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Question 1
1.C.1.g
flex.bpa.tb.051_0120
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Olive Industries produced 30,000 units this month and used 36,000 machine hours. The company’s static budget for manufacturing overhead costs based
on 37,500 machine hours is as follows:

Variable
Indirect materials $441,000
Indirect labor 630,000
Factory supplies 63,000
Fixed
Depreciation $189,000
Taxes 31,500
Supervision 157,500

During the month, Olive’s actual costs were $11.80 per machine hour for indirect materials. What is the amount of difference for indirect materials shown
on the company’s manufacturing overhead flexible budget report?

Correct

$1,440 unfavorable

$1,500 unfavorable

$16,200 favorable

$1,500 favorable

Rationale
 $1,440 unfavorable
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Since indirect materials is a
variable cost, the amount in a flexible budget will be different from the amount in a static budget to the extent that the actual activity level differs
from the activity level used to prepare the static budget. Olive’s budgeted amount of indirect materials is $11.76 per machine hour ($441,000 ÷
37,500). If 36,000 machine hours are used, the indirect materials in the flexible budget will be $423,360 ($11.76 × 36,000). The actual amount of
indirect materials is $424,800 ($11.80 × 36,000). Since actual spending is $1,440 more than the flexible budget amount, the $1,440 variance is
unfavorable.

Rationale
 $1,500 unfavorable
This answer is incorrect. Olive’s static budget indirect materials is $441,000 and indirect materials spending for 37,500 machine hours is $442,500
($11.80 × 37,500). However, this does not measure the difference between actual spending and flexible budget spending.

Rationale
 $16,200 favorable
This answer is incorrect. Olive’s static budget indirect materials is $441,000 and its actual indirect materials spending is $424,800 ($11.80 × 36,000).
The static budget variance is $16,200 favorable, but it does not measure the difference between actual spending and flexible budget spending.

Rationale
 $1,500 favorable
This answer is incorrect. Olive’s static budget indirect materials is $441,000 and indirect materials spending for 37,500 machine hours is $442,500
($11.80 × 37,500). However, this does not measure the difference between actual spending and flexible budget spending.

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Question 2
1.C.1.c
tb.flex.bpa.005_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Under which of the following circumstances would a financially favorable variance not be truly favorable?
Correct

A company saved money by purchasing cheap cloth dye that produces environmentally hazardous byproducts.
Your Answer

A company saved money by switching to a different raw materials supplier.

A company saved money by replacing an old machine that was inefficient.

A company saved money by firing several employees who had a habit of calling in sick at least once per week.

Rationale
 A company saved money by purchasing cheap cloth dye that produces environmentally hazardous byproducts.
Correct. Variances are classified depending on how they impact actual net income relative to net income in the static budget. Any variance that
would increase actual net income relative to budgeted net income is a favorable variance. Two reasons for favorable variances are paying less than
the standard cost per unit of an input or using less than the standard amount of the input per unit of output. While favorable variances result in
actual costs being lower than standard costs, they are not always “good” for the organization. One example of a favorable variance not being
“good” for the organization is when lower-quality cloth dye than called for is purchased. The lower-quality dye will likely cost less than the standard
(resulting in a favorable price variance), but the hazardous byproducts produced will likely be expensive to address and may result in lower selling
prices. In this case, the favorable variance is not “good” for the organization.

Rationale
 A company saved money by switching to a different raw materials supplier.
Incorrect. Switching to a different raw materials supplier to save money will not necessarily be “bad” for the organization if the same quality
materials are obtained for a lower price.

Rationale
 A company saved money by replacing an old machine that was inefficient.
Incorrect. Replacing inefficient machinery to save money will not necessarily be “bad” for the organization if the same quality output is obtained for
a lower cost.

Rationale
 A company saved money by firing several employees who had a habit of calling in sick at least once per week.
Incorrect. Saving money by replacing unreliable employees will not necessarily be “bad” for the organization if the same amount of output is
obtained for a lower cost.
Question 3
1.C.1.i
1C1-AT04
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
The purpose of identifying manufacturing variances and assigning their responsibility to a person/department should be to:
pinpoint fault for operating problems in the organization.
Your Answer

determine the proper cost of the products produced so that selling prices can be adjusted accordingly.
Correct

use the knowledge about the variances to promote continuous improvement in the manufacturing operations.

trace the variances to finished goods so that the inventory can be properly valued at year end.

Rationale
 pinpoint fault for operating problems in the organization.
This answer is incorrect. The purpose of identifying manufacturing variances and assigning their responsibility to a person/department is not to
pinpoint fault for operating problems in the organization.

Rationale
 determine the proper cost of the products produced so that selling prices can be adjusted accordingly.
This answer is incorrect. The purpose of identifying manufacturing variances and assigning their responsibility to a person/department is not to
determine the proper cost of the products produced so that selling prices can be adjusted accordingly.

Rationale
 use the knowledge about the variances to promote continuous improvement in the manufacturing operations.
The purpose of identifying manufacturing variances and assigning their responsibility to a person/department is to promote continuous
improvement in the manufacturing operations.

Rationale
 trace the variances to finished goods so that the inventory can be properly valued at year end.
This answer is incorrect. The purpose of identifying manufacturing variances and assigning their responsibility to a person/department is not to
trace the variances to finished goods so that the inventory can be properly valued at year end.
Question 4
1.C.1.g
flex.bpa.tb.052_0120
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Clover Company produced 20,000 units this month and used 24,000 machine hours. Clover’s controller prepared the following static budget for
manufacturing overhead costs based on 25,000 machine hours.

Variable
Indirect materials $294,000
Indirect labor 420,000
Factory supplies 42,000
Fixed
Depreciation $126,000
Taxes 21,000
Supervision 105,000

During the month, Clover’s actual costs were $1.75 per machine hour for factory supplies. What is the amount of difference for factory supplies shown on
the company’s manufacturing overhead flexible budget report?

$5,320 favorable
Correct

$1,680 unfavorable

$1,750 unfavorable

$0 – budgeted and actual costs were equal

Rationale
 $5,320 favorable
This answer is incorrect. Clover’s flexible budget factory supplies is $40,320 ($1.68 × 24,000) and factory supplies for 20,000 machine hours (rather
than 20,000 units) is $35,000 ($1.75 × 20,000). However, this does not measure the difference between actual spending and flexible budget
spending.

Rationale
 $1,680 unfavorable
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Since factory supplies is a
variable cost, the amount in a flexible budget will be different from the amount in a static budget to the extent that the actual activity level differs
from the activity level used to prepare the static budget. Clover’s budgeted amount of factory supplies is $1.68 per machine hour ($42,000 ÷ 25,000).
If 24,000 machine hours are used, the factory supplies in the flexible budget will be $40,320 ($1.68 × 24,000). The actual amount of factory supplies is
$42,000 ($1.75 × 24,000). Since actual spending is $1,680 more than the flexible budget amount, the $1,680 variance is unfavorable.

Rationale
 $1,750 unfavorable
This answer is incorrect. Clover’s static budget factory supplies is $42,000 and factory supplies for 25,000 machine hours is $43,750 ($1.75 × 25,000).
However, this does not measure the difference between actual spending and flexible budget spending.

Rationale
 $0 – budgeted and actual costs were equal
This answer is incorrect. Clover’s static budget factory supplies is $42,000 and its actual factory supplies spending is $42,000 ($1.75 × 24,000). The
static budget variance is $0, but it does not measure the difference between actual spending and flexible budget spending.
Question 5
1.C.1.g
1C1-AT35
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
The difference between the actual amounts and the flexible budget amounts for the actual output achieved is the:
budget variance.
Your Answer

sales volume variance.

standard cost variance.

Correct

flexible budget variance.

Rationale
 budget variance.
This answer is incorrect. The difference between the actual amounts and the flexible budget amounts for the actual output achieved is not the
budget variance.

Rationale
 sales volume variance.
This answer is incorrect. The difference between the actual amounts and the flexible budget amounts for the actual output achieved is not the sales
volume variance.

Rationale
 standard cost variance.
This answer is incorrect. The difference between the actual amounts and the flexible budget amounts for the actual output achieved is not the
standard cost variance.

Rationale
 flexible budget variance.
The flexible budget variance measures the difference between the actual amounts and the flexible budget amounts for the actual output.
Question 6
1.C.1.c
1C1-LS92
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

A company has a direct labor price variance that is favorable. Of the following, the most serious concern the company may have about this variance is
that:

* Source: Retired ICMA CMA Exam Questions.

the circumstances giving rise to the favorable variance will not continue in the future.
Correct

the cause of the favorable variance may result in other larger unfavorable variances in the value-chain.

the production manager may not be using human resources as efficiently as possible.

actual production is less than budgeted production.

Rationale
 the circumstances giving rise to the favorable variance will not continue in the future.
This answer is incorrect. If a company has a direct labor price variance that is favorable, the most serious concern the company may have about this
variance is not that the circumstances giving rise to the favorable variance will not continue in the future.

Rationale
 the cause of the favorable variance may result in other larger unfavorable variances in the value-chain.
In any situation, and in any organization, all variances in the value chain must be analyzed to assure that any unfavorable variances are scrutinized
and, if possible, fixed to be more adaptable to changes in operating activities.

Rationale
 the production manager may not be using human resources as efficiently as possible.
This answer is incorrect. If a company has a direct labor price variance that is favorable, the most serious concern the company may have about this
variance is not that the production manager may not be using human resources as efficiently as possible.

Rationale
 actual production is less than budgeted production.
This answer is incorrect. If a company has a direct labor price variance that is favorable, the most serious concern the company may have about this
variance is not that actual production is less than budget production.
Question 7
1.C.1.e
tb.flex.bpa.009_1808
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
In the Proctor Company, indirect labor is budgeted for $24,000 and factory supervision is budgeted for $8,000 at normal capacity of 80,000 direct labor
hours. If 90,000 direct labor hours are worked, what would the flexible budget total be for these costs?
$32,000
Your Answer

$36,000

$33,000
Correct

$35,000

Rationale
 $32,000
Incorrect. Since factory supervision is a fixed cost it will be the same amount ($8,000) in the static and flexible budgets. If indirect labor is also
assumed to be a fixed cost, then the total flexible budget for 90,000 direct labor hours is $32,000 ($8,000 + $24,000). However, indirect labor is a
variable cost, not a fixed cost.

Rationale
 $36,000
Incorrect. If supervision is assumed to be a variable cost, then the flexible budget amount will be $9,000 ($0.10 per hour × 90,000 hours). Since
indirect labor is a variable cost it must be adjusted for the different level of activity. The budgeted amount is $0.30 per direct labor ($24,000 ÷
80,000). If there are 90,000 direct labor hours, indirect labor will be $27,000 ($0.30 × 90,000). This would make the total flexible budget for 90,000
direct labor hours be $36,000 ($9,000 + $27,000). However, faculty supervision is a fixed cost, not a variable cost.

Rationale
 $33,000
Incorrect. If supervision is assumed to be a variable cost, then the flexible budget amount will be $9,000 ($0.10 per hour × 90,000 hours). If indirect
labor is assumed to be a fixed cost, then it will be $24,000 in the flexible budget. This would make the total flexible budget for 90,000 direct labor
hours be $33,000 ($9,000 + $24,000). However, faculty supervision is a fixed cost, not a variable cost and indirect labor is a variable cost, not a fixed
cost.

Rationale
 $35,000
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. Since
factory supervision is a fixed cost it will be the same amount ($8,000) in the static and flexible budgets. Since indirect labor is a variable cost it must
be adjusted for the different level of activity. The budgeted amount is $0.30 per direct labor ($24,000 ÷ 80,000). If there are 90,000 direct labor hours,
indirect labor will be $27,000 ($0.30 × 90,000). The total flexible budget for 90,000 direct labor hours is $35,000 ($8,000 + $27,000).
Question 8
1.C.1.g
tb.flex.bpa.017_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 5
Tyler Strings uses flexible budgets. Tyler's normal capacity is 2,800 violins per year. At this level of activity, budgeted manufacturing overhead is $89,600
variable and $252,000 fixed. Tyler's actual overhead costs were $350,000 when 3,150 violins were produced. If Tyler uses a flexible budget, what is the
difference between actual and budgeted costs?
$8,400 favorable.
Your Answer

$8,400 unfavorable.
Correct

$2,800 favorable.

$2,800 unfavorable.

Rationale
 $8,400 favorable.
Incorrect. The static budget is $341,600. If this is compared to the actual spending of $350,000, there is an $8,400 unfavorable variance, not a
favorable variance, since actual spending exceeds budgeted spending. In addition, because the company uses flexible budgets, the flexible budget,
not the static budget, value needs to be compared to the actual spending.

Rationale
 $8,400 unfavorable.
Incorrect. The static budget is $341,600. If this is compared to the actual spending of $350,000, there is an $8,400 unfavorable variance since actual
spending exceeds budgeted spending. However, since the company uses flexible budgets, the flexible budget, not the static budget, value needs to
be compared to the actual spending.

Rationale
 $2,800 favorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in both static budgets and flexible budgets as fixed costs do not change when activity changes. Variable costs in a flexible budget will be
different from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget.
The budgeted amount of variable cost is $32.00 per violin ($89,600 ÷ 2,800). If there are 3,150 violins produced, variable manufacturing overhead
will be $100,800 ($32.00 × 3,150) in the flexible budget. The total flexible budget for 3,150 violins is $352,800 ($100,800 + $252,000). Since actual
spending is only $350,000, the $2,800 variance is favorable.

Rationale
 $2,800 unfavorable.
Incorrect. The budgeted amount of variable cost is $32.00 per violin ($89,600 ÷ 2,800). If there are 3,150 violins produced, variable manufacturing
overhead will be $100,800 ($32.00 × 3,150) in the flexible budget. The total flexible budget for 3,150 violins is $352,800 ($100,800 + $252,000). While
the variance is $2,800 ($350,000 − $352,800), it is favorable, not unfavorable, since actual spending is $2,800 less than the flexible budget amount.
Question 9
1.C.1.a
1C1-LS98
LOS: 1.C.1.a
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: hard
Bloom Code: 5

Fortune Corporation's Marketing Department recently accepted a rush order for a nonstock item from a valued customer. The Marketing Department
filed the necessary paperwork with the Production Department, which complained greatly about the lack of time to do the job the right way.
Nevertheless, the Production Department accepted the manufacturing commitment and filed the required paperwork with the Purchasing Department
for the needed raw materials. A purchasing clerk temporarily misplaced the paperwork. By the time the paperwork was found, it was too late to order
from the company's regular supplier. A new supplier was located, and that vendor quoted a very attractive price. The materials arrived and were rushed
into production, bypassing the normal inspection processes (as directed by the Production Department supervisor) to make up for lost time.
Unfortunately, the goods were of low quality and created considerable difficulty for Fortune's assembly-line personnel. Which of the following best
indicates the responsibility for the materials usage variance in this situation?

* Source: Retired ICMA CMA Exam Questions.

Correct

Purchasing, Marketing, and Production

Your Answer

Purchasing and Marketing

Marketing and Production

Purchasing

Rationale
 Purchasing, Marketing, and Production
In this situation, Purchasing had ultimate responsibility of the quality of the materials included in this order. However, given that all departments
had a hand in pushing this order through the system quickly, each department has the responsibility to ensure the quality.

Rationale
 Purchasing and Marketing
This answer is incorrect. While it is true that purchasing and marketing have responsibility for the materials usage variance, production does as
well.

Rationale
 Marketing and Production
This answer is incorrect. While it is true that marketing and production have responsibility for the materials usage variance, purchasing does as
well.

Rationale
 Purchasing
This answer is incorrect. While it is true that purchasing has responsibility for the materials usage variance, production and marketing do as well.
Question 10
1.C.1.b
1B2-LS26d
LOS: 1.C.1.b
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

After performing a thorough study of Michigan Company's operations, an independent consultant determined that the firm's labor standards were
probably too tight. All of the following facts are consistent with the consultant's conclusion except:

*Source: Retired ICMA CMA Exam Questions.

Correct

Michigan's budgeting process was well-defined and based on a bottom-up philosophy.

management noted that minimal incentive bonuses have been paid in recent periods.

production supervisors found several significant fluctuations in manufacturing volume, with short-term increases on output being followed by rapid,
sustained declines.

a review of performance reports revealed the presence of many unfavorable efficiency variances.

Rationale
 Michigan's budgeting process was well-defined and based on a bottom-up philosophy.
When any study is performed in analyzing the operations of an organization, it is important to analyze all factors that affect the organization's
operations. In the case of Michigan Company, having a budgeting process that is well-defined and based on a bottom-up philosophy, and the fact
that a review of performance reports revealed the presence of many unfavorable efficiency variances, is not consistent with the consultant's
conclusion that the labor standards were probably too tight. Rather, having a top-down philosophy to budgeting should be consistent with the
consultant's decision.

Rationale
 management noted that minimal incentive bonuses have been paid in recent periods.
This answer is incorrect. Management noting that minimal incentive bonuses have been paid in recent periods is consistent with the consultant's
conclusion.

Rationale
 production supervisors found several significant fluctuations in manufacturing volume, with short-term increases on output being
followed by rapid, sustained declines.
This answer is incorrect. Production supervisors finding several significant fluctuations in manufacturing volume, with short-term increases on
output being followed by rapid, sustained declines is consistent with the consultant's conclusion.

Rationale
 a review of performance reports revealed the presence of many unfavorable efficiency variances.
This answer is incorrect. A review of performance reports revealing the presence of many unfavorable efficiency variances is consistent with the
consultant's conclusion.
Question 11
1.C.1.i
flex.bpa.tb.054_0120
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
Identifying an exception under management by exception uses these criteria:
Your Answer

materiality and frequency.

controllability and frequency.

controllability only.
Correct

materiality and controllability.

