and the product of the actual quantity sold and the budgeted unit variable cost ($180,000 6,000 = $30). Answer (D) is incorrect because The amount of the fixed cost variance is $4,000. [135] Gleim #: Source: CMA Answer (A) is incorrect because A favorable variance exists. The standard amount for the actual output exceeded the actual amount. Answer (B) is correct. The direct materials quantity variance equals the difference between the standard and actual quantities times the standard price. Hence, the favorable direct materials quantity variance is $4,950 [1,650 units (60 standard pounds 58 actual pounds) $1.50 standard]. Answer (C) is incorrect because The amount of the direct materials price variance is $14,355. Answer (D) is incorrect because The amount of the direct materials price variance is $14,355. Copyright 2008 Gleim Publications, Inc. Page 50

130 [136] Gleim #: Source: CIA 1187 II-10 Answer (A) is incorrect because Accountability is adequately established by the inventory entries. Answer (B) is correct. One step in the control process is measurement of actual results against standards. For example, the standard quantity of materials for a given output is established prior to production. If the actual materials usage exceeds the standard, the variance is unfavorable and corrective action may be needed. Answer (C) is incorrect because Variance entries cannot safeguard assets, they can only provide information for use in controlling the cost of production. Answer (D) is incorrect because Internal cost accounting information need not comply with GAAP. [137] Gleim #: Source: Publisher Answer (A) is incorrect because The variance of $ favorable is based on the actual mix of purchases. Answer (B) is incorrect because The direct materials mix variance is $ favorable. Answer (C) is correct. The direct materials yield variance equals the difference between the actual input and the standard input allowed for the actual output times the budgeted weighted-average standard cost per input unit at the standard mix. The standard input for the actual output was 84,000 liters (140 batches 600 liters per batch). The standard mix budgeted weighted-average standard unit cost is $.225 per liter ($135 total cost 600 liters). Thus, the yield variance is $94.50 unfavorable [(84,000 liters allowed 84,420 liters used) $.225]. Answer (D) is incorrect because The direct materials quantity variance is $ favorable. [138] Gleim #: Source: Publisher Answer (A) is incorrect because The balanced scorecard approach uses financial and nonfinancial measures. Answer (B) is incorrect because The balanced scorecard approach uses multiple measures. Answer (C) is incorrect because The balanced scorecard approach uses financial and nonfinancial measures. Answer (D) is correct. The trend in managerial performance evaluation is the balanced scorecard approach. Multiple measures of performance permit a determination as to whether a manager is achieving certain objectives at the expense of others that may be equally or more important. These measures may be financial or nonfinancial and usually include items in four categories: profitability; customer satisfaction; innovation; and efficiency, quality, and time. Copyright 2008 Gleim Publications, Inc. Page 51

131 [139] Gleim #: Source: Publisher Answer (A) is incorrect because Investment centers and profit centers are responsible for revenues. Answer (B) is incorrect because A cost center is not responsible for revenues. Answer (C) is correct. In investment centers, managers are responsible for all activities, including costs, revenues, and investments. An investment center is a profit center with significant control over the amount of capital invested. This control extends to investments such as receivables and property, plant, and equipment, as well as entry into new markets. A cost center, for example, a production department, is responsible for costs only. A profit center, for example, the appliance department in a retail store, is responsible for both revenues and expenses. Answer (D) is incorrect because The performance reports of an investment center and a profit center but not a cost center include controllable revenues. [140] Gleim #: Source: Publisher Answer (A) is correct. Allocated fixed overhead should not be included in internal reports based on a responsibility accounting system because it cannot be controlled by a manager of a responsibility center. Answer (B) is incorrect because A main purpose of internal reports is to show the variance between actual and budgeted controllable costs so corrective action can be taken when and where needed. Answer (C) is incorrect because The organizational chart, which outlines the authority-responsibility chain of a company, is an integral part of the responsibility accounting system. Answer (D) is incorrect because In responsibility accounting, managers are only held responsible for costs they have the authority to control. [141] Gleim #: Source: Publisher Answer (A) is correct. The direct labor efficiency variance equals the difference between the standard and actual amounts of labor hours times the standard rate. The standard rate is $10 per hour. The actual amount of labor hours is 3,200 hours. The standard amount of labor hours is 3,000 (2 hours 1,500 units). Thus, the direct labor efficiency variance is $2,000 [(3,000 3,200) $10]. The variance is unfavorable because more labor hours were used than the standard. Answer (B) is incorrect because The difference between the direct labor efficiency variance and the product of the cost difference ($.25) and the standard hours allowed is $1,250. Answer (C) is incorrect because The amount of $2,050 uses the actual labor price. Answer (D) is incorrect because The difference between the labor efficiency and rate variances is $1,200. Copyright 2008 Gleim Publications, Inc. Page 52