Rationale
 materiality and frequency.
This answer is incorrect. Materiality is an important criterion to use in identifying exceptions for management to consider as addressing more
material items will result in greater benefit to the organization than addressing less material items. However, frequency is not an important
criterion to consider as a small variance that frequently occurs does not require management’s attention.

Rationale
 controllability and frequency.
This answer is incorrect. Controllability is an important criterion to use in identifying exceptions for management to consider as a manager’s time
will be wasted if he or she attempts to address an issue that he or she does not control. However, frequency is not an important criterion to
consider as a small variance that frequently occurs does not require management’s attention.

Rationale
 controllability only.
This answer is incorrect. Controllability is an important criterion to use in identifying exceptions for management to consider as a manager’s time
will be wasted if he or she attempts to address an issue that he or she does not control. However, it is not the only thing to consider when making
this decision.

Rationale
 materiality and controllability.
Management by exception involves focusing management’s attention on areas where actual performance varies significantly from budgeted
performance. It allows management to better use its time to address performance issues. Materiality is an important criterion to use in identifying
exceptions for management to consider as addressing more material items will result in greater benefit to the organization than addressing less
material items. Controllability is also an important criterion to use as a manager’s time will be wasted if he or she attempts to address an issue that
he or she does not control.
Question 12
1.C.1.e
cma11.p1.t1.me.0059_0820
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: hard
Bloom Code: 4

A company's master budget for the year planned for the manufacture and sale of 5,600 toys for ¥750,000 in revenue, ¥400,000 in variable expenses, and
¥255,000 in fixed expenses. By the end of the year, the company had manufactured and sold only 4,500 toys for ¥650,000 in revenue, ¥375,000 in variables
expenses, and ¥195,000 in fixed expenses. What is the operating income variance for the company for the year?

*Source: Retired ICMA CMA Exam Questions.

Correct

¥15,000 unfavorable

¥25,000 favorable.

¥75,000 unfavorable.

¥100,000 unfavorable.

Rationale
 ¥15,000 unfavorable
The operating income variance for the company is ¥15,000 unfavorable, budgeted operating income is ¥95,000, actual operating income is ¥80,000,
and budgeted operating income is ¥15,000 higher than actual.
Budget Actual
Units 5,600 4,500
Sales revenue ¥750,000 ¥650,000
Variable expenses 400,000 375,000
Contribution margin 350,000 275,000
Fixed expenses 255,000 195,000
Operating income ¥95,000 ¥80,000

Rationale
 ¥25,000 favorable.
This answer is incorrect. The variable expense variance is ¥25,000 favorable.

Rationale
 ¥75,000 unfavorable.
This answer is incorrect. The contribution margin variance is ¥75,000 unfavorable.

Rationale
 ¥100,000 unfavorable.
This answer is incorrect. The sales revenue variance is ¥100,000 unfavorable.
Question 13
1.C.1.c
tb.flex.bpa.006_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Carden Manufacturing decided to purchase raw materials from a new supplier for a cheaper price, but after a couple of months they found that the new
materials were of an inferior quality. How would this affect their variance?
They would have a variance that is favorable for both price and quantity.
Correct

They would have a favorable price variance and an unfavorable quantity variance.

They would have a variance that is unfavorable for both price and quantity.
Your Answer

The company would have an unfavorable price variance and a favorable quantity variance.

Rationale
 They would have a variance that is favorable for both price and quantity.
Incorrect. Lower-quality materials are often harder to work with and result in excessive waste, which would likely result in an unfavorable quantity
variance, not a favorable quantity variance.

Rationale
 They would have a favorable price variance and an unfavorable quantity variance.
Correct. Variances are classified depending on how they impact actual net income relative to net income in the static budget. Any variance that
would increase actual net income relative to budgeted net income is a favorable variance and any variance that would decrease net income relative
to budgeted net income is an unfavorable variance. Two reasons for input variances are paying a different amount than the standard cost per unit
of an input and using a different amount than the standard amount of the input per unit of output. One variance can sometimes impact another
variance. One example is when lower-quality materials than called for are purchased. The lower-quality materials will likely cost less than the
standard price, resulting in a favorable price variance. At the same time, lower-quality materials are often harder to work with and result in
excessive waste, resulting in an unfavorable quantity variance.

Rationale
 They would have a variance that is unfavorable for both price and quantity.
Incorrect. The lower-quality materials will cost less than the standard price, which results in a favorable price variance, not an unfavorable price
variance.

Rationale
 The company would have an unfavorable price variance and a favorable quantity variance.
Incorrect. The lower-quality materials will cost less than the standard price, resulting in a favorable price variance, not an unfavorable price
variance. At the same time, the lower quality materials are often harder to work with and result in excessive waste, resulting in an unfavorable
quantity variance, not a favorable quantity variance.
Question 14
1.C.1.h
tb.flex.bpa.033_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Sarah's Seamstresses employs 15 unskilled seamstresses and 8 skilled seamstresses. One week in November, 9 of the 15 unskilled workers called in sick
with the stomach flu. Because the skilled seamstresses did not have enough work to do with the lower production by the unskilled seamstresses, some of
the skilled seamstresses performed tasks normally done by unskilled seamstresses. What effect would this have on the company's direct labor variance?
Correct

The direct labor price variance would be unfavorable.

The direct labor price variance would be favorable.

The direct labor quantity variance would be unfavorable.

Your Answer

The total direct labor variance would be unfavorable.

Rationale
 The direct labor price variance would be unfavorable.
Correct. Direct labor variances arise for a number of reasons. Having higher-skilled workers doing tasks normally performed by lower-skilled
workers will likely result in the actual labor price being higher than the standard labor price. This higher price results in an unfavorable direct labor
price variance.

Rationale
 The direct labor price variance would be favorable.
Incorrect. Having higher-skilled workers doing tasks normally performed by lower-skilled workers will likely result in the actual labor price being
higher than the standard labor price. This higher price results in an unfavorable, not favorable, direct labor price variance.

Rationale
 The direct labor quantity variance would be unfavorable.
Incorrect. Having higher-skilled workers doing tasks normally performed by lower-skilled workers will likely result in fewer hours being worked than
standard. This will result in a favorable, not unfavorable labor quantity variance.

Rationale
 The total direct labor variance would be unfavorable.
Incorrect. Having higher-skilled workers doing tasks normally performed by lower-skilled workers will likely result in the actual labor price being
higher than the standard labor price. This higher price results in an unfavorable direct labor price variance. However, it will also likely result in fewer
hours being worked than standard, which will result in a favorable labor quantity variance. In some cases, the unfavorable price variance will
outweigh the favorable quantity variance (resulting in an unfavorable total labor variance) and sometimes the favorable labor quantity variance
will outweigh the unfavorable labor price variance (resulting in a favorable total labor variance).
Question 15
1.C.1.c
aq.flex.bpa.004_0820
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: hard
Bloom Code: 6

Trendy Technology (TT), a company that manufactures earbuds, used the following standards to establish a master budget before the start of the
upcoming operating year.

Trendy Technology
Earbuds (Classic) Earbuds (Deluxe)
Expected Sales Volume 30,000 Earbuds 15,000 Earbuds
Standard Price per set Earbuds $50 $150
Standard Variable Costs per set Earbuds $25 $90
Budgeted Fixed Cost (Total) $1,000,000

Note that TT has two types of earbuds it sells. The Classic earbuds have a cord and the Deluxe earbuds are wireless. In the upcoming year, TT plans to sell
30,000 Classic earbuds and 15,000 Deluxe earbuds. At the end of the year, TT had the following results.

Trendy Technology
Earbuds (Classic) Earbuds (Deluxe)
Actual Sales Volume 35,000 Earbuds 12,000 Earbuds
Actual Price per set Earbuds $48 $153
Actual Variable Costs per set Earbuds $26 $84
Actual Fixed Cost (Total) $1,150,000

When comparing the actual results to the master budget, what is the operating profit variance?

$650,000 Favorable

$650,000 Unfavorable
Correct

$202,000 Unfavorable

$202,000 Favorable

Rationale
 $650,000 Favorable
This answer is incorrect. This answer represents the master budget operating profit, not the operating profit variance when comparing the actual
results to the master budget. Additionally, master budget operating profit alone cannot be favorable or unfavorable. The operating profit variance
must be calculated by subtracting master budget operating profit from actual results operating profit before determining if the variance is
favorable or unfavorable.

Rationale
 $650,000 Unfavorable
This answer is incorrect. This answer represents the master budget operating profit, not the operating profit variance when comparing the actual
results to the master budget. Additionally, master budget operating profit alone cannot be favorable or unfavorable. The operating profit variance
must be calculated by subtracting master budget operating profit from actual results operating profit before determining if the variance is
favorable or unfavorable.

Rationale
 $202,000 Unfavorable

When comparing the actual results to the master budget, the operating profit variance is calculated as follows:

Actual Results Master Budget Variances

Classic Sales Volume 35,000 Earbuds 30,000 Earbuds 5,000 Earbuds F
Deluxe Sales Volume 12,000 Earbuds 15,000 Earbuds 3,000 Earbuds U
Classic Revenue $1,680,000 $1,500,000 $ 180,000 F
Deluxe Revenue 1,836,000 2,250,000 414,000 U
Total Revenue $3,516,000 $3,750,000 $ 234,000 U
Classic Variable Costs ($ 910,000) ($ 750,000) $ 160,000 U
Deluxe Variable Costs (1,008,000) (1,350,000) 342,000 F
Total Variable Costs ($1,918,000) ($2,100,000) $ 182,000 F
 Actual Results Master Budget Variances
Total Fixed Costs (1,150,000) (1,000,000) 150,000 U
Operating Profit $ 448,000 $ 650,000 $202,000 U

Rationale
 $202,000 Favorable
This answer is incorrect. This answer correctly calculated the operating profit variance when comparing the actual results to the master budget;
however, this variance is not favorable.
Question 16
1.C.1.e
tb.flex.bpa.013_1808
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Patricia is preparing a flexible budget report for 95,000 machine hours of production in August. Her normal flexible budget contains values for 90,000
machine hours and 100,000 machine hours. Which of the following costs will Patricia need to recalculate?
Correct

Utilities.
Your Answer

Property taxes.

Liability insurance.

Depreciation.

Rationale
 Utilities.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. Because
utilities are a variable cost and likely to change based on changes in machine hours, Patricia must recalculate it when preparing a flexible budget
based on 95,000 machine hours.

Rationale
 Property taxes.
Incorrect. Because property taxes are not a variable cost and unlikely to change based on changes in machine hours, Patricia does not need to
recalculate it when preparing a flexible budget based on 95,000 machine hours.

Rationale
 Liability insurance.
Incorrect. Because liability insurance is not a variable cost and unlikely to change based on changes in machine hours, Patricia does not need to
recalculate it when preparing a flexible budget based on 95,000 machine hours.

Rationale
 Depreciation.
Incorrect. Because depreciation is not a variable cost and unlikely to change based on changes in machine hours, Patricia does not need to
recalculate it when preparing a flexible budget based on 95,000 machine hours.
Question 17
1.C.1.c
aq.flex.bpa.003_0820
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Trendy Technology (TT), a company that manufactures fitness watches, used the following standards to establish a master budget before the start of the
upcoming operating year.

Trendy Technology
Budget Fitness Watch
Expected Sales Volume 50,000 Watches
Standard Price per Watch $200
Standard Variable Costs per Watch $100
Budgeted Fixed Cost (Total) $3,000,000

In the upcoming year, TT plans to sell 50,000 fitness watches. At the end of the year, TT had the following results.

Trendy Technology
Actual Fitness Watch
Actual Sales Volume 49,000 Watches
Actual Price per Watch $210
Actual Variable Costs (Total) $4,950,000
Actual Fixed Cost (Total) $2,900,000

When comparing the actual results to the master budget, what is the revenue variance?

Correct

$290,000 Favorable
Your Answer

$340,000 Favorable

$290,000 Unfavorable

$340,000 Unfavorable

Rationale
 $290,000 Favorable

When comparing the actual results to the master budget, the revenue variance is calculated as follows:

Trendy Technology
Actual Results Master Budget Variances
Fitness Watch Sales Volume 49,000 watches 50,000 watches 1,000 watches U
Prices per Watch $210 $200 $10 U
Total Revenue $10,290,000 $10,000,000 $290,000 F

Rationale
 $340,000 Favorable
This answer is incorrect. This answer represents the contribution margin variance against the master budget, not the revenue variance.

Rationale
 $290,000 Unfavorable
This answer is incorrect. This answer correctly calculates the revenue variance against the master budget. However, this variance would not be
unfavorable (U).

Rationale
 $340,000 Unfavorable
This answer is incorrect. This answer represents the contribution margin variance against the master budget, not the revenue variance. In addition,
this variance would not be unfavorable (U).
Question 18
1.C.1.h
tb.flex.bpa.035_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Suppose that the yield of gasoline from an oil-refining operation decreases because of excessive impurities in the input material. Which is most likely?
A favorable direct materials quantity variance.
Correct

An unfavorable direct materials quantity variance.

Your Answer

An unfavorable direct materials price variance.

There will be no effect on variances.

Rationale
 A favorable direct materials quantity variance.
Incorrect. A decrease in yield resulting from excessive input impurities will likely result in using more materials to produce output than is standard.
This greater material need results in an unfavorable, not favorable, direct materials quantity variance.

Rationale
 An unfavorable direct materials quantity variance.
Correct. Direct material variances arise for a number of reasons. A decrease in yield resulting from excessive input impurities will likely result in
using more materials to produce output than is standard. This greater material need results in an unfavorable direct materials quantity variance.

Rationale
 An unfavorable direct materials price variance.
Incorrect. A decrease in yield resulting from excessive input impurities will likely result in using more materials to produce output than is standard.
An unfavorable direct materials price variance indicates that the actual price paid for materials is higher than the standard price. If input materials
contain excess impurities, it is more likely that the actual price will be lower, not higher, than the standard price because of the lower quality.

Rationale
 There will be no effect on variances.
Incorrect. A decrease in yield resulting from excessive input impurities will likely result in using more materials to produce output than is standard.
This greater material need results in an unfavorable direct materials quantity variance. In addition, the actual price for the material may be lower
than the standard price because of the lower quality. If this occurs, then there will be a favorable direct materials price variance.
Question 19
1.C.1.h
tb.flex.bpa.024_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Which of the following circumstances suggests that a company is experiencing efficiencies in their purchasing department?
The company has a favorable direct materials variance because it has a new machine that wastes fewer raw materials.

The company has a favorable direct materials variance because it now charges shipping costs to the customer.
Your Answer

The company has a favorable direct materials variance because it is using raw materials of a lower quality.
Correct

The company has a favorable direct materials variance because it no longer has to pay shipping costs for raw materials.

Rationale
 The company has a favorable direct materials variance because it has a new machine that wastes fewer raw materials.
Incorrect. This answer relates to efficiencies in the production department, where the machine is located, not the purchasing department.

Rationale
 The company has a favorable direct materials variance because it now charges shipping costs to the customer.
Incorrect. Charging shipping costs to customers will not result in a favorable direct materials variance since it relates to selling prices, not
purchasing prices. This will result in a favorable sales price variance.

Rationale
 The company has a favorable direct materials variance because it is using raw materials of a lower quality.
Incorrect. Purchasing lower-quality materials is not related to efficiencies in the purchasing department. It is a poor decision by the purchasing
department, and would lead to inefficiencies.

Rationale
 The company has a favorable direct materials variance because it no longer has to pay shipping costs for raw materials.
Correct. Favorable direct materials variances arise for a number of reasons. Not all those reasons are related to efficiencies in the purchasing
department. One example that does relate to efficiencies in the purchasing department is a favorable direct materials variance from no longer
having to pay shipping costs. This reduces the amount paid for materials, resulting in a favorable direct material price variance. An efficient
purchasing department can negotiate to eliminate shipping costs.
Question 20
1.C.1.d
flex.bpa.tb.045_0120
LOS: 1.C.1.d
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
A company expected to spend $250,000 on materials to produce 10,000 units of product in 20X8 but it actually spent $240,000 on materials in 20X8. What
conclusion can be drawn from this?
The company used materials more efficiently than expected in 20X8.

The company paid a higher price for materials than expected in 20X8.
Correct

The company spent less on materials in 20X8 than it expected to spend.

The company spent less on materials in 20X8 than it should have spent.

Rationale
 The company used materials more efficiently than expected in 20X8.
This answer is incorrect. It is not possible to determine the actual amount of materials used or the amount that “should” have been used from the
information provided.

Rationale
 The company paid a higher price for materials than expected in 20X8.
This answer is incorrect. It is not possible to determine the actual price paid or the expected price from the information provided.

Rationale
 The company spent less on materials in 20X8 than it expected to spend.
A master budget is prepared before a period begins and it contains information on expected revenues and expenses for the period. Because actual
spending on materials in 20X8 is lower than the master budget amount, one can conclude that the company spent less on materials than it
expected to spend.

Rationale
 The company spent less on materials in 20X8 than it should have spent.
This answer is incorrect. A master budget does not provide information about how much should have been spent on materials in 20X8.
Question 21
1.C.1.e
flex.bpa.tb.049_0120
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
The static budget for production of swimwear by Russell Aquatics is based on 10,000 units produced per month. For this level of production, indirect
materials are $64,000, indirect labor is $57,000, utilities are $9,000, depreciation is $14,000, and supervision is $3,000. What would the company’s total
budget be if they produced a flexible budget for 12,000 units?
$176,400

$145,200
Correct

$173,000

$159,600

Rationale
 $176,400
This answer is incorrect. If manufacturing overhead is 100% variable, manufacturing overhead would be $14.70 per unit ($147,000 [$64,000 +
$57,000 + $9,000 + $14,000 + $3,000] ÷ 10,000), which translates to $176,400 for 12,000 units ($14.70 × 12,000). However, manufacturing overhead is
not 100% variable.

Rationale
 $145,200
This answer is incorrect. The cost of indirect materials ($76,800) and indirect labor ($68,400) at 12,000 units is $145,200. However, these are not the
only components of manufacturing overhead.

Rationale
 $173,000
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the same in a
static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different from
variable costs in a static budget to the extent that the actual activity level differs from the activity level used to prepare the static budget. Since
depreciation and supervision are fixed manufacturing overhead items, they will be the same amount ($17,000 [$14,000 + $3,000]) in the static and
flexible budgets. Since indirect materials, indirect labor, and utilities are variable manufacturing items, they must be adjusted for the different level
of activity. The budgeted amount is $13.00 per unit ($130,000 [$64,000 + $57,000 + $9,000] ÷ 10,000). If there are 12,000 units, variable
manufacturing overhead will be $156,000 ($13.00 × 12,000). Russell’s total flexible budget for 12,000 units is $173,000 ($17,000 + $156,000).

Rationale
 $159,600
This answer is incorrect. The cost of indirect materials ($76,800), indirect labor ($68,400), and utilities ($10,800) at 12,000 units is $156,000. If
supervision is treated as variable, then it will be $3,600 at 12,000 units. However, supervision is not variable and not all the components of
manufacturing overhead are included.
Question 22
1.C.1.i
cma11.p1.t1.me.0048_0820
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2

Using management by exception allows managers to focus their attention on

*Source: Retired ICMA CMA Exam Questions.

Correct

areas that have deviated most from expectations.

nonadministrative costs and revenues.

Your Answer

unfavorable variances.

variable costs and revenues.

Rationale
 areas that have deviated most from expectations.
Management by exception enables managers to focus on the most important variances, either by dollar amount or percentage, while bypassing
insignificant discrepancies between the budget and actual results or between actual and expected results.

Rationale
 nonadministrative costs and revenues.
This answer is incorrect. Management by exception allows managers to focus on the most significant variances between actual and expected
results for all costs and revenues, not just nonadministrative ones.

Rationale
 unfavorable variances.
This answer is incorrect. Management by exception allows management to focus on the most significant variances, favorable or unfavorable,
between actual results and expected results.

Rationale
 variable costs and revenues.
This answer is incorrect. Management by exception allows management to focus on the most significant variance between actual results and
expected results for both fixed and variable costs and revenues, not just variable costs and revenues.
Question 23
1.C.1.i
flex.bpa.tb.057_0120
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
Lee was comparing the actual costs incurred by production to the budgeted production costs. After his comparison, he calculated the price variance and
quantity variance for materials. Which of the following may have prompted Lee to perform the variance calculation?
Inventory was $12,300 over budget, and sales revenue was $12,500 under budget.

Administrative and selling expenses were $15,700 over budget, and sales revenue was $46,000 over budget.
Correct

Cost of goods sold was $26,500 over budget, and sales revenue was $1,000 under budget.

Cost of goods sold was $24,100 under budget, and sales revenue was $38,400 under budget.

Rationale
 Inventory was $12,300 over budget, and sales revenue was $12,500 under budget.
This answer is incorrect. The price variance and quantity variance for materials are not likely to be related to sales revenue being under budget and
inventory being over budget as these two variances both indicate fewer units than expected were sold.

Rationale
 Administrative and selling expenses were $15,700 over budget, and sales revenue was $46,000 over budget.
This answer is incorrect. The price variance and quantity variance for materials are not likely to be related to administrative and selling expenses
being over budget and sales revenue being over budget as these two variances both indicate sales were higher than expected.

Rationale
 Cost of goods sold was $26,500 over budget, and sales revenue was $1,000 under budget.
Variances represent deviations from budgeted performance. The price variance for materials analyzes whether the actual price paid for materials
was higher or lower than the budgeted price and the quantity variance for materials analyzes whether more or less materials were used in
production than “should” have been used. These two variances are likely related to cost of goods sold being over budget, especially since sales
revenue was under budget. Sales revenue being under budget may indicate fewer units than expected were sold.

Rationale
 Cost of goods sold was $24,100 under budget, and sales revenue was $38,400 under budget.
This answer is incorrect. While the price variance and quantity variance for materials are likely to be related to cost of goods sold, the fact that it is
under budget and sales revenue is under budget indicates that sales were lower than expected.
Question 24
1.C.1.c
tb.flex.bpa.004_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
After calculating variances, Blake had actual costs that were less than standard costs. In contrast, Hannah had actual costs that were more than
standard costs. What was the difference between Blake and Hannah?
Correct

Blake had a favorable variance, while Hannah had an unfavorable variance.

Blake had an unfavorable variance, while Hannah had a favorable variance.

Your Answer

Blake had a price variance, while Hannah had a quantity variance.

Blake had a quantity variance, while Hannah had a price variance.

Rationale
 Blake had a favorable variance, while Hannah had an unfavorable variance.
Correct. Variances are classified depending on how they impact actual net income relative to net income in the static budget. Any variance that
would increase actual net income relative to budgeted net income is a favorable variance and any variance that would decrease actual net income
relative to budgeted net income is an unfavorable variance. This means actual costs lower than standard costs are favorable variances and actual
costs higher than standard costs are unfavorable variances. As a result, Blake had a favorable variance while Hannah had an unfavorable variance.

Rationale
 Blake had an unfavorable variance, while Hannah had a favorable variance.
Incorrect. Blake did not have an unfavorable variance, as Blake spent less than expected while Hannah did not have a favorable variance, as she
spent more than expected.

Rationale
 Blake had a price variance, while Hannah had a quantity variance.
Incorrect. Price variances and quantity variances can be favorable or unfavorable. As a result, it is not possible to conclude whether Blake and
Hannah had either type of variance (price or quantity).

Rationale
 Blake had a quantity variance, while Hannah had a price variance.
Incorrect. Price variances and quantity variances can be favorable or unfavorable. As a result, it is not possible to conclude whether Blake and
Hannah had either type of variance (price or quantity).
Question 25
1.C.1.d
1B2-LS23
LOS: 1.C.1.d
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

When compared with ideal standards, practical standards:

*Source: Retired ICMA CMA Exam Questions.

Correct

serve as a better motivating target for manufacturing personnel.

Your Answer

produce lower per-unit product costs.

result in a less desirable basis for the development of budgets.

incorporate very generous allowances for spoilage and worker inefficiencies.

Rationale
 serve as a better motivating target for manufacturing personnel.
Practical standards allow for normal downtime, employee rest periods, and the like, and serve as a better motivating target for manufacturing
personnel. Ideal standards are those that allow for no down-time, and require peak effort 100% of the time.

Rationale
 produce lower per-unit product costs.
This answer is incorrect. When compared with ideal standards, practical standards do not produce lower per-unit product costs.

Rationale
 result in a less desirable basis for the development of budgets.
This answer is incorrect. When compared with ideal standards, practical standards do not result in a less desirable basis for the development of
budgets.

Rationale
 incorporate very generous allowances for spoilage and worker inefficiencies.
This answer is incorrect. When compared with ideal standards, practical standards do not incorporate very generous allowances for spoilage and
worker inefficiencies.
Question 26
1.C.1.g
flex.bpa.tb.050_0120
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Clover Company produced 20,000 units this month and used 24,000 machine hours. Clover’s controller prepared the following static budget for
manufacturing overhead costs based on 25,000 machine hours.

Variable
Indirect materials $294,000
Indirect labor 420,000
Factory supplies 42,000
Fixed
Depreciation $126,000
Taxes 21,000
Supervision 105,000

During the month, Clover’s actual costs were $16.60 per machine hour for indirect labor. What is the amount of difference for indirect labor shown on the
company’s manufacturing overhead flexible budget report?

$21,600 favorable

$5,000 favorable
Your Answer

$5,000 unfavorable
Correct

$4,800 favorable

Rationale
 $21,600 favorable
This answer is incorrect. Clover’s static budget indirect labor is $420,000 and its actual indirect labor spending is $398,400 ($16.60 × 24,000). The
static budget variance is $21,600 favorable, but it does not measure the difference between actual spending and flexible budget spending.

Rationale
 $5,000 favorable
This answer is incorrect. Clover’s static budget indirect labor is $420,000 and indirect labor spending for 25,000 machine hours is $415,000 ($16.60 ×
25,000). However, this does not measure the difference between actual spending and flexible budget spending.

Rationale
 $5,000 unfavorable
This answer is incorrect. Clover’s static budget indirect labor is $420,000 and indirect labor spending for 25,000 machine hours is $415,000 ($16.60 ×
25,000). However, this does not measure the difference between actual spending and flexible budget spending.

Rationale
 $4,800 favorable
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Since indirect labor is a
variable cost, the amount in a flexible budget will be different from the amount in a static budget to the extent that the actual activity level differs
from the activity level used to prepare the static budget. Clover’s budgeted amount of indirect labor is $16.80 per machine hour ($420,000 ÷ 25,000).
If 24,000 machine hours are used, the indirect labor in the flexible budget will be $403,200 ($16.80 × 24,000). The actual amount of indirect labor is
$398,400 ($16.60 × 24,000). Since actual spending is $4,800 less than the flexible budget amount, the $4,800 variance is favorable.
Question 27
1.C.1.b
flex.bpa.tb.039_0120
LOS: 1.C.1.b
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
All of the following events are likely to cause a revenue variance at a company, except:
A strike at a supplier prevents a company from receiving goods needed to fulfill orders.

A strike at a competitor prevents that company from fulfilling its orders.

Your Answer

A company runs commercials based on research demonstrating the superiority of its products over competitors’ products.
Correct

A company runs commercials in honor of its recently deceased founder.

Rationale
 A strike at a supplier prevents a company from receiving goods needed to fulfill orders.
This answer is incorrect. A strike at a supplier that prevents a company from receiving goods needed to fulfill orders is likely to result in the
company selling fewer units than expected and cause a revenue variance.

Rationale
 A strike at a competitor prevents that company from fulfilling its orders.
This answer is incorrect. A strike that prevents a competitor from fulfilling its orders is likely to result in the other company selling more units than
expected and cause a revenue variance.

Rationale
 A company runs commercials based on research demonstrating the superiority of its products over competitors’ products.
This answer is incorrect. A company running commercials based on research demonstrating the superiority of its products over competitors’
products is likely to result in the company selling more units than expected and cause a revenue variance.

Rationale
 A company runs commercials in honor of its recently deceased founder.
Variances measure the difference between expected and actual performance. A company running commercials in honor of its recently deceased
founder is not likely to change the number of units sold or the price the company can charge for its products; therefore, a revenue variance is not
likely to occur.
Question 28
1.C.1.c
tb.flex.bpa.008_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
The static budget for Sammy's Shirts shown below was prepared using an activity level of 10,000 units. If Sammy's actual production is 8,000 units, how
will the actual costs compare to the budgeted costs? Why?
Budget
Variable Costs
Direct Materials ($8) $30,000
Direct Labor ($19) 85,000
Overhead ($27) 126,000
Total Variable Costs $241,000
Fixed Costs
Depreciation $15,000
Supervision 8,000
Total Fixed Costs 23,000
Total Costs $264,000

Actual costs will likely match budgeted costs because the static budgets will slide up or down based on Sammy's actual activity level.
Your Answer

Actual costs will likely be above budgeted costs because the static budget will consider Sammy's lost income from the decreased number of units.
Correct

Actual costs will likely be below budgeted costs because the static budget will only compare Sammy's results to the predetermined 10,000 units.

Actual costs will not be compared to budgeted costs because the static budget is not an appropriate measure for Sammy's lower production.

Rationale
 Actual costs will likely match budgeted costs because the static budgets will slide up or down based on Sammy's actual activity level.
Incorrect. A flexible budget, not a static budget, slides up or down based on actual activity level.

Rationale
 Actual costs will likely be above budgeted costs because the static budget will consider Sammy's lost income from the decreased
number of units.
Incorrect. Because Sammy's actual activity is lower than its expected activity, its actual costs will likely be lower than the costs in its static budget,
not higher as variable costs are expected to decrease as activity decreases. In addition, a static budget does not include lost income from fewer
units as it is based on a single level of activity.

Rationale
 Actual costs will likely be below budgeted costs because the static budget will only compare Sammy's results to the predetermined
10,000 units.
Correct. A static budget is prepared before a period begins based on the expected level of activity for the period. It is called a static budget because
it is based on a single level of activity that does not change based on actual results. Since Sammy's actual activity is lower than its expected activity,
its actual costs will likely be lower than the costs in its static budget since variable costs are expected to decrease as activity decreases.

Rationale
 Actual costs will not be compared to budgeted costs because the static budget is not an appropriate measure for Sammy's lower
production.
Incorrect. Comparing actual costs to static budget costs is an appropriate measure for lower production as this comparison measures how much
actual costs are lower than budgeted costs. This is the essence of lower production.
Question 29
1.C.1.e
flex.bpa.tb.047_0120
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

Ultimate Beauty produces cosmetics which are sold to wholesalers. For a recent period, the company had the following static budget for manufacturing
overhead costs based on 120,000 machine hours.

Variable
Indirect materials $336,000
Indirect labor 480,000
Factory supplies 48,000
Fixed
Depreciation $144,000
Taxes 24,000
Supervision 120,000

Ultimate Beauty is now preparing a flexible budget based on 96,000 actual machine hours. What amount will be reported on the flexible budget for
manufacturing overhead?

Correct

$979,200
Your Answer

$921,600

$691,200

$864,000

Rationale
 $979,200
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the same in a
static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different from
variable costs in a static budget to the extent that the actual activity level differs from the activity level used to prepare the static budget. The fixed
manufacturing overhead will be the same amount ($288,000 [$144,000 + $24,000 + $120,000]) in the static and flexible budgets. The variable
manufacturing cost must be adjusted for the different level of activity. The budgeted amount is $7.20 per machine hour ($864,000 [$336,000 +
$480,000 + $48,000] ÷ 120,000). If there are 96,000 machine hours, variable manufacturing overhead will be $691,200 ($7.20 × 96,000). Ultimate’s
total flexible budget for 96,000 machine hours is $979,200 ($288,000 + $691,200).

Rationale
 $921,600
This answer is incorrect. If manufacturing overhead is 100% variable, manufacturing overhead would be $9.60 per machine hour ($1,152,000
[$336,000 + $480,000 + $48,000 + $144,000 + $24,000 + $120,000] ÷ 120,000), which translates to $921,600 for 96,000 machine hours ($9.60 × 96,000).
However, manufacturing overhead is not 100% variable.

Rationale
 $691,200
This answer is incorrect. If there are 96,000 machine hours, variable manufacturing overhead will be $691,200 ($7.20 × 96,000). However, the flexible
budget for manufacturing overhead consists of more than variable manufacturing overhead.

Rationale
 $864,000
This answer is incorrect. $864,000 is the variable manufacturing overhead for 120,000 machine hours, not total manufacturing overhead for 96,000
machine hours.
Question 30
1.C.1.h
tb.flex.bpa.036_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
What would the most likely result be if the new screen-printing machine at Line Drive Apparel burned 20% of the shirts during the process of applying the
team logos?
A favorable direct materials quantity variance.
Correct

An unfavorable direct materials quantity variance.

Your Answer

An unfavorable direct materials price variance.

There will be no effect on variances.

Rationale
 A favorable direct materials quantity variance.
Incorrect. Destroying 20% of output due to equipment problems will likely result in using more shirts to produce output than is standard. This
greater need for shirts results in an unfavorable, not favorable, direct materials quantity variance.

Rationale
 An unfavorable direct materials quantity variance.
Correct. Direct material variances arise for a number of reasons. Destroying 20% of output due to equipment problems will likely result in using
more shirts to produce output than is standard. This greater need for shirts results in an unfavorable direct materials quantity variance.

Rationale
 An unfavorable direct materials price variance.
Incorrect. Destroying 20% of output due to equipment problems will likely result in using more shirts to produce output than is standard. An
unfavorable direct materials price variance indicates that the actual price paid for materials is higher than the standard price. Destroying shirts in
the production process is not likely to impact the price paid per shirt.

Rationale
 There will be no effect on variances.
Incorrect. Destroying 20% of output due to equipment problems will likely result in using more shirts to produce output than is standard. This
greater need for shirts results in an unfavorable direct materials quantity variance. This means there is an effect on at least one variance.
Question 31
1.C.1.h
tb.flex.bpa.030_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Jewel and Sasha were calculating materials variances for the company. Both needed to know the actual quantity and standard price of materials.
However, only Jewel needed to know the actual price of the materials, and only Sasha needed to know the standard quantity of materials. Why?
Correct

Jewel was calculating materials price variance, whereas Sasha was calculating materials quantity variance.

Jewel was calculating materials quantity variance, whereas Sasha was calculating materials quality variance.
Your Answer

Jewel was calculating materials quality variance, whereas Sasha was calculating materials price variance.

Jewel was calculating materials quantity variance, whereas Sasha was calculating materials price variance.

Rationale
 Jewel was calculating materials price variance, whereas Sasha was calculating materials quantity variance.
Correct. To calculate a direct materials price variance, one multiplies the difference between the standard price of materials and the actual price of
materials by the actual quantity of materials purchased. To calculate a direct materials quantity variance, one multiplies the difference between
the standard quantity of materials and the actual quantity of materials by the standard price of materials. Since Jewel needed to know the actual
quantity of materials, the standard price of materials, and the actual price of materials, she was calculating the direct materials price variance.
Since Sasha needed to know the actual quantity of materials, the standard price of materials, and the standard quantity of materials, she was
calculating the direct materials quantity variance.

Rationale
 Jewel was calculating materials quantity variance, whereas Sasha was calculating materials quality variance.
Incorrect. The actual price is not used in the materials quantity variance. In addition, the materials quality variance is not an actual variance.