132 [142] Gleim #: Source: CMA Answer (A) is incorrect because Reciprocal allocation is a method of allocating service department costs to producing departments. Answer (B) is incorrect because A functional accounting system is one in which costs are accumulated by the nature of the function performed. Answer (C) is incorrect because Contribution accounting is a system in which costs are divided according to whether they are fixed or variable. Answer (D) is correct. Profitability accounting is accounting for profit centers. When sales managers have the authority and responsibility to control costs, they are a profit center. [143] Gleim #: Source: CMA Answer (A) is correct. Most variances are of significance to someone who is responsible for that variance. However, a fixed overhead volume variance is often not the responsibility of anyone other than top management. The fixed overhead volume variance equals the difference between budgeted fixed overhead and the amount applied (standard input allowed for the actual output standard rate). It can be caused by economic downturns, labor strife, bad weather, or a change in planned output. Thus, a fixed overhead volume variance resulting from a top management decision to reduce output has fewer behavioral implications than other variances. Answer (B) is incorrect because A favorable direct labor rate variance related to hiring is a concern of the human resources function. The favorable rate variance might be more than offset by an unfavorable direct labor efficiency variance or a direct materials quantity variance (if waste occurred). Answer (C) is incorrect because An unfavorable direct labor efficiency variance reflects upon production workers who have used too many hours. Answer (D) is incorrect because An unfavorable direct materials quantity variance affects production management and possibly the purchasing function. It may indicate an inefficient use of materials or the use of poor quality materials. Copyright 2008 Gleim Publications, Inc. Page 53

133 [144] Gleim #: Source: Publisher Answer (A) is incorrect because A budget allowance based on actual input is not used in the computation of the controllable variance. Answer (B) is incorrect because A budget allowance based on applied fixed overhead is used to determine the volume variance. Answer (C) is correct. In two-way analysis, the total overhead variance (fixed + variable) is composed of the volume variance (total fixed overhead cost budgeted fixed overhead applied based on standard input allowed for the actual output) and the controllable (budget) variance (the difference between the total actual overhead and the volume variance). Hence, the controllable (budget) variance is the sum of 1) the difference between actual and budgeted fixed overhead and 2) the difference between actual variable overhead and the variable overhead budgeted based on the standard input allowed for the actual output. Answer (D) is incorrect because A budget allowance based on actual input is not used in the computation of the controllable variance. [145] Gleim #: Source: CIA 594 III-40 Answer (A) is correct. The calculation of transfer prices in the international arena must be systematic. A scheme for calculating transfer prices for a firm may correctly price the firm s product in Country A but not in Country The product may be overpriced in Country B, causing sales to be lower than anticipated; or, the product may be underpriced in Country B, and the authorities may allege that the firm is dumping its product there. Answer (B) is incorrect because Properly chosen transfer prices allocate revenues and expenses to divisions in various countries. These numbers are used as part of the input for the performance evaluation of each division. Answer (C) is incorrect because Transfer prices motivate division managers to buy parts and products (from either internal or external suppliers) at the lowest possible prices and to sell their products (to either internal or external customers) at the highest possible prices. Hence, each division has a profit making orientation. Answer (D) is incorrect because Properly chosen transfer prices allow firms to attempt to minimize worldwide taxes by producing various parts of the products in different countries and strategically transferring the parts at various systematically calculated prices. Copyright 2008 Gleim Publications, Inc. Page 54

134 [146] Gleim #: Source: CMA Answer (A) is correct. The fixed cost variance equals the difference between actual fixed costs and budgeted fixed costs. Answer (B) is incorrect because The variance is unfavorable. Answer (C) is incorrect because The variable cost variance is $5,000. Answer (D) is incorrect because The variable cost variance is $5,000. [147] Gleim #: Source: Publisher Answer (A) is correct. Three-way analysis of variance combines the fixed overhead budget (spending) and variable overhead spending variances of four-way analysis of variance. It includes spending, efficiency, and volume variances. The spending variance is the difference between the actual overhead incurred and the budgeted overhead for the actual input. Budgeted overhead [$10,500 + (5,250 $3.80)] $ 30,450 Actual overhead (22,500) $ 7,950 F Answer (B) is incorrect because The amount of $9,660 is based on standard, not actual, hours. Answer (C) is incorrect because Using actual fixed overhead to calculate budgeted overhead results in $8,250. Answer (D) is incorrect because The spending variance is favorable. [148] Gleim #: Source: CMA Answer (A) is incorrect because Sales of the division would appear on the statement. Answer (B) is incorrect because The division s fixed selling expenses are separable fixed costs. Answer (C) is incorrect because Variable costs of the division are included. Answer (D) is correct. Segment margin is the contribution margin for a segment of a business minus fixed costs. It is a measure of long-run profitability. Thus, an allocation of the corporate officers salaries should not be included in segment margin because they are neither variable costs nor fixed costs that can be rationally allocated to the segment. Other items that are often not allocated include corporate income taxes, interest, company-wide R&D expenses, and central administration costs. Copyright 2008 Gleim Publications, Inc. Page 55

135 [149] Gleim #: Source: CIA 1193 IV-18 Answer (A) is incorrect because Marginal cost based transfer prices provide more of an incentive to the purchasing division to buy internally and thus use idle facilities of the selling division than does the usually higher market-based transfer price. Answer (B) is incorrect because Corporate politics is less of a factor than in other methods, such as a negotiated transfer price. Market-based prices are objective. Answer (C) is incorrect because Marginal production cost transfer prices do not relate to market-based transfer prices. Answer (D) is correct. A transfer price is the price charged in an intercompany transaction. Market-based prices provide market discipline because efficient internal suppliers will tend to prosper, thereby enhancing the overall long-term competitiveness of the firm. [150] Gleim #: Source: CMA Answer (A) is incorrect because Sales has no effect on the materials efficiency variance. Answer (B) is incorrect because Sales has no effect on the materials efficiency variance. Answer (C) is correct. The materials efficiency variance is the difference between actual and standard quantities used in production, times the standard price. An unfavorable materials efficiency variance is usually caused by wastage, shrinkage, or theft. Thus, it may be the responsibility of the production department because excess usage would occur while the materials are in that department. In addition, industrial engineering may play a role because it is responsible for design of the production process. Answer (D) is incorrect because Purchasing rarely can control the materials efficiency variance. [151] Gleim #: Source: CMA Answer (A) is incorrect because The unit standard cost is $2.50. Answer (B) is incorrect because The total standard cost of direct materials for each unit of finished product is $5. Answer (C) is incorrect because The actual cost per unit of direct materials is $3. Answer (D) is correct. Given that the company produced 12,000 units with a total standard cost for direct materials of $60,000, the standard cost must be $5.00 ($60,000 12,000 units) per unit of finished product. Because each unit of finished product requires two units of direct materials, the standard unit cost for direct materials must be $2.50. Copyright 2008 Gleim Publications, Inc. Page 56

136 [152] Gleim #: Source: CMA Answer (A) is incorrect because A return less than the cost of capital would have decreased residual income. Answer (B) is incorrect because A negative NPV would have decreased residual income. Answer (C) is incorrect because A positive NPV would increase residual income. Answer (D) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. If residual income remained unchanged, then the return on the project must have been the same as the firm s cost of capital. [153] Gleim #: Source: CIA 587 IV-15 Answer (A) is incorrect because To control costs, the production department may be charged with the overtime costs. Answer (B) is correct. The sales department should be responsible for the overtime costs because it can best judge whether the additional cost of the rush order is justified. The production department also may be held responsible for the overtime costs because charging the full overtime cost to the sales department would give the production department no incentive to control these costs. However, the human resources department would never be charged with the overtime costs because it has no effect on the incurrence of production overtime. Answer (C) is incorrect because To control costs, the sales department may be charged with the overtime costs. Answer (D) is incorrect because The sales department and the production department may be charged with the overtime costs. [154] Gleim #: Source: CMA Answer (A) is correct. A cost center is a responsibility center that is accountable only for costs. The cost center is the least complex type of segment because it has no responsibility for revenues or investments. Answer (B) is incorrect because A profit center is a segment responsible for both revenues and costs. A profit center has the authority to make decisions concerning markets and sources of supply. Answer (C) is incorrect because An investment center is a responsibility center that is accountable for revenues (markets), costs (sources of supply), and invested capital. Answer (D) is incorrect because A contribution center is responsible for revenues and variable costs, but not invested capital. Copyright 2008 Gleim Publications, Inc. Page 57

137 [155] Gleim #: Source: Publisher Answer (A) is correct. If 1.5 yards remain in each unit after spoilage of 25% of the direct materials input, the total per unit input must have been 2 yards (1.5 75%). The standard unit direct materials cost is therefore $4.00 (2 yards $2). Answer (B) is incorrect because The cost per unit excluding spoilage is $3.00. Answer (C) is incorrect because The 1.5 yards of good output should be divided (not multiplied) by 75% to determine the standard yards of material per unit. Answer (D) is incorrect because The amount of $3.75 is found by adding 25% of the materials of the finished product as spoilage and then multiplying by the $2.00 cost per yard [( ) $2]. [156] Gleim #: Source: Publisher Answer (A) is incorrect because It defines the materials mix variance. Answer (B) is incorrect because It states the definition of the labor mix variance. Answer (C) is correct. The materials yield variance is the difference between the standard input allowed and actual input, times the budgeted average unit price. The materials yield variance is a calculation based on the assumption that the standard mix was maintained in producing a given output. Answer (D) is incorrect because It describes the labor yield variance. [157] Gleim #: Source: Publisher Answer (A) is incorrect because Standard costing and flexible budgeting are the most appropriate techniques. Answer (B) is incorrect because Standard costing and flexible budgeting are the most appropriate techniques. Answer (C) is incorrect because Standard costing and flexible budgeting are the most appropriate techniques. Answer (D) is correct. A flexible budget is a set of static budgets prepared in anticipation of varying levels of activity. Unlike a static budget, the use of a flexible budget permits effective evaluation of actual results when actual and expected production differ. Setting cost standards facilitates preparation of a flexible budget. For example, a standard unit variable cost is useful in determining the total variable cost for a given output. Copyright 2008 Gleim Publications, Inc. Page 58