Rationale
 Jewel was calculating materials quality variance, whereas Sasha was calculating materials price variance.
Incorrect. The materials quality variance is not an actual variance. In addition, Sasha would need the actual price to compute the materials price
variance, not the standard quantity of material.

Rationale
 Jewel was calculating materials quantity variance, whereas Sasha was calculating materials price variance.
Incorrect. Since Jewel needed to know the actual quantity of materials, the standard price of materials, and the actual price of materials, she was
calculating the direct materials price variance, not the direct materials quantity variance. In addition, since Sasha needed to know the actual
quantity of materials, the standard price of materials, and the standard quantity of materials, she was calculating the direct materials quantity
variance, not the direct materials price variance.
Question 32
1.C.1.h
tb.flex.bpa.027_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Which of the following suggests that a company is experiencing inefficiencies in the production department?
The company is experiencing an unfavorable materials variance because it is being charged higher shipping costs by its suppliers.
Correct

The company is experiencing an unfavorable materials variance because new employees have made several errors when assembling products.
Your Answer

The company is experiencing an unfavorable materials variance because it purchased a higher quality of raw materials.

The company is experiencing an unfavorable materials variance because a lower quality of raw materials is causing more waste as broken materials
are thrown away.

Rationale
 The company is experiencing an unfavorable materials variance because it is being charged higher shipping costs by its suppliers.
Incorrect. This answer relates to inefficiencies in the purchasing department, not the production department.

Rationale
 The company is experiencing an unfavorable materials variance because new employees have made several errors when assembling
products.
Correct. Unfavorable direct materials variances arise for a number of reasons. Not all of those reasons are related to inefficiencies in the production
department. One example that does relate to inefficiencies in the production department is an unfavorable direct materials variance from new
employees making several errors in assembling products. This increases the amount of materials used since the products likely need to be
reassembled with additional materials, resulting in an unfavorable direct materials quantity variance. Inadequate training of new employees is a
sign of an inefficient production department.

Rationale
 The company is experiencing an unfavorable materials variance because it purchased a higher quality of raw materials.
Incorrect. Purchasing higher-quality materials is not related to inefficiencies in the production department. It is a decision made by the purchasing
department. Additionally, the higher-quality material may result in a favorable direct materials quantity variance, which would indicate efficiencies,
not inefficiencies, in the production department.

Rationale
 The company is experiencing an unfavorable materials variance because a lower quality of raw materials is causing more waste as
broken materials are thrown away.
Incorrect. Purchasing lower-quality materials is not related to inefficiencies in the production department. It is a poor decision by the purchasing
department.
Question 33
1.C.1.g
tb.flex.bpa.019_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Gamma Ray Shades produces awnings and umbrellas which they sell to hotel chains. The company had the following static budget for manufacturing
overhead costs based on 120,000 machine hours:

Variable
Indirect Materials $235,200
Indirect Labor $336,000
Factory Supplies $33,600
Fixed
Depreciation $100,800
Taxes $16,800
Supervision $84,000

During the year, Gamma Ray Shades used 132,000 actual machine hours. The company's actual cost for indirect materials was $260,200, for indirect
labor was $370,000, and for factory supplies was $37,000. What amount will be reported on the manufacturing overhead flexible budget report under the
“Difference” column for indirect labor?

$400 favorable.

$34,000 unfavorable.
Your Answer

$34,000 favorable.
Correct

$400 unfavorable.

Rationale
 $400 favorable.
Incorrect. The budgeted amount of indirect labor is $2.80 per machine hour ($336,000 ÷ 120,000). If there are 132,000 machine hours, indirect labor
will be $369,600 ($2.80 × 132,000) in the flexible budget. While the variance is $400 ($369,600 − $370,000), it is unfavorable, not favorable, since
actual spending is $400 more than the flexible budget amount.

Rationale
 $34,000 unfavorable.
Incorrect. The static budget is $336,000. If this is compared to the actual spending of $370,000, there is a $34,000 ($370,000 − $336.000) unfavorable
variance since actual spending exceeds budgeted spending. However, the question asks about the flexible budget, not the static budget.

Rationale
 $34,000 favorable.
Incorrect. The static budget is $336,000. If this is compared to the actual spending of $370,000, there is a $34,000 ($370,000 − $336,000) unfavorable
variance, not a favorable variance, since actual spending exceeds budgeted spending. In addition, the question asks about the flexible budget, not
the static budget.

Rationale
 $400 unfavorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. The
budgeted amount of indirect labor is $2.80 per machine hour ($336,000 ÷ 120,000). If there are 132,000 machine hours, indirect labor will be
$369,600 ($2.80 × 132,000) in the flexible budget. Since actual indirect labor is $370,000, the $400 variance is unfavorable.
Question 34
1.C.1.i
flex.bpa.tb.058_0120
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
Jamison Enterprises had a total overhead variance of $27,200 unfavorable in the third quarter of 20x7. After an investigation, the company found that the
overhead variance was the result of one machine that frequently broke down, causing a delay in production. The responsibility for this variance would
rest with which of the following departments?
Sales department

Personnel department
Your Answer

Purchasing department
Correct

Production department

Rationale
 Sales department
This answer is incorrect. The sales department is not responsible for the upkeep of production equipment. As a result, it is not responsible for a
variance caused by the frequent breakdown of equipment.

Rationale
 Personnel department
This answer is incorrect. The personnel department is not responsible for the upkeep of production equipment. As a result, it is not responsible for a
variance caused by the frequent breakdown of equipment.

Rationale
 Purchasing department
This answer is incorrect. The purchasing department is not responsible for the upkeep of production equipment. As a result, it is not responsible for
a variance caused by the frequent breakdown of equipment.

Rationale
 Production department
Variances represent deviations from budgeted performance. Management by exception involves focusing management’s attention on areas where
actual performance varies significantly from budgeted performance. It allows management to better use its time to address performance issues.
Since the production department is most responsible for the upkeep of production equipment, a variance caused by the frequent breakdown of
equipment is the responsibility of the production department.
Question 35
1.C.1.b
1C1-AT10
LOS: 1.C.1.b
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
Which one of the following variances is most controllable by the production control supervisor?
Fixed overhead budget variance
Correct

Material usage variance

Fixed overhead volume variance

Your Answer

Material price variance

Rationale
 Fixed overhead budget variance
This answer is incorrect. The fixed overhead budget variance is not most controllable by the production control supervisor.

Rationale
 Material usage variance
The only items that a production supervisor can control are the usages of materials, direct labor, supplies, and utilities. The supervisor has control
over usage of resources, but not the purchase prices of resources.

Rationale
 Fixed overhead volume variance
This answer is incorrect. The fixed overhead volume variance is not most controllable by the production control supervisor.

Rationale
 Material price variance
This answer is incorrect. The material price variance is not most controllable by the production control supervisor.
Question 36
1.C.1.h
tb.flex.bpa.026_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
JT Engineering uses copper in its widgets. Demand for copper in the widget industry is greater than the available supply. As a result, JT is unable to
secure its typical discount with suppliers. Assuming that JT orders the same quantity as usual and that no changes are made to any of JT's materials
standards, what is the most likely end-of-quarter result?
A favorable materials price variance.
Correct

An unfavorable materials price variance.

Your Answer

An unfavorable materials quantity variance.

A favorable materials quantity variance.

Rationale
 A favorable materials price variance.
Incorrect. Not receiving a typical discount on material purchases will likely result in a higher purchase price than the standard purchase price for
materials. This higher price results in an unfavorable, not favorable, direct materials price variance.

Rationale
 An unfavorable materials price variance.
Correct. Direct materials variances arise for a number of reasons. Not receiving a typical discount on material purchases will likely result in a higher
purchase price than the standard purchase price for materials. This higher price results in an unfavorable direct materials price variance.

Rationale
 An unfavorable materials quantity variance.
Incorrect. The quality of the materials has not changed, so it is unlikely that there would be a materials quantity variance, as the materials
themselves are the same as previously used.

Rationale
 A favorable materials quantity variance.
Incorrect. The quality of the materials has not changed, so it is unlikely that there would be a materials quantity variance, as the materials
themselves are the same as previously used. Therefore, this is an incorrect answer.
Question 37
1.C.1.d
flex.bpa.tb.044_0120
LOS: 1.C.1.d
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
A company expected to spend $100,000 on labor to produce 25,000 units of product in 20X8 but it actually spent $110,000 on labor in 20X8. What
conclusion can be drawn from this?
The company’s labor was less efficient than expected in 20X8.

The company paid a higher wage rate than expected in 20X8.

Correct

The company spent more on labor in 20X8 than it expected to spend.

The company spent more on labor in 20X8 than it should have spent.

Rationale
 The company’s labor was less efficient than expected in 20X8.
This answer is incorrect. It is not possible to determine the actual hours worked or the hours that “should” have been worked from the information
provided.

Rationale
 The company paid a higher wage rate than expected in 20X8.
This answer is incorrect. It is not possible to determine the actual wage rate paid or the expected wage rate from the information provided.

Rationale
 The company spent more on labor in 20X8 than it expected to spend.
A master budget is prepared before a period begins and it contains information on expected revenues and expenses for the period. Because actual
spending on labor in 20X8 is higher than the master budget amount, one can conclude that the company spent more on labor than it expected to
spend.

Rationale
 The company spent more on labor in 20X8 than it should have spent.
This answer is incorrect. A master budget does not provide information about how much should have been spent on labor in 20X8.
Question 38
1.C.1.e
tb.flex.bpa.011_1808
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Gamma Ray Shades produces awnings and umbrellas which they sell to hotel chains. The company had the following static budget for manufacturing
overhead costs based on 120,000 machine hours:

Variable
Indirect Materials $235,200
Indirect Labor $336,000
Factory Supplies $33,600
Fixed
Depreciation $100,800
Taxes $16,800
Supervision $84,000

You have been asked to prepare a flexible budget based on 132,000 actual machine hours. What amount will be reported in your flexible budget for
manufacturing overhead?

$887,040
Your Answer

$665,280

$806,400
Correct

$866,880

Rationale
 $887,040
Incorrect. If the fixed manufacturing costs are assumed to be variable costs, then the flexible budget amount will be $221,760 ($1.68 per machine
hour × 132,000). The budgeted manufacturing cost amount is $5.04 per machine hour ($604,800 ÷ 120,000). If there are 132,000 machine hours,
variable manufacturing overhead will be $665,280 ($5.04 × 132,000). This would make the total flexible budget for 132,000 machine hours be
$887,040 ($221,760 + $665,280). However, the fixed component should not be treated like the variable component.

Rationale
 $665,280
Incorrect. The budgeted manufacturing cost amount is $5.04 per machine hour ($604,800 ÷ 120,000). If there are 132,000 machine hours, variable
manufacturing overhead will be $665,280 ($5.04 × 132,000). However, this ignores the fixed component.

Rationale
 $806,400
Incorrect. The fixed manufacturing overhead will be the same amount ($201,600) in the static and flexible budgets. If the variable component is
assumed to be fixed, then the total flexible budget for 132,000 machine hours is $806,400 ($201,600 + $604,800). However, the variable component
should not be treated like the fixed component.

Rationale
 $866,880
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. The fixed
manufacturing overhead will be the same amount ($201,600) in the static and flexible budgets. The variable manufacturing cost must be adjusted
for the different level of activity. The budgeted amount is $5.04 per machine hour ($604,800 ÷ 120,000). If there are 132,000 machine hours, variable
manufacturing overhead will be $665,280 ($5.04 × 132,000). The total flexible budget for 132,000 machine hours is $866,880 ($201,600 + $665,280).
Question 39
1.C.1.h
tb.flex.bpa.031_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
In the month of July, Royer Industries reported a total variance of $65,473. Because the variance is usually less than $10,000, the CEO asked for a report
detailing the exact cause of the variance. How would the accountants at Royer find the cause of the variance?
Start by determining the variance per unit rather than total variance.
Correct

Start by calculating separate variances for direct materials, direct labor, and overhead.
Your Answer

Start by calculating separate variances for price and quantity.

Start by talking to the different departments to determine what they think the cause of the variance is.

Rationale
 Start by determining the variance per unit rather than total variance.
Incorrect. Starting by calculating variances on a per-unit basis is not likely to be helpful as knowing the variance per unit does not help identify the
cause or causes of a variance. It is just another way of looking at a variance.

Rationale
 Start by calculating separate variances for direct materials, direct labor, and overhead.
Correct. Variance analysis is useful for understanding why actual performance differs from expected performance. To find the cause or causes of a
total variance, a good first step is to separate the total impact into its various components. This involves calculating separate variances for each
category of expenses as well as for revenue. An example of this is to calculate separate variances for direct materials, direct labor, and overhead.

Rationale
 Start by calculating separate variances for price and quantity.
Incorrect. While knowing price and quantity variances is helpful to identifying the cause or causes of variances, it is first necessary to calculate
separate variances for each category of expenses. Once this is known, then price and quantity variances can be calculated for each category. It is
not useful to talk about one price variance or one quantity variance since there are many different inputs.

Rationale
 Start by talking to the different departments to determine what they think the cause of the variance is.
Incorrect. While talking to different departments to determine what they think is the cause of the variance is useful, it is not appropriate as a first
step. It is first necessary to calculate separate variances for each category of expenses. Once this is known, then it is possible to identify which
departments should be consulted. If an expense category has a negligible variance, it is not necessary to consult that area.
Question 40
1.C.1.g
tb.flex.bpa.021_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Gamma Ray Shades produces awnings and umbrellas which they sell to hotel chains. The company had the following static budget for manufacturing
overhead costs based on 120,000 machine hours:

Variable
Indirect Materials $235,200
Indirect Labor $336,000
Factory Supplies $33,600
Fixed
Depreciation $100,800
Taxes $16,800
Supervision $84,000

During the year, Gamma Ray Shades used 132,000 actual machine hours. The company's actual cost for taxes was $17,040 and actual cost for supervision
was $85,320. What amount will be reported on the manufacturing overhead flexible budget report under the “Difference” column for supervision?

Your Answer

$7,080 favorable.

$1,320 favorable.

$7,080 unfavorable.
Correct

$1,320 unfavorable.

Rationale
 $7,080 favorable.
Incorrect. If supervision is treated as a variable cost, the budgeted amount is $0.70 per machine hour ($84,000 ÷ 120,000). If supervision is treated as
a variable cost and there are 132,000 machine hours, supervision will be $92,400 ($0.70 × 132,000) in the flexible budget. Since actual spending for
supervision is $85,320, there would then be a favorable variance of $7,080 ($85,320 − $92,400). However, supervision is a fixed cost, not a variable
cost.

Rationale
 $1,320 favorable.
Incorrect. Since supervision is a fixed cost, it is $84,000 in the flexible budget and static budget. Since actual spending for supervision is $85,320, the
variance is $1,320. However, it is unfavorable, not favorable, since actual spending is $1,320 ($85,320 − $84,000) more than the flexible budget
amount.

Rationale
 $7,080 unfavorable.
Incorrect. If supervision is treated as a variable cost, the budgeted amount is $0.70 per machine hour ($70,000 ÷ 100,000). If supervision is treated as
a variable cost, the budgeted amount is $0.70 per machine hour ($84,000 ÷ 120,000). If supervision is treated as a variable cost and there are 132,000
machine hours, supervision will be $92,400 ($0.70 × 132,000) in the flexible budget. Since actual spending for supervision is $85,320, there would
then be a variance of $7,080 ($85,320 − $92,400). However, the variance would be favorable, not unfavorable, since the actual spending is lower
than the flexible budget amount. In addition, supervision is a fixed cost, not a variable cost.

Rationale
 $1,320 unfavorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. Since
supervision is a fixed cost, it is $84,000 in the flexible budget and static budget. Since actual spending for supervision is $85,320, the $1,320 ($85,320
− $84,000) variance is unfavorable.
Question 41
1.C.1.b
aq.flex.bpa.002_0820
LOS: 1.C.1.b
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
How are variances involved with the management process of planning, controlling, and evaluating operations?
The management process changes performance measures every time there is a variance. This represents the planning phase of the management
process.

The orgaization’s performance monitoring system captures and reports variances in operations. This represents the controlling phase of the
management process.

The managers determine the cause for variances in order to incentivize employees. This represents the evaluating phase of the management process.
Correct

The performance monitoring system captures and reports variances in operations. This represents the controlling phase of the management process.
Additionally, managers determine the cause for variances in order to incentivize employees. This represents the evaluating phase of the management
process.

Rationale
 The management process changes performance measures every time there is a variance. This represents the planning phase of the
management process.
This answer is incorrect. Operational planning is where the strategy is defined into operational objectives, performance measures are set, and
resources are committed. This is the budgeting process for the organization. While insights gained in the evaluating phase will inform the planning
stage for the upcoming operational cycle, performance measures will not be altered each time there is a variance.

Rationale
 The orgaization’s performance monitoring system captures and reports variances in operations. This represents the controlling phase
of the management process.
This answer is incomplete. While this statement is correct, variances are involved in other aspects of the management process.

Rationale
 The managers determine the cause for variances in order to incentivize employees. This represents the evaluating phase of the
management process.
This answer is incomplete. While this statement is correct, variances are involved in other aspects of the management process.

Rationale
 The performance monitoring system captures and reports variances in operations. This represents the controlling phase of the
management process. Additionally, managers determine the cause for variances in order to incentivize employees. This represents the
evaluating phase of the management process.
Performance analysis begins by capturing and reporting variances in operations (Controlling), and then determining causes for variances in order
to incentivize employees (Evaluating). Controlling operational processes requires that expectations are established and incentivized, and results
are gathered and reported. It is in this process that management accountants capture and report variances. Evaluating the operations involves
rewarding performance, determining why objectives were met or not, and using the insight gained to complete the feedback loop and inform the
planning stage for the upcoming operational cycle.
Question 42
1.C.1.c
tb.flex.bpa.001_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
For June, Inground Pools’ static budget was based on the sale and installation of 25 pools. However, the summer was projected to be much hotter than
usual, and the company sold and installed 38 pools. If the actual costs for the 38 pools were compared to the budgeted costs for the 25 pools, the
difference would likely be:
Correct

unfavorable.

favorable.

zero.
Your Answer

negligible.