138 [158] Gleim #: Source: CMA Sample Q3-11 Answer (A) is incorrect because The variance of $117 unfavorable is based on the standard input for 1,300 units. Answer (B) is incorrect because The variance of $150 unfavorable is based on the assumption that 5,000 lbs. were purchased. Answer (C) is correct. The materials purchase price variance equals the quantity purchased multiplied by the difference between the standard price and the actual price, or $135 unfavorable [4,500 lbs. ($.75 $.72)]. Answer (D) is incorrect because The variance of $123 unfavorable is based on the actual quantity used. [159] Gleim #: Source: CMA Answer (A) is incorrect because The buying division is indifferent as to whether to purchase internally or externally. Answer (B) is incorrect because The transfer is at a loss (relative to full cost) to the selling division, although the company as a whole will benefit. Answer (C) is correct. If the selling division has excess capacity, it should lower its transfer price to match the outside offer. This decision optimizes the profits of the company as a whole by allowing for use of capacity that would otherwise be idle. Answer (D) is incorrect because This action is congruent with the goals of Parkside. The use of idle capacity enhances profits. [160] Gleim #: Source: CMA Answer (A) is incorrect because Direct fixed costs controllable by the segment manager affect both performance measures. Answer (B) is incorrect because Unallocated fixed costs do not affect either performance measure. Answer (C) is incorrect because Direct variable costs affect both performance measures. Answer (D) is correct. The performance of the segment is judged on all costs assigned to it, but the segment manager is only judged on costs that he or she can control. Some fixed costs are imposed on segments by the organization s upper management, and they are thus beyond the segment manager s control. These direct costs controllable by others make up the difference between segment manager performance and segment performance. Copyright 2008 Gleim Publications, Inc. Page 59

139 [161] Gleim #: Source: Publisher Answer (A) is incorrect because Using the budgeted variable overhead and by reversing the order of subtraction results in $1,800 unfavorable. Answer (B) is incorrect because Using the budgeted variable overhead results in $1,800 favorable. Answer (C) is correct. The variable overhead spending variance is found by subtracting actual variable overhead from the product of actual hours and the standard rate. Accordingly, the variable overhead spending variance is $1,000 favorable [(9,900 $2) $18,800]. Answer (D) is incorrect because Reversing the order of subtraction results in $1,000 unfavorable. [162] Gleim #: Source: Publisher Answer (A) is correct. Materials yield and mix variances are the components of the materials usage (quantity or efficiency) variance. They are useful only if certain classes or types of materials can be substituted for each other. The materials mix variance is calculated to isolate the effects of the change in the mix of materials used. Thus, it equals the sum of the products of the difference between the amount of each class of materials actually used and the standard amount allowed times the difference between the budgeted price for that class and the budgeted weighted-average materials cost for all materials in the mix. Because substitutability of materials may not be possible in every situation, the materials mix variance is suitable for analysis only when the manager has some control over the composition of the mix. Answer (B) is incorrect because It states the definition of the materials yield variance. Answer (C) is incorrect because The mix variance is based on budgeted prices. Answer (D) is incorrect because It defines the labor yield variance. [163] Gleim #: Source: Publisher Answer (A) is incorrect because Using a standard hours per unit rate of 9 hours and reversing the order of subtraction results in $9,900 unfavorable. Answer (B) is incorrect because Using a standard hours per unit rate of 9 hours results in $9,900 favorable. Answer (C) is incorrect because Multiplying by the budgeted number of units, 2,000, instead of actual, 2,200, results in $900 unfavorable. Answer (D) is correct. The variable overhead efficiency variance is found by multiplying the difference between standard hours and actual hours by the standard rate. The number of standard hours is calculated by multiplying the actual units by the standard hours per unit. Thus, the number of standard hours is 9,900 ($2, hours per unit), and the variable overhead efficiency variance is $0 [(9,900 9,900) $2]. Copyright 2008 Gleim Publications, Inc. Page 60

140 [164] Gleim #: Source: CMA Answer (A) is incorrect because The amount of $17,250 is the sales volume variance. Answer (B) is correct. The first step is to calculate the contribution margin (CM) for a composite unit using budgeted mix percentages and budgeted margins: Product E: {[5,500 (5, ,500)] $4.50} = $2.475 Product F: {[4,500 (5, ,500)] $10.00} = $4.500 Composite Budget UCM $6.975 This process is repeated using actual mix percentages and budgeted margins: Product E: {[6,000 (6, ,000)] $4.50} = $2.250 Product F: {[6,000 (6, ,000)] $10.00} = $5.000 Composite Actual UCM $7.250 The difference between the two is multiplied by the number of units sold to arrive at the sales mix variance [(6, ,000) ($7.250 actual $6.975 budget) = (12,000 $0.275) = $3,300 favorable]. Answer (C) is incorrect because Improperly using unweighted contribution margins results in $3,420 favorable. Answer (D) is incorrect because The sales volume variance in units multiplied by the actual price equals $18,150 favorable; it is not a mix variance. [165] Gleim #: Source: Publisher Answer (A) is incorrect because The amount of $(20,000) assumes that ROI in dollars is $25,000 (operating income) and that the targeted amount is $45,000 ($750,000 6% of sales). Answer (B) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. The rate used is ordinarily the weighted-average cost of capital. Some entities measure managerial performance in terms of the amount of residual income rather than the percentage ROI. Assuming the investment base is defined as total assets available, Charlie s targeted amount is $30,000 ($500,000 total assets 6% cost of capital). Assuming that operating income of $25,000 is the ROI in dollars, residual income was $(5,000). Answer (C) is incorrect because The return on sales was 3.33%. Answer (D) is incorrect because This percentage is the cost of capital. Copyright 2008 Gleim Publications, Inc. Page 61

141 [166] Gleim #: Source: CMA Answer (A) is incorrect because Worker performance is a possible cause of a materials efficiency variance. Answer (B) is correct. An unfavorable materials quantity or usage (efficiency) variance can be caused by a number of factors, including waste, shrinkage, theft, poor performance by production workers, nonskilled workers, or the purchase of below-standard-quality materials by the purchasing department. Changes in product design can also affect the quantity of materials used. Sales volume of the product should not be a contributing factor to a materials efficiency variance. Answer (C) is incorrect because Purchasing department actions are possible causes of a materials efficiency variance. Answer (D) is incorrect because Product design is a possible cause of a materials efficiency variance. [167] Gleim #: Source: CMA Answer (A) is incorrect because The fixed overhead per labor hour is $25. Answer (B) is incorrect because The variable portion of the overhead application rate is $10. Answer (C) is correct. The predetermined overhead application rate is $15 [($1,200,000 FOH + $2,400,000 VOH) 240,000 machine hours]. Answer (D) is incorrect because The fixed overhead application rate is $5. [168] Gleim #: Source: CMA Answer (A) is incorrect because Efficiency variances are applicable to variable costs. Answer (B) is incorrect because Efficiency variances are applicable to variable costs. Answer (C) is incorrect because Efficiency variances are applicable to variable costs. Answer (D) is correct. Variable overhead variances can be subdivided into spending and efficiency components. However, fixed overhead variances do not have an efficiency component because fixed costs, by definition, are not related to changing levels of output. Fixed overhead variances are typically subdivided into a budget (or fixed overhead spending) variance and a volume variance. Copyright 2008 Gleim Publications, Inc. Page 62

142 [169] Gleim #: Source: CMA Answer (A) is incorrect because The fixed overhead spending variance is favorable since the actual amount was less than budgeted. Answer (B) is incorrect because The fixed overhead spending variance is calculated based on budgeted fixed overhead. Answer (C) is correct. Actual fixed overhead was $575,000. Budgeted fixed overhead was $3 per unit at an estimated production of 200,000 units; a total of $600,000. The difference of $25,000 is a favorable variance because the actual amount was less than that budgeted. Answer (D) is incorrect because The fixed overhead spending variance is the difference between the actual fixed factory overhead and the amount budgeted. [170] Gleim #: Source: CMA Answer (A) is correct. Fixed factory O/H in a standard costing system is applied to the product based on the predetermined O/H rate multiplied by the standard hours allowed for the actual output. Thus, the applied fixed factory O/H is limited to the standard amount. Answer (B) is incorrect because The applied fixed factory O/H is limited to the standard amount determined using the standard O/H rate per DL hour, not the actual O/H cost per DL hour. Answer (C) is incorrect because The O/H application is not based on units of production for the AH. Answer (D) is incorrect because The standard hours allowed for the actual units of finished output is used, not the AH. Copyright 2008 Gleim Publications, Inc. Page 63