Rationale
 unfavorable.
Correct. Variances are classified depending on how they impact actual net income relative to net income in the static budget. Any variance that
would increase actual net income relative to net income in the static budget is a favorable variance and any variance that would decrease actual
net income relative to net income in the static budget is an unfavorable variance. A favorable variance is not necessarily “good” and an unfavorable
variance is not necessarily “bad.” The actual costs to sell and install 38 pools are likely to be higher than the budgeted costs to sell and install 25
pools. This higher cost would make actual net income lower than net income in the static budget, all other factors held constant. This means the
difference is an unfavorable difference.

Rationale
 favorable.
Incorrect. The actual costs to sell and install 38 pools are likely to be higher than the budgeted costs to sell and install 25 pools. This higher cost
would make actual net income lower than net income in the static budget, all other factors held constant. This means the difference is an
unfavorable difference, not a favorable difference. A favorable difference would mean the actual costs are lower than the static budget costs.

Rationale
 zero.
Incorrect. The actual costs to sell and install 38 pools are likely to be higher than the budgeted costs to sell and install 25 pools. A zero difference
would mean the actual costs are the same as the static budget costs.

Rationale
 negligible.
Incorrect. The actual costs to sell and install 38 pools are likely to be significantly higher than the budgeted costs to sell and install 25 pools since
actual production is 52% higher than budgeted production. This means the difference is a significant difference, not a negligible difference. A
negligible difference would mean the actual costs are very similar to the static budget costs.
Question 43
1.C.1.e
tb.flex.bpa.010_1808
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Home Furnishings had the following static budget for manufacturing overhead costs based on 100,000 machine hours:

Variable
Indirect Materials $196,000
Indirect Labor $280,000
Factory Supplies $28,000
Fixed
Depreciation $84,000
Taxes $14,000
Supervision $70,000

The controller for Home Furnishings is now preparing a flexible budget based on 110,000 actual machine hours. What amount will be reported on the
flexible budget for manufacturing overhead?

$739,200

$554,400
Your Answer

$672,000
Correct

$722,400

Rationale
 $739,200
Incorrect. If the fixed manufacturing costs are wrongly assumed to be variable costs, then the flexible budget amount will be $184,800 ($1.68 per
machine hour × 110,000 hours). The budgeted manufacturing cost amount is $5.04 per machine hour ($504,000 ÷ 100,000). If there are 110,000
machine hours, variable manufacturing overhead will be $554,400 ($5.04 × 110,000). This would make the total flexible budget for 110,000 machine
hours be $739,200 ($184,800 + $554,400). However, the fixed component should not be treated like the variable component.

Rationale
 $554,400
Incorrect. The budgeted amount is $5.04 per machine hour ($504,000 ÷ 100,000). If there are 110,000 machine hours, variable manufacturing
overhead will be $554,400 ($5.04 × 110,000). However, this ignores the fixed component.

Rationale
 $672,000
Incorrect. The fixed manufacturing overhead is the same amount ($168,000) in the static and flexible budgets. If the variable component is assumed
to be fixed, then the total flexible budget for 110,000 machine hours is $672,000 ($168,000 + $504,000). However, the variable component should not
be treated like the fixed component.

Rationale
 $722,400
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. The fixed
manufacturing overhead will be the same amount ($168,000) in the static and flexible budgets. The variable manufacturing cost must be adjusted
for the different level of activity. The budgeted amount is $5.04 per machine hour ($504,000 ÷ 100,000). If there are 110,000 machine hours, variable
manufacturing overhead will be $554,400 ($5.04 × 110,000). The total flexible budget for 110,000 machine hours is $722,400 ($168,000 + $554,400).
Question 44
1.C.1.g
tb.flex.bpa.023_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
The flexible budget for production of snack cakes by Grandma's Bakery is based on 50,000 units produced per month. For this level of production,
indirect materials are $8,500, indirect labor is $9,300, utilities are $3,000, depreciation is $6,000, and supervision is $1,500. In the month of November,
they spent $7,950 for indirect materials, $8,990 for indirect labor, and $3,400 for utilities to make 50,000 snack cakes. What was the variance in variable
costs for November?
$460 unfavorable.

$860 favorable.
Correct

$460 favorable.

$860 unfavorable.

Rationale
 $460 unfavorable.
Incorrect. Variable costs for Grandma's Bakery include indirect materials, indirect labor, and utilities. Depreciation and supervision are fixed costs.
The total variable costs in the flexible budget are $20,800 ($8,500 + $9,300 + $3,000) and the actual total variable costs are $20,340 ($7,950 + $8,990 +
$3,400). While there is a variance of $460 ($20,340 – 20,800), it is not unfavorable, since actual spending is lower than the flexible budget amount.

Rationale
 $860 favorable.
Incorrect. Variable costs for Grandma's Bakery include indirect materials, indirect labor, and utilities. Depreciation and supervision are fixed costs.
If utilities are omitted, total variable costs in the flexible budget would be $17,800 ($8,500 + $9,300) and the actual total variable costs are $16,940
($7,950 + $8,990). Since actual spending would be lower than the flexible budget amount by $860 ($16,940 − $17,800), there would be an $860
favorable variance. However, utilities need to be included in the variable costs.

Rationale
 $460 favorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. Variable
costs for Grandma's Bakery include indirect materials, indirect labor, and utilities. Depreciation and supervision are fixed costs. The total variable
costs in the flexible budget are $20,800 ($8,500 + $9,300 + $3,000) and the actual total variable costs are $20,340 ($7,950 + $8,990 + $3,400). Since
actual spending is lower than the flexible budget amount by $460 ($20,340 – 20,800), there is a $460 favorable variance.

Rationale
 $860 unfavorable.
Incorrect. Variable costs for Grandma's Bakery include indirect materials, indirect labor, and utilities. Depreciation and supervision are fixed costs.
If utilities are omitted, total variable costs in the flexible budget would be $17,800 ($8,500 + $9,300) and the actual total variable costs are $16,940
($7,950 + $8,990). This would result in a variance of $860 ($16,940 − $17,800). However, it would be favorable, not unfavorable, since actual
spending would be lower than the flexible budget. In addition, utilities need to be included in the variable costs.
Question 45
1.C.1.a
aq.flex.bpa.001_0820
LOS: 1.C.1.a
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

Cool Computers (CC) had the following operational goals and actual results for this year.

Goal Actual
Revenue $500,000 $490,000
Manufacturing Costs $350,000 $320,000
Non-Manufacturing Costs $100,000 $120,000
Profit $50,000 $50,000

Which of the following correctly describes CC's performance in relation to its operational goals?

CC met or exceeded the following operational goals: Revenue, Manufacturing Costs, Non-Manufacturing Costs, and Profit.
Correct

CC met or exceeded the following operational goals: Manufacturing Costs and Profit.
Your Answer

CC met or exceeded the following operational goals: Revenue and Non-Manufacturing Costs.

CC met or exceeded the following operational goals: Manufacturing Costs.

Rationale
 CC met or exceeded the following operational goals: Revenue, Manufacturing Costs, Non-Manufacturing Costs, and Profit.
This answer is incorrect. CC did not meet or exceed all the operational goals.

Rationale
 CC met or exceeded the following operational goals: Manufacturing Costs and Profit.
CC exceeded the manufacturing costs goal by having actual manufacturing costs of $320,000, which is lower than the goal of $350,000. It is better
for the cost to be lower than the goal. The opposite is true for revenue and profit. CC met the profit goal by having actual profit of $50,000, which is
the same as the goal of $50,000.

Rationale
 CC met or exceeded the following operational goals: Revenue and Non-Manufacturing Costs.
This answer is incorrect. This answer mixes up the operational goals that CC did meet or exceed with the ones that CC did not meet or exceed.

Rationale
 CC met or exceeded the following operational goals: Manufacturing Costs.
This answer is incorrect. This answer does not consider that CC met the profit goal.
Question 46
1.C.1.h
tb.flex.bpa.029_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
What is the difference between calculating materials price variance and materials quantity variance?
Price variance requires knowing the standard price of materials, whereas quantity variance requires knowing the actual price of materials.
Correct

Price variance requires knowing the actual price of materials, whereas quantity variance requires knowing the standard quantity of materials.

Price variance requires knowing the actual quantity of materials, whereas quantity variance requires knowing the actual price of materials.

Price variance requires knowing the standard quantity of materials, whereas quantity variance requires knowing the actual price of materials.

Rationale
 Price variance requires knowing the standard price of materials, whereas quantity variance requires knowing the actual price of
materials.
Incorrect. To calculate a direct materials price variance, one multiplies the difference between the standard price of materials and the actual price
of materials by the actual quantity of materials purchased. To calculate a direct materials quantity variance, one multiplies the difference between
the standard quantity of materials and the actual quantity of materials by the standard price of materials. While one needs to know the standard
price of materials to calculate a direct materials price variance, it is not necessary to know the actual price of materials to calculate a direct
materials quantity variance.

Rationale
 Price variance requires knowing the actual price of materials, whereas quantity variance requires knowing the standard quantity of
materials.
Correct. To calculate a direct materials price variance, one multiplies the difference between the standard price of materials and the actual price of
materials by the actual quantity of materials purchased. To calculate a direct materials quantity variance, one multiplies the difference between
the standard quantity of materials and the actual quantity of materials by the standard price of materials. This means one needs to know the actual
price of materials to calculate a direct materials price variance and the standard quantity of materials to calculate a direct materials quantity
variance.

Rationale
 Price variance requires knowing the actual quantity of materials, whereas quantity variance requires knowing the actual price of
materials.
Incorrect. To calculate a direct materials price variance, one multiplies the difference between the standard price of materials and the actual price
of materials by the actual quantity of materials purchased. To calculate a direct materials quantity variance, one multiplies the difference between
the standard quantity of materials and the actual quantity of materials by the standard price of materials. While one needs to know the actual
quantity of materials to calculate a direct materials price variance, it is not necessary to know the actual price of materials to calculate a direct
materials quantity variance.

Rationale
 Price variance requires knowing the standard quantity of materials, whereas quantity variance requires knowing the actual price of
materials.
Incorrect. To calculate a direct materials price variance, one multiplies the difference between the standard price of materials and the actual price
of materials by the actual quantity of materials purchased. To calculate a direct materials quantity variance, one multiplies the difference between
the standard quantity of materials and the actual quantity of materials by the standard price of materials. This means it is not necessary to know
the standard quantity of materials to calculate a direct materials price variance and it is not necessary to know the actual price of materials to
calculate a direct materials quantity variance.
Question 47
1.C.1.c
flex.bpa.tb.040_0120
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
Fox Company’s static budget shows $27,000 budgeted for direct materials, $36,000 budgeted for direct labor, and $9,000 budgeted for overhead. Fox’s
actual direct materials were $28,000, actual direct labor was $34,000, and actual overhead was $9,200. What is the total difference between the static
budget and actual, and is the difference favorable or unfavorable?
$800, unfavorable
Correct

$800, favorable
Your Answer

$3,200, favorable

$3,200, unfavorable

Rationale
 $800, unfavorable
This answer is incorrect. Fox’s static budget spending is $72,000 ($27,000 + $36,000 + $9,000) and its actual spending is $71,200 ($28,000 + $34,000 +
$9,200). The variance is $800, but it is not unfavorable.

Rationale
 $800, favorable
A static budget is prepared before a period begins based on the expected level of activity for the period. It is called a static budget because it is
based on a single level of activity that does not change based on actual results. When this is compared to actual spending, actual spending lower
than static budget spending is a favorable variance as this lower actual spending increases actual net income relative to budgeted income. Fox’s
static budget spending is $72,000 ($27,000 + $36,000 + $9,000) and its actual spending is $71,200 ($28,000 + $34,000 + $9,200). Since actual spending
is $800 less, this is a favorable $800 variance.

Rationale
 $3,200, favorable
This answer is incorrect. The difference between static budget spending and actual spending is $1,000 for direct materials, $2,000 for direct labor,
and $200 for overhead. These total $3,200. However, it does not take into consideration the “direction” of the differences.

Rationale
 $3,200, unfavorable
This answer is incorrect. The difference between static budget spending and actual spending is $1,000 for direct materials, $2,000 for direct labor,
and $200 for overhead. These total $3,200. However, it does not take into consideration the “direction” of the differences.
Question 48
1.C.1.g
tb.flex.bpa.015_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Windell Company uses flexible budgets. At normal capacity of 8,000 units, budgeted manufacturing overhead is: $64,000 variable and $180,000 fixed. If
Windell had actual overhead costs of $250,000 for 9,000 units produced, what is the variance between actual and budgeted costs?
$2,000 unfavorable.

$6,000 unfavorable.

$6,000 favorable.
Correct

$2,000 favorable.

Rationale
 $2,000 unfavorable.
Incorrect. The budgeted amount of variable cost is $8.00 per unit ($64,000 ÷ 8,000). If there are 9,000 units produced, variable manufacturing
overhead will be $72,000 ($8.00 × 9,000) in the flexible budget. The total flexible budget for 9,000 units is $252,000 ($180,000 + $72,000). While the
variance is $2,000, it is not unfavorable, since actual spending is $2,000 less than the flexible budget amount.

Rationale
 $6,000 unfavorable.
Incorrect. The static budget is $244,000 ($64,000 + $180,000). If this is compared to the actual spending of $250,000, there is a $6,000 unfavorable
variance since actual spending exceeds budgeted spending. However, since the company uses flexible budgets, the flexible budget value needs to
be compared to the actual spending.

Rationale
 $6,000 favorable.
Incorrect. The static budget is $244,000 ($64,000 + $180,000). If this is compared to the actual spending of $250,000, there is a $6,000 unfavorable
variance, not a favorable variance, since actual spending exceeds budgeted spending. In addition, since the company uses flexible budgets, the
flexible budget value needs to be compared to the actual spending.

Rationale
 $2,000 favorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. The
budgeted amount of variable cost is $8.00 per unit ($64,000 ÷ 8,000). If there are 9,000 units produced, variable manufacturing overhead will be
$72,000 ($8.00 × 9,000) in the flexible budget. The total flexible budget for 9,000 units is $252,000 ($180,000 + $72,000). Since actual spending is only
$250,000, the $2,000 variance is favorable.
Question 49
1.C.1.e
aq.flex.bpa.006_0820
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Based on the following information for one of its products, what is the flexible budget operating profit for Trendy Technology (TT)?

Actual sales volume 3,000

Expected sales volume 3,100
Standard variable cost per unit $5.00
Actual variable cost per unit $4.75
Actual fixed cost $8,000
Budgeted fixed cost $8,250
Actual sales price per unit $8.00
Standard sales price per unit $8.25

Correct

$1,500
Your Answer

$750

$2,250

$1,750

Rationale
 $1,500

The flexible budget operating profit for TT is calculated as follows:

Actual sales volume 3,000

Standard sales price per unit × $8.25
Total budgeted revenue $24,750
Actual sales volume 3,000
Standard variable cost per unit × $5.00
Total budgeted variable costs $15,000
Total budgeted fixed costs ( 8,250)
Flexible budget operating profit $ 1,500

Rationale
 $750
This answer is incorrect. This answer calculated flexible budget operating profit with actual sales price per unit instead of standard sales price per
unit.

Rationale
 $2,250
This answer is incorrect. This answer calculated flexible budget operating profit with actual variable cost per unit instead of standard variable cost
per unit.

Rationale
 $1,750
This answer is incorrect. This answer calculated flexible budget operating profit with actual fixed costs instead of budgeted fixed costs.
Question 50
1.C.1.e
cma11.p1.t1.me.0057_0820
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

A company's master budget for the year planned that the company would manufacture and sell 2,000 units for €500,000 in sales, €350,000 in variable
expenses, and €45,000 in fixed expenses. If the company manufactured and sold only 1,750 units during the year, how much is the company's flexible
budget operating income?

*Source: Retired ICMA CMA Exam Questions.

€42,500
Correct

€86,250.

€91,875
Your Answer

€105,000

Rationale
 €42,500
This answer is incorrect. This is the budgeted operating income for 1,750 units if all the costs are fixed costs.

Rationale
 €86,250.
If the company manufactured and sold only 1,750 units during the year, the flexible budget would show operating income of €86,250. A flexible
budget is a budget adjusted for the actual level of output.
Sales revenue (€500,000 ÷ 2,000) × 1,750 €437,500
Variable expenses (€350,000 ÷ 2,000) × 1,750 306,250
Contribution margin 131,250
Fixed expenses 45,000
Operating income €86,250

Rationale
 €91,875
This answer is incorrect. This is the budgeted operating income for 1,750 units if all the costs are variable costs.

Rationale
 €105,000
This answer is incorrect. This is the budgeted operating income if 2,000 units are sold.
Question 51
1.C.1.g
tb.flex.bpa.018_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Home Furnishings had the following static budget for manufacturing overhead costs based on 100,000 machine hours:

Variable
Indirect Materials $196,000
Indirect Labor $280,000
Factory Supplies $28,000
Fixed
Depreciation $84,000
Taxes $14,000
Supervision $70,000

During the year, Home Furnishings used 110,000 actual machine hours. The company's actual cost for indirect materials was $198,200, for indirect labor
was $276,000, and for factory supplies was $34,400. What amount will be reported on the manufacturing overhead flexible budget report under the
“Difference” column for indirect labor?

Correct

$32,000 favorable.

$17,400 favorable.
Your Answer

$3,600 unfavorable.