143 [171] Gleim #: Source: CIA 1190 IV-18 Answer (A) is incorrect because The sales-volume variance is the difference between the flexible-budget contribution margin ($110,000) and the master-budget amount ($120,000). The $10,000 variance is unfavorable because the flexiblebudget amount is less than the master-budget contribution margin. Answer (B) is correct. The sales-volume variance is the difference between the flexible-budget contribution margin and the static (master) budget contribution margin. Its components are the sales quantity and sales mix variances. The contribution margin is used rather than operating income because fixed costs are the same in both budgets. Unit sales price and variable cost are held constant so as to isolate the effect of the difference in unit sales volume. Because the flexible-budget contribution margin ($110,000) is less than the master-budget amount ($120,000), the variance ($10,000) is unfavorable. Answer (C) is incorrect because The difference between the flexible-budget revenue ($220,000) and the actual revenue ($208,000) is $12,000. The sales-volume variance is measured as the difference between the flexible-budget contribution margin and the master-budget contribution margin. Answer (D) is incorrect because The difference between actual and flexible variable costs is $11,000. The sales-volume variance is the difference between the flexible-budget contribution margin ($110,000) and the master-budget amount ($120,000). The $10,000 variance is unfavorable because the flexible-budget amount is less than the master-budget contribution margin. [172] Gleim #: Source: CMA Answer (A) is incorrect because The variance is unfavorable. Answer (B) is incorrect because The difference between the standard labor cost ($9,500,000) and total actual (fixed + variable) cost ($9,738,000) is $238,000. Answer (C) is incorrect because The efficiency variance is based on standard hours for actual production levels--in this case, 190,000 hours. Answer (D) is correct. The labor efficiency variance is the difference between standard and actual hours, multiplied by the standard cost per hour. The standard labor rate is $50 per hour, and the standard time allowed for 9,500 articles is 190,000 hours (9,500 20). Actual hours worked totaled 192,000. Thus, an unfavorable variance of 2,000 hours occurred. The unfavorable labor efficiency variance is therefore $100,000 (2,000 hours $50). Copyright 2008 Gleim Publications, Inc. Page 64

144 [173] Gleim #: Source: Publisher Answer (A) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. It equals the excess of business unit profit over the product of average total assets and a target rate of return. If a manager has $19,000,000 of invested capital ($17,200,000 of plant and equipment + $1,800,000 of working capital), a 15% imputed interest charge equals $2,850,000. Adding $2,000,000 of residual income to the imputed interest results in a target profit of $4,850,000. This profit can be achieved if costs are $25,150,000 ($30,000,000 revenue $4,850,000 profit). Answer (B) is incorrect because Scenario 3 requires maximum costs of $25,330,000 to reach the target. Answer (C) is incorrect because Scenario 4 requires maximum costs of $25,600,000 to reach the target. Answer (D) is incorrect because Scenario 2 requires maximum costs of $26,220,000 to reach the target. [174] Gleim #: Source: Publisher Answer (A) is correct. Managerial effort is the extent to which a manager attempts to accomplish a goal. Managerial effort may include psychological as well as physical commitment to a goal. Answer (B) is incorrect because Motivation is the desire and the commitment to achieve a specific goal. Answer (C) is incorrect because Goal congruence is the sharing of goals by supervisors and subordinates. Answer (D) is incorrect because Autonomy is the extent to which individuals have the authority to make decisions. [175] Gleim #: Source: Publisher Answer (A) is incorrect because A price variance is the difference between the expected and actual outlays caused by a variation in price. Answer (B) is incorrect because A mix variance results when the actual sales or production mix differs from the budgeted mix. Answer (C) is incorrect because The combined price-quantity variance is the total actual outlay (actual quantity actual price) minus the budgeted outlay (standard price standard quantity). Answer (D) is correct. The volume variance is the difference between budgeted fixed overhead and the amount applied based on the standard overhead rate and standard input for the actual output. Copyright 2008 Gleim Publications, Inc. Page 65

145 [176] Gleim #: Source: Publisher Answer (A) is incorrect because Net income is an after-tax amount, i.e., it only appears on the corporate, not the business unit, income statement. Answer (B) is incorrect because Dollar sales do not give a measure of operating performance based on resources required. Answer (C) is incorrect because Profit percentages do not give a measure of operating performance based on resources required. Answer (D) is correct. Each investment center of a business should be evaluated based upon return on investment (ROI) to judge operating performance. In essence, ROI is the business unit s operating income stated as a percentage of average total assets (i.e., resources deployed). [177] Gleim #: Source: CMA Answer (A) is incorrect because Any past cost of capital or interest rate is irrelevant in the evaluation of future management performance. What is important is the rate that could or should be earned in the present period. Answer (B) is correct. Normally, management sets a target rate that all managers are expected to achieve. Anything above or below this normal return will catch the attention of higher management. Answer (C) is incorrect because Any past cost of capital or interest rate is irrelevant in the evaluation of future management performance. What is important is the rate that could or should be earned in the present period. Answer (D) is incorrect because Any past cost of capital or interest rate is irrelevant in the evaluation of future management performance. What is important is the rate that could or should be earned in the present period. [178] Gleim #: Source: Publisher Answer (A) is correct. Overtime premiums arising from a heavy overall volume of work rather than from the requirements of a specific job are deemed to apply to all production. Hence, they are treated as indirect costs and assigned to overhead. Answer (B) is incorrect because The labor efficiency variance concerns amounts of labor, not rates. Answer (C) is incorrect because Overtime wages do not affect the yield variance. Answer (D) is incorrect because The quantity (usage) variance is a direct materials variance that is not affected by overtime wages. Copyright 2008 Gleim Publications, Inc. Page 66

146 [179] Gleim #: Source: CMA Answer (A) is incorrect because Marketing centers are a functional area, not a performance center. Answer (B) is correct. Responsibility centers may be categorized as cost centers (managers accountable for costs), revenue centers (managers accountable for revenues), profit centers [managers accountable for revenues and costs, i.e., for markets (revenues) and sources of supply (costs)], and investment centers (managers accountable for revenues, costs, and investments). Cost centers is the best answer because it is the most general. All subunits have costs but may not have revenues or investments. Answer (C) is incorrect because It may not be feasible for a given company to organize in product centers. Answer (D) is incorrect because Some subunits may not earn revenue. [180] Gleim #: Source: Publisher Answer (A) is incorrect because Reversing the order of subtraction results in $1,745 favorable. Answer (B) is correct. The static budget variance is the difference between the standard cost of labor (i.e., the total variance to be explained) and the actual cost of labor. Based on the standard hours and rates given, the standard cost of labor is $159,060 [(7,920 $12.00) + (4,620 $8.00) + (4,510 $6.00)]. The actual cost of labor is $160,805 ($100,245 + $35,260 + $25,300). Thus, the static budget variance is $1,745 unfavorable ($159,060 standard $160,805 actual). Answer (C) is incorrect because Reversing the order of subtraction for the flexible budget variance results in $2,205 favorable. Answer (D) is incorrect because The flexible budget variance is $2,205 unfavorable. Copyright 2008 Gleim Publications, Inc. Page 67

147 [181] Gleim #: Source: CIA 1191 IV-19 Answer (A) is incorrect because The market price will better achieve the goals of a transfer pricing system. The selling division would not have as strong an incentive to control costs if some variant of actual cost is used. Answer (B) is incorrect because The market price will better achieve the goals of a transfer pricing system. The selling division would not have as strong an incentive to control costs if some variant of actual cost is used. Answer (C) is correct. The three basic criteria that the transfer pricing system in a decentralized company should satisfy are to (1) provide information allowing central management to evaluate divisions with respect to total company profit and each division s contribution to profit, (2) stimulate each manager s efficiency without losing each division s autonomy, and (3) motivate each divisional manager to achieve his/her own profit goal in a manner contributing to the company s success. The market price should be used as the transfer price to avoid waste and maximize efficiency in a competitive economy (an outside market in which all padding produced can be sold). This price also measures the product s profitability and the division managers performance in a competitive environment. Answer (D) is incorrect because The market price will better achieve the goals of a transfer pricing system. The selling division would not have as strong an incentive to control costs if some variant of actual cost is used. The efficiency of the purchasing division is also promoted when it must treat the selling division as if it were an independent vendor. [182] Gleim #: Source: CMA Answer (A) is incorrect because The amount of $25,690,000 results from subtracting working capital from plant and equipment in determining invested capital. Answer (B) is incorrect because This level of cost would result in a residual income greater than $2,000,000. Answer (C) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. If a manager has $19,000,000 of invested capital ($17,200,000 of plant and equipment + $1,800,000 of working capital), a 15% imputed interest charge equals $2,850,000. Adding $2,000,000 of residual income to this opportunity cost of capital results in a target profit of $4,850,000. This profit can be achieved if costs are $25,150,000 ($30,000,000 revenue $4,850,000 profit). Answer (D) is incorrect because This level of cost would result in a residual income greater than $2,000,000. Copyright 2008 Gleim Publications, Inc. Page 68

148 [183] Gleim #: Source: CMA Answer (A) is incorrect because The efficiency variances would not cause the favorable price variance. Answer (B) is incorrect because The purchase of higher than standard materials would lead to an unfavorable price variance. Answer (C) is correct. A favorable price variance might indicate that cheaper materials of lower quality were purchased and that greater usage was necessary. Answer (D) is incorrect because Labor mix problems would cause labor variances, not material variance. [184] Gleim #: Source: Publisher Answer (A) is incorrect because The amount of $515 is based on the budgeted weighted-average rate for the actual mix. Answer (B) is correct. The direct labor yield variance is the difference between budgeted and actual hours times the budgeted weighted-average rate for the planned mix. Total hours worked were 1,575 ( ), standard hours allowed equaled 1,500 ( ), and the budgeted weighted-average rate for the planned mix was $6.67 {[(500 $8) + (500 $7) + (500 $5)] 1,500 standard DLH}. Thus, the variance is $500 unfavorable ($ ). Answer (C) is incorrect because The direct labor efficiency variance is $820. Answer (D) is incorrect because The direct labor mix variance is $320. [185] Gleim #: Source: CMA Answer (A) is correct. The variable overhead spending and efficiency variances are the components of the total variable overhead variance. Given that actual variable overhead was $80,000 and the flexible budget amount was $90,000, the total variance is $10,000 favorable. If the overhead spending variance is $2,000 favorable, the efficiency variance must be $8,000 favorable ($10,000 total $2,000 spending). At a rate of $20 per hour, this variance is equivalent to 400 direct labor hours ($8,000 $20). Answer (B) is incorrect because The variances are favorable. Answer (C) is incorrect because The variances are favorable. Answer (D) is incorrect because The number of 100 direct labor hours are equivalent to the spending variance (100 hours $20 = $2,000). Copyright 2008 Gleim Publications, Inc. Page 69