$4,000 favorable.

Rationale
 $32,000 favorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. The
budgeted amount of indirect labor is $2.80 per machine hour ($280,000 ÷ 100,000). If there are 110,000 machine hours, indirect labor will be
$308,000 ($2.80 × 110,000) in the flexible budget. Since actual indirect labor is only $276,000, the $32,000 ($276,000 − $308,000) variance is
favorable.

Rationale
 $17,400 favorable.
Incorrect. The budgeted amount of indirect materials is $1.96 per machine hour ($196,000 ÷ 100,000). If there are 110,000 machine hours, indirect
materials will be $215,600 ($1.96 × 110,000) in the flexible budget. Since actual indirect materials is only $198,200, the $17,400 ($198,200 − $215,600)
variance is favorable. However, the question asks about indirect labor, not indirect materials.

Rationale
 $3,600 unfavorable.
Incorrect. The budgeted amount of factory supplies is $0.28 per machine hour ($28,000 ÷ 100,000). If there are 110,000 machine hours, factory
supplies will be $30,800 ($0.28 × 110,000) in the flexible budget. Since actual factory supplies is $34,400 the $3,600 ($34,400 − $30,800) variance is
unfavorable. However, the question asks about indirect labor, not factory supplies.

Rationale
 $4,000 favorable.
Incorrect. The static budget for indirect labor is $280,000. If this is compared to the actual spending of $276,000, there is a $4,000 ($276,000 −
$280,000) favorable variance since actual spending is less than budgeted spending. However, the question asks about the flexible budget, not the
static budget.
Question 52
1.C.1.i
aq.flex.bpa.009_0820
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
Which of the following correctly represents the management-by-exception concept in variance analysis?
Only favorable variances provide a signal to management indicating that something in the organization is out of compliance with budget standards or
performance expectations.

Only unfavorable variances provide a signal to management indicating that something in the organization is out of compliance with budget standards
or budget performance.
Correct

Both favorable and unfavorable variances provide a signal to management indicating that something in the organization is out of compliance with
budget standards or performance expectations.
Your Answer

Variances by themselves do not provide a signal to management that something in the organization is out of compliance with budget standards or
performance expectations.

Rationale
 Only favorable variances provide a signal to management indicating that something in the organization is out of compliance with
budget standards or performance expectations.
This answer is incorrect. Unfavorable variances also provide a signal to management that something in the organization is out of compliance with
budget standards or performance expectations.

Rationale
 Only unfavorable variances provide a signal to management indicating that something in the organization is out of compliance with
budget standards or budget performance.
This answer is incorrect. Favorable variances also provide a signal to management that something in the organization is out of compliance with
budget standards or performance expectations.

Rationale
 Both favorable and unfavorable variances provide a signal to management indicating that something in the organization is out of
compliance with budget standards or performance expectations.
Variances provide a signal to management indicating that something in the organization is out of compliance with budget standards or
performance expectations, regardless of whether the variance is favorable or unfavorable. If the variance is large enough, it calls attention to
management. The value of this management-by-exception approach is it helps the organization focus on current processes that may need
attention. It's important to note that variances do not inform management on what the actual problem is or what needs to be done. Variances are
simply “signals” to managers to investigate.

Rationale
 Variances by themselves do not provide a signal to management that something in the organization is out of compliance with budget
standards or performance expectations.
This answer is incorrect. Variances by themselves do provide a signal to management that something in the organization is out of compliance with
budget standards or performance expectations.
Question 53
1.C.1.d
flex.bpa.tb.042_0120
LOS: 1.C.1.d
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 1
Which of the following best describes the process of comparing actual results to the master budget?
Comparing the actual spending in a given year to the actual spending in the prior year
Correct

Comparing the actual spending in a given year to the expected spending for that year

Comparing the actual spending in a given year to the expected spending for the actual level of activity achieved in a given year
Your Answer

Comparing the actual spending in a given year to a competitor’s spending for the same year

Rationale
 Comparing the actual spending in a given year to the actual spending in the prior year
This answer is incorrect. A master budget does not include information on a prior year’s spending.

Rationale
 Comparing the actual spending in a given year to the expected spending for that year
A master budget is prepared before a period begins and it contains information on expected revenues and expenses for the period. Comparing
spending in a given year to the master budget is the same as comparing spending in a given year to the expected spending for that year.

Rationale
 Comparing the actual spending in a given year to the expected spending for the actual level of activity achieved in a given year
This answer is incorrect. A flexible budget contains information on expected spending for the actual level of activity achieved in a given year, not the
master budget.

Rationale
 Comparing the actual spending in a given year to a competitor’s spending for the same year
This answer is incorrect. A master budget does not include information on a competitor’s spending for the same year.
Question 54
1.C.1.i
flex.bpa.tb.059_0120
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
Payson Industries had a total overhead variance of $45,600 unfavorable in the fourth quarter of 20x6. After an investigation, the company found that the
overhead variance was the result of lower than expected sales. The responsibility for this variance would rest with which of the following departments?
Correct

Sales department

Production department

Personnel department
Your Answer

Purchasing department

Rationale
 Sales department
Variances represent deviations from budgeted performance. Management by exception involves focusing management’s attention on areas where
actual performance varies significantly from budgeted performance. It allows management to better use its time to address performance issues.
Since the sales department is most responsible for generating sales, a variance caused by lower than expected sales is the responsibility of the sales
department.

Rationale
 Production department
This answer is incorrect. The production department is not responsible for generating sales. As a result, it is not responsible for a variance caused
by lower than expected sales.

Rationale
 Personnel department
This answer is incorrect. The personnel department is not responsible for generating sales. As a result, it is not responsible for a variance caused by
lower than expected sales.

Rationale
 Purchasing department
This answer is incorrect. The purchasing department is not responsible for generating sales. As a result, it is not responsible for a variance caused
by lower than expected sales.
Question 55
1.C.1.h
tb.flex.bpa.025_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
If a company decides to buy materials in bulk to receive a discount, how would this affect its variance?
The company would have a favorable materials quantity variance.
Your Answer

The company would have an unfavorable materials price variance.

The company would have an unfavorable materials quantity variance.

Correct

The company would have a favorable materials price variance.

Rationale
 The company would have a favorable materials quantity variance.
Incorrect. This lower price due to a bulk discount is not likely to result in a favorable materials quantity variance as this variance is the result of
using fewer materials than the standard allows. This can be caused by cutting corners or excellent employee training, but not from receiving a bulk
discount.

Rationale
 The company would have an unfavorable materials price variance.
Incorrect. Buying materials in bulk in order to receive a discount will likely result in a lower purchase price than the standard purchase price for
materials. This lower price results in a favorable, not unfavorable, materials price variance.

Rationale
 The company would have an unfavorable materials quantity variance.
Incorrect. This lower price due to a bulk discount is not likely to result in an unfavorable materials quantity variance as this variance is the result of
using more materials than the standard allows. This can be caused by using a lower-quality material than expected or poor employee training, but
not from receiving a bulk discount.

Rationale
 The company would have a favorable materials price variance.
Correct. Direct materials variances arise for a number of reasons. Buying materials in bulk in order to receive a discount will likely result in a lower
purchase price than the standard purchase price for materials. This lower price results in a favorable materials price variance.
Question 56
1.C.1.g
flex.bpa.tb.053_0120
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Olive Industries produced 30,000 units this month and used 36,000 machine hours. The company’s static budget for manufacturing overhead costs based
on 37,500 machine hours is as follows:

Variable
Indirect materials $441,000
Indirect labor 630,000
Factory supplies 63,000
Fixed
Depreciation $126,000
Taxes 21,000
Supervision 105,000

During the month, Olive’s actual costs were $1.75 per machine hour for factory supplies. What is the amount of difference for factory supplies shown on
the company’s manufacturing overhead flexible budget report?

$7,980 favorable

$2,520 favorable
Correct

$2,520 unfavorable

$0 – budgeted and actual costs were equal

Rationale
 $7,980 favorable
This answer is incorrect. Olive’s flexible budget for factory supplies is $60,480 ($1.68 × 36,000). The variance is based on comparing $60,480 with
$52,500 ($1.75 × 30,000 units). However, the $1.75 rate for machine hours cannot be combined with units produced.

Rationale
 $2,520 favorable
This answer is incorrect. Olive’s static budget factory supplies is $63,000 and the flexible budget for supplies is $60,480 ($1.68 × 36,000). However,
this difference between the static budget and flexible budget spending is not reported as a variance on the flexible budget report.

Rationale
 $2,520 unfavorable

Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Since factory supplies is a
variable cost, the amount in a flexible budget will be different from the amount in a static budget to the extent that the actual activity level differs
from the activity level used to prepare the static budget. Olive’s standard price for factory supplies is $1.68 per machine hour ($63,000 ÷ 37,500).
Based on 36,000 machine hours actually used, budgeted spending for factory supplies in the flexible budget will be $60,480 ($1.68 × 36,000). The
actual cost of factory supplies is $63,000 ($1.75 × 36,000). Since actual spending is $2,520 more than the flexible budget amount, the $2,520
spending (or price) variance is unfavorable.

Hours Rate Total Variance

Static Budget 37,500 $1.68 $63,000.00
$2,520.00
Flexible Budget 36,000 $1.68 $60,480.00
$(2,520.00)
Actual Results 36,000 $1.75 $63,000.00

Rationale
 $0 – budgeted and actual costs were equal
This answer is incorrect. Olive’s static budget factory supplies is $63,000 and its actual factory supplies spending is $63,000 ($1.75 × 36,000). The
static budget variance is $0, but it does not measure the difference between actual spending and flexible budget spending.
Question 57
1.C.1.b
flex.bpa.tb.038_0120
LOS: 1.C.1.b
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
All of the following events are likely to cause a labor cost variance, except:
A company producing 20% more units than expected.

A company producing 15% fewer units than expected.

A company providing unplanned raises to all employees.

Correct

A company increasing the price charged for its product.

Rationale
 A company producing 20% more units than expected.
This answer is incorrect. Producing 20% more units than expected is likely to result in spending more on labor than expected and cause a labor cost
variance.

Rationale
 A company producing 15% fewer units than expected.
This answer is incorrect. Producing 15% fewer units than expected is likely to result in spending less on labor than expected and cause a labor cost
variance.

Rationale
 A company providing unplanned raises to all employees.
This answer is incorrect. Providing unplanned raises to all employees is likely to result in spending more on labor than expected and cause a labor
cost variance.

Rationale
 A company increasing the price charged for its product.
Variances measure the difference between expected and actual performance. A company increasing the price of its product is not likely to change
the amount spent on labor immediately; therefore, a labor cost variance is not likely to occur.
Question 58
1.C.1.i
flex.bpa.tb.055_0120
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
When reporting variances:
Correct

the reports should facilitate management by exception.

promptness is relatively unimportant.

Your Answer

management normally investigates all variances.

the reports are not departmentalized.

Rationale
 the reports should facilitate management by exception.
Variances represent deviations from budgeted performance. Management by exception involves focusing management’s attention on areas where
actual performance varies significantly from budgeted performance. By reporting variances in a way that facilitates management by exception,
management is able to make better use of its time to address performance issues.

Rationale
 promptness is relatively unimportant.
This answer is incorrect. Since variances represent deviations from budgeted performance, it is important that decision-makers receive variance
information promptly.

Rationale
 management normally investigates all variances.
This answer is incorrect. While variances represent deviations from budgeted performance, it is unlikely that management has the time to
investigate all variances.

Rationale
 the reports are not departmentalized.
This answer is incorrect. Variances represent deviations from budgeted performance. Not all variances are relevant for all departments. For
example, a sales department is not likely to need information about the direct materials price variance.
Question 59
1.C.1.c
tb.flex.bpa.003_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
What is the difference between a favorable variance and an unfavorable variance?
A favorable variance occurs when actual costs are more than standard costs, whereas an unfavorable variance occurs when actual costs are less than
standard costs.

A favorable variance occurs when net income is higher than last year, whereas an unfavorable variance occurs when net income is lower than last
year.
Correct

A favorable variance occurs when actual costs are less than standard costs, whereas an unfavorable variance occurs when actual costs are more than
standard costs.

A favorable variance occurs when a company has net income, whereas an unfavorable variance occurs when a company has net loss.

Rationale
 A favorable variance occurs when actual costs are more than standard costs, whereas an unfavorable variance occurs when actual costs
are less than standard costs.
Incorrect. Actual costs higher than standard costs would not be favorable, as this means that more money is spent than expected. Actual costs
lower than standard costs would not be unfavorable, as money is being saved in that circumstance.

Rationale
 A favorable variance occurs when net income is higher than last year, whereas an unfavorable variance occurs when net income is lower
than last year.
Incorrect. Whether current net income is higher or lower than last year is independent of whether the variance is favorable or unfavorable.

Rationale
 A favorable variance occurs when actual costs are less than standard costs, whereas an unfavorable variance occurs when actual costs
are more than standard costs.
Correct. Variances are classified depending on how they impact actual net income relative to net income in the static budget. Any variance that
would increase actual net income relative to budgeted net income is a favorable variance and any variance that would decrease actual net income
relative to budgeted net income is an unfavorable variance. This means actual costs lower than standard costs are favorable variances and actual
costs higher than standard costs are unfavorable variances.

Rationale
 A favorable variance occurs when a company has net income, whereas an unfavorable variance occurs when a company has net loss.
Incorrect. Whether a company has net income or a net loss is independent of whether the variance is favorable or unfavorable. A company could
have favorable variances and still experience a loss or vice versa.
Question 60
1.C.1.e
tb.flex.bpa.012_1808
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Which of the following companies is most likely to prepare a flexible budget for their products or services?
Blacknight Restaurants, which has a two-month waiting list for reservations.

Clearwater Chemicals, which regularly sells $12,000 to $12,200 worth of sodium bicarbonate each month.
Correct

Toy Works, which produces and sells 60% of their toys in November and December, with fluctuating sales the rest of the year.
Your Answer

Handmade Furnishings, which requires a preorder time of two months for handmade furniture pieces.

Rationale
 Blacknight Restaurants, which has a two-month waiting list for reservations.
Incorrect. Flexible budgets are most useful when the actual level of activity differs from period to period since it is difficult to predict activity using a
static budget (and therefore costs) when activity level varies. Since Blacknight is likely filled to capacity or close to capacity every night, a flexible
budget would not likely be useful for it to prepare.

Rationale
 Clearwater Chemicals, which regularly sells $12,000 to $12,200 worth of sodium bicarbonate each month.
Incorrect. Since sales do not fluctuate much for Clearwater, a flexible budget would not likely be useful for it to prepare. A static budget would most
likely be sufficient.

Rationale
 Toy Works, which produces and sells 60% of their toys in November and December, with fluctuating sales the rest of the year.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. They are most
useful when the actual level of activity differs from period to period since it is difficult to predict activity (and therefore costs) when activity level
varies. Since activity fluctuates significantly for Toy Works, a flexible budget would be useful for it to prepare.

Rationale
 Handmade Furnishings, which requires a preorder time of two months for handmade furniture pieces.
Incorrect. Since sales are easy to predict for Handmade because of the two-month preorder time, a flexible budget would not likely be useful for it
to prepare. Instead, Handmade could accurately forecast given the known level of production, creating a static budget.
Question 61
1.C.1.e
flex.bpa.tb.048_0120
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
The static budget for production of bicycles by Wheel Professionals is based on 3,000 units produced per month. For this level of production, indirect
materials are $75,000, indirect labor is $92,000, utilities are $26,000, depreciation is $42,000, and supervision is $6,000. What would the company’s total
budget be if it produced a flexible budget for 4,000 units?
$321,333
Correct

$305,333

$296,667

$307,333

Rationale
 $321,333
This answer is incorrect. If manufacturing overhead is 100% variable, manufacturing overhead would be $80.33 per unit ($241,000 [$75,000 +
$92,000 + $26,000 + $42,000 + $6,000] ÷ 3,000), which translates to $321,333 for 4,000 units ($80.33 × 4,000). However, manufacturing overhead is not
100% variable.

Rationale
 $305,333
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the same in a
static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different from
variable costs in a static budget to the extent that the actual activity level differs from the activity level used to prepare the static budget. Since
depreciation and supervision are fixed manufacturing overhead items, they will be the same amount ($48,000 [$42,000 + $6,000]) in the static and
flexible budgets. Since indirect materials, indirect labor, and utilities are variable manufacturing items, they must be adjusted for the different level
of activity. The budgeted amount is $64.33 per unit ($193,000 [$75,000 + $92,000 + $26,000] ÷ 3,000). If there are 4,000 units, variable manufacturing
overhead will be $257,333 ($64.33 × 4,000). Wheel’s total flexible budget for 4,000 units is $305,333 ($48,000 + $257,333).

Rationale
 $296,667
This answer is incorrect. If utilities are classified as a part of fixed manufacturing overhead, variable manufacturing overhead would be $55.67 per
unit ($167,000 ÷ 3,000) and fixed manufacturing overhead would be $74,000. This would result in manufacturing overhead of $296,667 for 4,000
units. However, utilities are not a part of fixed manufacturing overhead.

Rationale
 $307,333
This answer is incorrect. If supervision is classified as a part of variable fixed manufacturing overhead, variable manufacturing overhead would be
$66.33 per unit ($199,000 ÷ 3,000) and fixed manufacturing overhead would be $42,000. This would result in manufacturing overhead of $307,333 for
4,000 units. However, supervision is not a part of variable manufacturing overhead.
Question 62
1.C.1.g
aq.flex.bpa.007_1807
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

Given the following information, what is the flexible budget variance on operating profit for Trendy Technology (TT)?

Actual Results Flexible Budget

Total Sales Revenue $325,000 $350,000
Total Variable Costs $135,000 $120,000
Total Fixed Costs $44,000 $42,000

$188,000 Favorable
Your Answer

$42,000 Favorable
Correct

$42,000 Unfavorable

$188,000 Unfavorable

Rationale
 $188,000 Favorable
This answer is incorrect. This answer represents the flexible budget operating profit but does not represent the flexible budget variance on
operating profit.

Rationale
 $42,000 Favorable
This answer is incorrect. This answer correctly calculates the flexible budget variance on operating profit for TT. However, this variance is not
favorable.

Rationale
 $42,000 Unfavorable

The flexible budget variance on operating profit for TT is calculated as follows:

Actual Results Flexible Budget Variances

Total Sales Revenue $325,000 $350,000 $25,000 U
Total Variable Costs 135,000 120,000 15,000 U
Contribution Margin $190,000 $230,000 $40,000 U
Total Fixed Costs 44,000 42,000 2,000 U
Operating Profit $146,000 $188,000 $42,000 U

Rationale
 $188,000 Unfavorable
This answer is incorrect. This answer represents the flexible budget operating profit, but does not represent the flexible budget variance on
operating profit.
Question 63
1.C.1.h
tb.flex.bpa.028_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Jackson Industries expanded its production department and added 15 new employees. How would this likely affect Jackson's materials variance?
Correct

Materials variance would likely be unfavorable for several weeks and then return to normal.

Materials variance would likely be favorable for several weeks and then return to normal.
Your Answer

Materials variance would be permanently unfavorable.

Materials variance would be permanently favorable.

Rationale
 Materials variance would likely be unfavorable for several weeks and then return to normal.
Correct. Direct materials variances arise for a number of reasons. Adding 15 new employees will likely result in more materials than allowed by the
standard to be used until the new employees get “up to speed” on the production process. Once that happens, the amount used should revert back
to normal. This will initially result in an unfavorable direct materials quantity variance but then that variance should disappear.

Rationale
 Materials variance would likely be favorable for several weeks and then return to normal.
Incorrect. Adding 15 new employees will likely result in more materials than allowed by the standard to be used until the new employees get “up to
speed” on the production process. Once that happens, the amount used should revert back to normal. This will initially result in an unfavorable
direct materials quantity variance, not a favorable one.

Rationale
 Materials variance would be permanently unfavorable.
Incorrect. The additional hires should not permanently negatively impact the amount of materials used, as new employees will learn and become
more efficient over time. They will likely become as efficient as the older employees. This means the unfavorable variance will not be permanent.

Rationale
 Materials variance would be permanently favorable.
Incorrect. The additional hires should not permanently positively impact the amount of materials used, as new employees will likely be less
efficient at first, which would be unfavorable. If the variance starts unfavorable, it cannot permanently be favorable.
Question 64
1.C.1.c
1C1-LS80
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

Arkin Co.'s controller has prepared a flexible budget for the year just ended, adjusting the original static budget for the unexpected large increase in the
volume of sales. Arkin's costs are mostly variable. The controller is pleased to note that both actual revenues and actual costs approximated amounts
shown on the flexible budget. If actual revenues and actual costs are compared with amounts shown on the original (static) budget, what variances
would arise?

* Source: Retired ICMA CMA Exam Questions.

Revenue variances would be unfavorable and cost variances would be favorable.

Both revenue variances and cost variances would be favorable.

Correct

Revenue variances would be favorable and cost variances would be unfavorable.

Both revenue variances and cost variances would be unfavorable.

Rationale
 Revenue variances would be unfavorable and cost variances would be favorable.
This answer is incorrect. If actual revenues and actual costs are compared with amounts shown on the original (static) budget in this situation,
revenue variances would not be unfavorable and cost variances would not be favorable.

Rationale
 Both revenue variances and cost variances would be favorable.
This answer is incorrect. If actual revenues and actual costs are compared with amounts shown on the original (static) budget in this situation,
revenue variances would be favorable, but cost variances would not be favorable.

Rationale
 Revenue variances would be favorable and cost variances would be unfavorable.
When a static budget is developed, only one level of activity is used in its preparation. Therefore, it would cause favorable revenue variances due to
the higher level of activity, and cost variances would be unfavorable because costs associated with the new level of activity would not be
considered in the static budget.

Rationale
 Both revenue variances and cost variances would be unfavorable.
This answer is incorrect. If actual revenues and actual costs are compared with amounts shown on the original (static) budget in this situation,
revenue variances would not be unfavorable, but cost variances would be unfavorable.
Question 65
1.C.1.c
flex.bpa.tb.041_0120
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
Avalon, Inc.’s static budget shows $40,500 budgeted for direct materials, $54,000 budgeted for direct labor, and $13,500 budgeted for overhead. Avalon’s
actual direct materials were $42,000, actual direct labor was $51,000, and actual overhead was $13,800. What is the total difference between the static
budget and actual, and is the difference favorable or unfavorable?
$1,200, unfavorable

$4,800, favorable
Correct

$1,200, favorable

$4,800, unfavorable

Rationale
 $1,200, unfavorable
This answer is incorrect. Avalon’s static budget spending is $108,000 ($40,500 + $54,000 + $13,500) and its actual spending is $106,800 ($42,000 +
$51,000 + $13,800). The variance is $1,200, but it is not unfavorable.

Rationale
 $4,800, favorable
This answer is incorrect. The difference between static budget spending and actual spending is $1,500 for direct materials, $3,000 for direct labor,
and $300 for overhead. These total $4,800. However, it does not take into consideration the “direction” of the differences.

Rationale
 $1,200, favorable
A static budget is prepared before a period begins based on the expected level of activity for the period. It is called a static budget because it is
based on a single level of activity that does not change based on actual results. When this is compared to actual spending, actual spending lower
than static budget spending is a favorable variance as this lower actual spending increases actual net income relative to budgeted income. Avalon’s
static budget spending is $108,000 ($40,500 + $54,000 + $13,500) and its actual spending is $106,800 ($42,000 + $51,000 + $13,800). Since actual
spending is $1,200 less, this is a favorable $1,200 variance.

Rationale
 $4,800, unfavorable
This answer is incorrect. The difference between static budget spending and actual spending is $1,500 for direct materials, $3,000 for direct labor,
and $300 for overhead. These total $4,800. However, it does not take into consideration the “direction” of the differences.
Question 66
1.C.1.h
aq.flex.bpa.008_1807
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
Trendy Technology (TT) has an unfavorable flexible budget variance. TT management would like to know what could be causing this variance. Which of
the following could contribute to an unfavorable flexible budget variance?
Actual units sold was 2,350 while expected units sold was 2,500.
Correct

Actual variable cost per unit was $2.60 while standard variable cost per unit was $2.50.
Your Answer

Actual fixed costs were $3,250,000 while budgeted fixed costs were $3,500,000.

Actual sales price per unit was $5.25 when standard sales price per unit was $5.00.

Rationale
 Actual units sold was 2,350 while expected units sold was 2,500.
The difference between the actual units sold and units expected to be sold does not affect the flexible budget variance. The flexible budget is
calculated based on actual units sold.

Rationale
 Actual variable cost per unit was $2.60 while standard variable cost per unit was $2.50.
Actual variable costs higher than standard variable costs will contribute to an unfavorable flexible budget variance.

Rationale
 Actual fixed costs were $3,250,000 while budgeted fixed costs were $3,500,000.
Actual fixed costs that are lower than budgeted fixed costs will not contribute to an unfavorable flexible budget variance.

Rationale
 Actual sales price per unit was $5.25 when standard sales price per unit was $5.00.
Actual sales price higher than standard sales price will not contribute to an unfavorable flexible budget variance.
Question 67
1.C.1.e
tb.flex.bpa.014_1808
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
When calculating differences between projected and actual budget data in flexible budgets, which of the following costs would be the most important
cost to consider?
Property taxes.
Correct

Indirect labor.
Your Answer

Depreciation.

Supervisor salaries.

Rationale
 Property taxes.
Incorrect. Because property taxes are not a variable cost and are unlikely to change based on changes in activity level, it would not be important to
consider it when calculating differences between projected and actual budget data in flexible budgets.

Rationale
 Indirect labor.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. Because
indirect labor is a variable cost and likely to change based on changes in activity level, it would be important to consider it when calculating
differences between projected and actual budget data in flexible budgets.

Rationale
 Depreciation.
Incorrect. Because depreciation is not a variable cost and is unlikely to change based on changes in activity level, it would not be important to
consider it when calculating differences between projected and actual budget data in flexible budgets.

Rationale
 Supervisor salaries.
Incorrect. Because supervisor salaries are not a variable cost and are unlikely to change based on changes in activity level, it would not be
important to consider it when calculating differences between projected and actual budget data in flexible budgets.
Question 68
1.C.1.i
1C1-LS86
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2

The benefits of management by exception reporting include all of the following except a reduction in:

* Source: Retired ICMA CMA Exam Questions.

information overload.

reporting of production costs.

Your Answer

unfocused management actions.

Correct

reliance on advance planning.

Rationale
 information overload.
This answer is incorrect. The benefits of management by exception reporting include a reduction in information overload.

Rationale
 reporting of production costs.
This answer is incorrect. The benefits of management by exception reporting include a reduction in reporting of production costs.

Rationale
 unfocused management actions.
This answer is incorrect. The benefits of management by exception reporting include a reduction in unfocused management actions.

Rationale
 reliance on advance planning.
Benefits of management by exception reporting include reduction of the reporting of production costs, information overload, and unfocused
management actions.
Question 69
1.C.1.h
tb.flex.bpa.034_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
Nick's Wood Furniture employs six unskilled workers who cut and assemble furniture pieces and four skilled workers who carve designs onto the
furniture. One week in June, when two unskilled workers were on vacation, another unskilled worker called in sick. Because the skilled workers did not
have enough work to do with the lower production by the unskilled workers, one of the skilled workers helped cut and assemble furniture pieces. What
effect would this have on the company's direct labor variance?
The direct labor price variance would be favorable.
Your Answer

The direct labor quantity variance would be unfavorable.

Correct

The direct labor price variance would be unfavorable.

The total direct labor variance would be unfavorable.

Rationale
 The direct labor price variance would be favorable.
Incorrect. Having higher-skilled workers doing tasks normally performed by lower-skilled workers will likely result in the actual labor price being
higher than the standard labor price. This higher price results in an unfavorable, not favorable, direct labor price variance.

Rationale
 The direct labor quantity variance would be unfavorable.
Incorrect. Direct labor variances arise for a number of reasons. Having higher-skilled workers doing tasks normally performed by lower-skilled
workers will likely result in fewer hours being worked than standard. This will result in a favorable, not unfavorable, labor quantity variance.

Rationale
 The direct labor price variance would be unfavorable.
Correct. Direct labor variances arise for a number of reasons. Having higher-skilled workers doing tasks normally performed by lower-skilled
workers will likely result in the actual labor price being higher than the standard labor price. This higher price results in an unfavorable direct labor
price variance.

Rationale
 The total direct labor variance would be unfavorable.
Incorrect. Higher-skilled workers doing tasks normally performed by lower-skilled workers will likely result in the actual labor price being higher
than the standard labor price. This higher price results in an unfavorable direct labor price variance. However, it will also likely result in fewer hours
being worked than standard, which will result in a favorable labor quantity variance. In some cases, the unfavorable price variance will outweigh
the favorable quantity variance (resulting in an unfavorable total labor variance) and sometimes the favorable labor quantity variance will
outweigh the unfavorable labor price variance (resulting in a favorable total labor variance). As the total effect can likely go favorable or
unfavorable, this is an incorrect answer.
Question 70
1.C.1.c
1C1-LS63
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3
If actual results for a period have $400,000 in direct materials (DM) costs and $40,000 in operating income (OI) but the static budget was $500,000 in DM
costs and $50,000 in OI, which of the following is true?
Correct

$100,000 favorable DM; $10,000 unfavorable OI.

$100,000 unfavorable DM; $10,000 favorable OI.

Your Answer

$100,000 unfavorable DM; $10,000 unfavorable OI.

$100,000 favorable DM; $10,000 favorable OI.

Rationale
 $100,000 favorable DM; $10,000 unfavorable OI.
Costs that are lower than expected are favorable, while revenues or income that are lower than expected are unfavorable.

Rationale
 $100,000 unfavorable DM; $10,000 favorable OI.
This answer is incorrect. If actual results for a period have $400,000 in direct materials (DM) costs and $40,000 in operating income (OI) but the static
budget was $500,000 in DM costs and $50,000 in OI, the static budget variance for DM and OI is not unfavorable and favorable, respectively.

Rationale
 $100,000 unfavorable DM; $10,000 unfavorable OI.
This answer is incorrect. If actual results for a period have $400,000 in direct materials (DM) costs and $40,000 in operating income (OI) but the static
budget was $500,000 in DM costs and $50,000 in OI, the static budget variance for DM is not unfavorable. The static budget variance for OI is
unfavorable, however.

Rationale
 $100,000 favorable DM; $10,000 favorable OI.
This answer is incorrect. If actual results for a period have $400,000 in direct materials (DM) costs and $40,000 in operating income (OI) but the static
budget was $500,000 in DM costs and $50,000 in OI, the static budget variance for DM is favorable. The static budget variance for OI is not favorable,
however.
Question 71
1.C.1.e
cma11.p1.t1.me.0056_0820
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: hard
Bloom Code: 4

A company reported the following cost information for the last fiscal year when it produced 100,000 units.

Direct labor $200,000

Direct materials 100,000
Manufacturing overhead 200,000
Selling and administrative expenses 150,000

All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative expenses. Using flexible budgeting, what
are the total costs associated with producing and selling 110,000 units?

*Source: Retired ICMA CMA Exam Questions.

$450,000
Your Answer

$650,000
Correct

$695,000

$715,000

Rationale
 $450,000
This answer is incorrect. The variable costs for 100,000 units is $450,000.

Rationale
 $650,000
This answer is incorrect. The budgeted costs for 110,000 units would be $650,000 if all the costs are fixed costs.

Rationale
 $695,000
Variable costs are $450,000 for 100,000 units, which translates to $4.50 per unit. At 110,000 units, total budgeted variable costs are $495,000. Fixed
costs for 110,000 units are budgeted to be the same as for 100,000 units ($200,000). This results in total budgeted costs of $695,000.

Rationale
 $715,000
This answer is incorrect. The budgeted costs for 110,000 units would be $715,000 if all the costs are variable costs.
Question 72
1.C.1.i
1C1-LS65
LOS: 1.C.1.i
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
A manager receives automated notices of both favorable and unfavorable variations from the budget. Which of the following methods is the manager
using?
Management by objective

Balanced scorecard

Total quality management

Correct

Management by exception

Rationale
 Management by objective
This answer is incorrect. A manager receiving automated notices of both favorable and unfavorable variations from the budget is not using
management by objective.

Rationale
 Balanced scorecard
This answer is incorrect. A manager receiving automated notices of both favorable and unfavorable variations from the budget is not using
balanced scorecard.

Rationale
 Total quality management
This answer is incorrect. A manager receiving automated notices of both favorable and unfavorable variations from the budget is not using total
quality management.

Rationale
 Management by exception
Management by exception flags exceptions for managers to concentrate on with the goal of more efficient management.
Question 73
1.C.1.d
aq.flex.bpa.005_0820
LOS: 1.C.1.d
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: easy
Bloom Code: 2
Which of the following statements is true regarding measuring performance by comparing actual results to the master budget?
When measuring performance by comparing actual results to the master budget, the master budget takes into consideration the volume of units that
were actually sold, instead of expected to be sold.

When measuring performance by comparing actual results to the master budget, it is not difficult to pinpoint what is causing variances.
Your Answer

When measuring performance by comparing actual results to the master budget, it is important to adjust the report on actual results to be consistent
with the expected (budgeted) sales volume of units in the master budget.
Correct

None of the other statements are true statements regarding measuring performance by comparing actual results to the master budget.

Rationale
 When measuring performance by comparing actual results to the master budget, the master budget takes into consideration the
volume of units that were actually sold, instead of expected to be sold.
This answer is incorrect. The master budget does not take into consideration the volume of units that were actually sold.

Rationale
 When measuring performance by comparing actual results to the master budget, it is not difficult to pinpoint what is causing variances.
This answer is incorrect. Because master budgets are based on budgeted production and sales output volumes, it is difficult to compare costs
against actual results that are often the result of a different level of production and sales volume.

Rationale
 When measuring performance by comparing actual results to the master budget, it is important to adjust the report on actual results to
be consistent with the expected (budgeted) sales volume of units in the master budget.
This answer is incorrect. Actual results should not be adjusted to be comparable in sales volume with the master budget.

Rationale
 None of the other statements are true statements regarding measuring performance by comparing actual results to the master budget.
When measuring performance by comparing actual results to the master budget, master budget takes is based on the volume of units that were
expected or budgeted to be sold, not the volume of units actually sold. This is a significant limitation of master budgets. As a result, it is much more
difficult to pinpoint what is causing variances by comparing actual results to the master budget.
Question 74
1.C.1.h
tb.flex.bpa.032_1808
LOS: 1.C.1.h
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
The accountants at Midland Cement found a materials variance of $15,892 for the month of May. Because the variance is usually less than $1,000, they
decided to investigate the cause of the variance. What would you expect them to do first?
Determine the variance per unit rather than total variance.
Correct

Calculate separate variances for price and quantity.

Your Answer

Calculate variances for direct labor and overhead as well.

Talk to the production manager to determine the problem.

Rationale
 Determine the variance per unit rather than total variance.
Incorrect. Starting by calculating variances on a per-unit basis is not likely to be helpful because knowing the variance per unit does not help
identify the cause or causes of a variance. It is just another way of looking at a variance.

Rationale
 Calculate separate variances for price and quantity.
Correct. Variance analysis is useful for understanding why actual performance differs from expected performance. To find the cause or causes of a
direct materials variance, a good first step is to separate the total variance into its price and quantity components. This will enable management to
better identify which department or departments need to be consulted to determine the cause of the variance.