149 [186] Gleim #: Source: Publisher Answer (A) is incorrect because Direct materials and direct labor variances are based on standard costs. Answer (B) is incorrect because Direct materials and direct labor variances are based on standard costs. Answer (C) is incorrect because Direct materials and direct labor variances are based on standard costs. Answer (D) is correct. The materials price variance is calculated by multiplying the difference between actual price and standard price by the actual units purchased. The materials usage variance is calculated by multiplying the difference between the actual usage and the standard usage by the standard price. Thus, the standard unit cost is used to compute both variances. [187] Gleim #: Source: CMA Answer (A) is incorrect because The variance of $60,000 favorable is based on 100,000 hours, not the actual hours of 94,000. Answer (B) is correct. The variable overhead spending variance is the difference between actual variable overhead and the variable overhead based on the standard rate and the actual activity level. Thus, the variable overhead spending variance was $12,000 favorable [(94,000 actual hours $8 standard rate) $740,000 actual cost]. Answer (C) is incorrect because The variable overhead efficiency variance is $48,000 unfavorable. Answer (D) is incorrect because The fixed overhead spending variance is $40,000 unfavorable. [188] Gleim #: Source: CMA Answer (A) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. Some firms prefer to measure managerial performance in terms of the amount of residual income rather than the percentage ROI. The principle is that the firm is expected to benefit from expansion as long as residual income is earned. Using a percentage ROI approach, expansion might be rejected if it lowered ROI even though residual income would increase. Answer (B) is incorrect because The residual income method is based on accrual-basis operating income rather than cash flows. Answer (C) is incorrect because ROI does not have to be maximized under the residual income approach. Answer (D) is incorrect because Maximizing the imputed interest rate charge would diminish the residual return. Copyright 2008 Gleim Publications, Inc. Page 70

150 [189] Gleim #: Source: CIA 1188 IV-23 Answer (A) is incorrect because Market price is an approach to determine a transfer price. Answer (B) is correct. A transfer price is the price charged by one segment of an organization for a product or service supplied to another segment of the same organization. Answer (C) is incorrect because Outlay price is an approach to determine a transfer price. Answer (D) is incorrect because Distress price is an approach to determine a transfer price. [190] Gleim #: Source: CMA Answer (A) is incorrect because Assuming a favorable quantity variance results in 23,000 units. Answer (B) is correct. The company produced 12,000 units of output, each of which required two units of direct materials. Thus, the standard input allowed for direct materials was 24,000 units at a standard cost of $2.50 each. An unfavorable quantity variance signifies that the actual quantity used was greater than the standard input allowed. The direct materials quantity variance equals the difference between standard and actual quantities times the standard price per unit. Consequently, because 1,000 ($2,500 U $2.50) additional units were used, the actual total quantity must have been 25,000 units (24,000 standard + 1,000). Answer (C) is incorrect because The number of units of finished product is 12,000. Answer (D) is incorrect because Assuming that each unit of finished product includes only one unit of direct materials results in 12,500 units. Copyright 2008 Gleim Publications, Inc. Page 71

151 [191] Gleim #: Source: Publisher Answer (A) is incorrect because The overhead variance for the year is $24,000 underabsorbed, not overabsorbed. Answer (B) is incorrect because The amount of $28,500 assumes a fixed overhead application rate of $5.75. Answer (C) is correct. The total overhead variance is the difference between the actual overhead and applied (absorbed) overhead. Given that neither fixed nor variable overhead differed from budgeted amounts, the only variance was caused by under- or overabsorption of fixed overhead. The variable overhead rate does not vary with the capacity. The fixed overhead rate at 90% capacity is Given that the actual capacity achieved was 75%, and that 30,000 standard hours were allowed, $120,000 (30,000 $4.00) of fixed overhead was applied. Thus, $24,000 ($144,000 FOH $120,000) was underabsorbed. Answer (D) is incorrect because The amount of $28,500 assumes a fixed overhead application rate of $5.75. Also, the variance is not overabsorbed. [192] Gleim #: Source: CMA Answer (A) is incorrect because Supervisor salaries are expected to be incurred uniformly through the year; thus, supervisor salaries are based on time, not units produced. Answer (B) is incorrect because The actual O/H ($28,000) was greater than the budgeted O/H ($324, months = $27,000); therefore, the variance is unfavorable. Answer (C) is correct. The budget (spending) variance for fixed O/H equals actual minus budgeted fixed O/H. The $324,000 cost of supervisory salaries is fixed and is incurred at $27,000 per month. Thus, the variance is the difference between actual costs of $28,000 and the budgeted costs of $27,000, or $1,000 unfavorable. Answer (D) is incorrect because Supervisor salaries are expected to be incurred uniformly through the year; thus, supervisor salaries are based on time, not units produced. Copyright 2008 Gleim Publications, Inc. Page 72