Rationale
 Calculate variances for direct labor and overhead as well.
Incorrect. While direct material variances may be related to direct labor or overhead variances, calculating these variances should not be the first
step in determining the cause of direct material variances. It is likely to be more effective to focus on the material price and quantity components
first than to focus on completely different cost categories first.

Rationale
 Talk to the production manager to determine the problem.
Incorrect. While talking to the production department to determine the problem may be useful, it is not appropriate as a first step. It is first
necessary to calculate the material price and quantity variances. This information may indicate that the production area is not the source of the
problem and that the purchasing department is the more likely source. Talking to the production manager first may turn out to be a waste of time.
Question 75
1.C.1.e
flex.bpa.tb.046_0120
LOS: 1.C.1.e
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 3

LH Tent Company produces tents and sells them to large sporting goods stores. For a recent period, the company had the following static budget for
manufacturing overhead costs based on 100,000 machine hours.

Variable
Indirect materials $280,000
Indirect labor 400,000
Factory supplies 40,000
Fixed
Depreciation $120,000
Taxes 20,000
Supervision 100,000

LH is now preparing a flexible budget based on 80,000 actual machine hours. What amount will be reported on the flexible budget for manufacturing
overhead?

$768,000

$576,000
Your Answer

$720,000
Correct

$816,000

Rationale
 $768,000
This answer is incorrect. If manufacturing overhead is 100% variable, manufacturing overhead would be $9.60 per machine hour ($960,000
[$280,000 + $400,000 + $40,000 + $120,000 + $20,000 + $100,000] ÷ 100,000), which translates to $768,000 for 80,000 machine hours ($9.60 × 80,000).
However, manufacturing overhead is not 100% variable.

Rationale
 $576,000
This answer is incorrect. If there are 80,000 machine hours, variable manufacturing overhead will be $576,000 ($7.20 × 80,000). However, the flexible
budget for manufacturing overhead consists of more than variable manufacturing overhead.

Rationale
 $720,000
This answer is incorrect. $720,000 is the variable manufacturing overhead for 100,000 machine hours, not total manufacturing overhead for 80,000
machine hours.

Rationale
 $816,000
Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the same in a
static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different from
variable costs in a static budget to the extent that the actual activity level differs from the activity level used to prepare the static budget. The fixed
manufacturing overhead will be the same amount ($240,000 [$120,000 + $20,000 + $100,000]) in the static and flexible budgets. The variable
manufacturing cost must be adjusted for the different level of activity. The budgeted amount is $7.20 per machine hour ($720,000 [$280,000 +
$400,000 + $40,000] ÷ 100,000). If there are 80,000 machine hours, variable manufacturing overhead will be $576,000 ($7.20 × 80,000). LH’s total
flexible budget for 80,000 machine hours is $816,000 ($240,000 + $576,000).
Question 76
1.C.1.g
tb.flex.bpa.016_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 5
Stanley Candy uses flexible budgets. Stanley's normal capacity is 32,000 pounds of candy per year. At this level of activity, budgeted manufacturing
overhead is $128,000 variable and $360,000 fixed. Stanley's actual overhead costs were $500,000 when 36,000 pounds of candy were produced. If Stanley
uses a flexible budget, what is the difference between actual and budgeted costs?
$12,000 favorable.

$12,000 unfavorable.
Your Answer

$4,000 unfavorable.
Correct

$4,000 favorable.

Rationale
 $12,000 favorable.
Incorrect. The static budget is $488,000. If this is compared to the actual spending of $500,000, there is a $12,000 unfavorable variance, not a
favorable variance, since actual spending exceeds budgeted spending. In addition, since the company uses flexible budgets, the flexible budget
value needs to be compared to the actual spending.

Rationale
 $12,000 unfavorable.
Incorrect. The static budget is $488,000. If this is compared to the actual spending of $500,000, there is a $12,000 unfavorable variance since actual
spending exceeds budgeted spending. However, since the company uses flexible budgets, the flexible budget value needs to be compared to the
actual spending.

Rationale
 $4,000 unfavorable.
Incorrect. The budgeted amount of variable cost is $4.00 per pound ($128,000 ÷ 32,000). If there are 36,000 pounds produced, variable
manufacturing overhead will be $144,000 ($4.00 × 36,000) in the flexible budget. The total flexible budget for 36,000 pounds is $504,000 ($144,000 +
$360,000). While the variance is $4,000, it is favorable, not unfavorable, since actual spending is $4,000 less than the flexible budget amount.

Rationale
 $4,000 favorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. The
budgeted amount of variable cost is $4.00 per pound ($128,000 ÷ 32,000). If there are 36,000 pounds produced, variable manufacturing overhead
will be $144,000 ($4.00 × 36,000) in the flexible budget. The total flexible budget for 36,000 pounds is $504,000 ($144,000 + $360,000). Since actual
spending is only $500,000, the $4,000 variance is favorable.
Question 77
1.C.1.g
tb.flex.bpa.020_1808
LOS: 1.C.1.g
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4

Home Furnishings had the following static budget for manufacturing overhead costs based on 100,000 machine hours:

Variable
Indirect Materials $196,000
Indirect Labor $280,000
Factory Supplies $28,000
Fixed
Depreciation $84,000
Taxes $14,000
Supervision $70,000

During the year, Home Furnishings used 110,000 actual machine hours. The company's actual cost for taxes was $14,200 and actual cost for supervision
was $71,100. What amount will be reported on the manufacturing overhead flexible budget report under the “Difference” column for supervision?

$5,900 favorable.
Correct

$1,100 unfavorable.

$1,100 favorable.

$5,900 unfavorable.

Rationale
 $5,900 favorable.
Incorrect. If supervision is treated as a variable cost, the budgeted amount is $0.70 per machine hour ($70,000 ÷ 100,000). If supervision is treated as
a variable cost and there are 110,000 machine hours, supervision will be $77,000 ($0.70 × 110,000) in the flexible budget. Since actual spending for
supervision is $71,100, there would then be a favorable variance of $5,900 ($71,100 − $77,000). However, supervision is a fixed cost, not a variable
cost.

Rationale
 $1,100 unfavorable.
Correct. Flexible budgets are prepared after a period is over to show budgeted amounts for the actual level of activity achieved. Fixed costs are the
same in a static budget and flexible budget as fixed costs do not change when activity changes. Variable costs in a flexible budget will be different
from variable costs in a static budget to the extent that actual activity level differs from the activity level used to prepare the static budget. Since
supervision is a fixed cost, it is $70,000 in the flexible budget and static budget. Since actual spending for supervision is $71,100, the $1,100 ($71,100
− $70,000) variance is unfavorable.

Rationale
 $1,100 favorable.
Incorrect. Since supervision is a fixed cost, it is $70,000 in the flexible budget and static budget. Since actual spending for supervision is $71,100, the
variance is $1,100. However, it is not favorable, as actual spending is $1,100 ($71,100 − $70,000) more than the flexible budget amount.

Rationale
 $5,900 unfavorable.
Incorrect. If supervision is treated as a variable cost, the budgeted amount is $0.70 per machine hour ($70,000 ÷ 100,000). If supervision is treated as
a variable cost and there are 110,000 machine hours, supervision will be $77,000 ($0.70 × 110,000) in the flexible budget. Since actual spending for
supervision is $71,100, there would then be a variance of $5,900 ($71,100 − $77,000). However, the variance would be favorable, not unfavorable,
since the actual spending is lower than the flexible budget amount. In addition, supervision is a fixed cost, not a variable cost.
Question 78
1.C.1.c
tb.flex.bpa.002_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
For December, Alpine Ski Resort's static budget was based on a 98% occupancy rate for their hotel. However, the winter has been much warmer than
usual with little snow, so the resort has only had a 72% occupancy rate. If the actual costs for the 72% occupancy rate were compared to the budgeted
costs for the 98% occupancy rate, the difference would likely be:
Correct

favorable.

unfavorable.

zero.
Your Answer

negligible.

Rationale
 favorable.
Correct. Variances are classified depending on how they impact actual net income relative to net income in the static budget. Any variance that
would increase actual net income relative to net income in the static budget is a favorable variance and any variance that would decrease actual
net income relative to net income in the static budget is an unfavorable variance. A favorable variance is not necessarily “good” and an unfavorable
variance is not necessarily “bad.” The actual costs with a 72% occupancy rate are likely to be lower than the budgeted costs with a 98% occupancy
rate. This lower cost would make actual net income higher than net income in the static budget, all other factors held constant. This means the
difference is a favorable difference.

Rationale
 unfavorable.
Incorrect. The actual costs with a 72% occupancy rate are likely to be lower than the budgeted costs with a 98% occupancy rate. This lower cost
would make actual net income higher than net income in the static budget, all other factors held constant. This means the difference is a favorable
difference, not an unfavorable difference. An unfavorable difference would mean the actual costs are higher than the static budget costs.

Rationale
 zero.
Incorrect. The actual costs with a 72% occupancy rate are likely to be substantially different than the budgeted costs with a 98% occupancy rate. A
zero difference would mean the actual costs are the same as the static budget costs.

Rationale
 negligible.
Incorrect. The actual costs with a 72% occupancy rate are likely to be substantially different than the budgeted costs with a 98% occupancy rate. A
negligible difference would mean the actual costs are very similar to the static budget costs.
Question 79
1.C.1.c
tb.flex.bpa.007_1808
LOS: 1.C.1.c
Lesson Reference: Flexible Budgets and Performance Analysis
Difficulty: medium
Bloom Code: 4
The static budget for Tillman's Toys shown below was prepared using an activity level of 15,000 units. If Tillman's actual production is 18,000 units, how
will the actual costs compare to the budgeted costs? Why?
Budget
Variable Costs
Direct Materials ($4) $20,000
Direct Labor ($13) 70,000
Overhead ($21) 110,000
Total Variable Costs $200,000
Fixed Costs
Depreciation $12,000
Supervision 7,000
Total Fixed Costs 19,000
Total Costs $219,000

Actual costs will likely match budgeted costs because the static budgets will slide up or down based on Tillman's actual activity level.
Correct

Actual costs will likely exceed budgeted costs because the static budget will only compare Tillman's results to the predetermined 15,000 units.
Your Answer

Actual costs will likely be below budgeted costs because the static budget will consider Tillman's extra income from the additional units.

Actual costs will not be compared to budgeted costs because the static budget is not an appropriate measure for Tillman's overage.

Rationale
 Actual costs will likely match budgeted costs because the static budgets will slide up or down based on Tillman's actual activity level.
Incorrect. A flexible budget, not a static budget, slides up or down based on actual activity level.

Rationale
 Actual costs will likely exceed budgeted costs because the static budget will only compare Tillman's results to the predetermined
15,000 units.
Correct. A static budget is prepared before a period begins based on the expected level of activity for the period. It is called a static budget because
it is based on a single level of activity that does not change based on actual results. Since Tillman's actual activity is higher than its expected
activity, its actual costs will likely be higher than the costs in its static budget since variable costs are expected to increase as activity increases.

Rationale
 Actual costs will likely be below budgeted costs because the static budget will consider Tillman's extra income from the additional
units.
Incorrect. Since Tillman's actual activity is higher than its expected activity, its actual costs will likely be higher than the costs in its static budget,
not lower, since variable costs are expected to increase as activity increases. In addition, a static budget does not include extra income from
additional units as it is based on a single level of activity.

Rationale
 Actual costs will not be compared to budgeted costs because the static budget is not an appropriate measure for Tillman's overage.
Incorrect. Comparing actual costs to static budget costs is an appropriate measure for overage as this comparison measures how much actual costs
exceed budgeted costs. This is the essence of overage.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.1.n
manex.srv.tb.015_0820
LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The HJU Company sells a simple product and a complex product. In 20X8, it expected to sell 9,000 simple units and 3,000 complex units and earn a
contribution margin of $10 per unit and $24 per unit respectively. In 20X8, it sold 12,600 simple units with a contribution margin of $8 per unit and 2,400
complex units with a contribution margin of $27 per unit. What is the sales mix variance for the complex product in 20X8?
$13,500 favorable
Correct

$32,400 unfavorable
Your Answer

$14,400 unfavorable

$18,000 favorable

Rationale
 $13,500 favorable
This answer is incorrect. The sales mix variance in 20X8 for the simple product is $13,500 favorable.

Rationale
 $32,400 unfavorable

Below is the framework approach.

Because the left-side result of the framework with the actual volume is lower than the right-side with the total actual volume × expected mix %, this
is an unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales mix percentage (16%) is lower than the expected mix percentage (25%), which is
unfavorable. Remember to use the precise mix percentages and not the rounded mix percentages when calculating this variance using the formula
approach.

Sales mix variance = Total actual volume × (Expected mix − Actual mix) × Standard Price

Sales mix variance: 15,000 × (25% − 16%) × $24.00 = $32,400 U

Note that the computational solution is actually a positive value. Variances are not reported as negative or positive values, but as unfavorable (U) or
favorable (F) values. Hence, even though the computation solution a positive value, the variance is actually unfavorable as we determined before
computing the size of the variances.

Rationale
 $14,400 unfavorable
This answer is incorrect. The sales volume variance in 20X8 for the complex product is $14,400 unfavorable.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Rationale
 $18,000 favorable
This answer is incorrect. The sales quantity variance in 20X8 for the complex product is $18,000 favorable.
Question 2
1.C.1.n
manex.srv.tb.014_0820
LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The HJU Company sells a simple product and a complex product. In 20X8, it expected to sell 9,000 simple units and 3,000 complex units and earn a
contribution margin of $10 per unit and $24 per unit respectively. In 20X8, it sold 12,600 simple units with a contribution margin of $8 per unit and 2,400
complex units with a contribution margin of $27 per unit. What is the sales mix variance for the simple product in 20X8?
Correct

$13,500 favorable

$32,400 unfavorable
Your Answer

$36,000 favorable

$22,500 favorable

Rationale
 $13,500 favorable

Below is the framework approach.

Because the left-side result of the framework with the actual volume is higher than the right-side with the total actual volume × expected mix %,
this is a favorable (F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales mix percentage (84%) is higher than the expected mix percentage (75%), which is
favorable. Remember to use the precise mix percentages and not the rounded mix percentages when calculating this variance using the formula
approach.

Sales mix variance = Total actual volume × (Expected mix − Actual mix) × Standard Price

Sales mix variance: 15,000 × (75% − 84%) × $10.00 = $13,500 F

Note that the computational solution is actually a negative value, but the result is reported as an absolute value. Variances are not reported as
negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution a negative value, the
variance is actually favorable as we determined before computing the size of the variances.

Rationale
 $32,400 unfavorable
This answer is incorrect. The sales mix variance in 20X8 for the complex product is $32,400 unfavorable.

Rationale
 $36,000 favorable
This answer is incorrect. The sales volume variance in 20X8 for the simple product is $36,000 favorable.
Rationale
 $22,500 favorable
This answer is incorrect. The sales quantity variance in 20X8 for the simple product is $22,500 favorable.
Question 3
1.C.1.n
manex.srv.tb.001_0120
LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The KOL Company sells two different products. It expected to sell 9,000 units of Product A and 6,000 units of Product B, but it actually sold 7,000 units of
Product A and 8,000 units of Product B. If Product A sells for a higher price than Product B, what will be the impact on actual revenue relative to budgeted
revenue?
Correct

Actual sales revenue will be lower than budgeted sales revenue.

Actual sales revenue will be the same as budgeted sales revenue.

Your Answer

It is not possible to determine the impact on sales revenue without knowing the actual selling prices.

Actual sales revenue will be higher than budgeted sales revenue.

Rationale
 Actual sales revenue will be lower than budgeted sales revenue.
The sales mix variance for a product considers the difference in revenue caused by the product’s actual percentage of unit sales (sales mix) being
different from its budgeted percentage of unit sales. If the actual sales mix percentage is lower than expected, its sales mix variance is unfavorable.
If the actual sales mix percentage is higher than expected, its sales mix is favorable. In this problem, Product A’s sales mix variance will be
unfavorable and Product B’s sales mix variance will be favorable. Since Product A has the higher sales price, its unfavorable variance will be larger
than Product B’s favorable variance which means the actual sales revenue will be lower than budgeted sales revenue.

Rationale
 Actual sales revenue will be the same as budgeted sales revenue.
This answer is incorrect. Even though actual total unit sales are the same as budgeted total unit sales, actual sales revenue will not be the same as
budgeted sales revenue because the products have different sales mixes and different selling prices.

Rationale
 It is not possible to determine the impact on sales revenue without knowing the actual selling prices.
This answer is incorrect. Even though specific selling prices are not provided, there is enough information in this problem to determine the impact
on sales revenue.

Rationale
 Actual sales revenue will be higher than budgeted sales revenue.
This answer is incorrect. Actual sales revenue will be higher than budgeted sales revenue if a favorable sales mix variance for one product more
than offsets an unfavorable sales mix variance for another product. The favorable sales mix variance in this problem does not more than offset the
unfavorable sales mix variance for the other product.
Question 4
1.C.1.n
1C3-AT35
LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4

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:

Correct

$3,300 favorable.
Your Answer

$3,300 unfavorable.

$8,100 favorable.

$8,100 unfavorable.

Rationale
 $3,300 favorable.

The sales mix variance formula can be calculated in several different ways. Three different ways to calculate the answer are found below.

First is the framework approach:

Calculate Expected Mix %:

Product E: 5,500 ÷ (5,500 + 4,500) = 55%

Product F: 4,500 ÷ (5,500 + 4,500) = 45%

Calculate Actual Mix %:

Product E: 6,000 ÷ (6,000 + 6,000) = 50%

Product F: 6,000 ÷ (6,000 + 6,000) = 50%

Use the framework to calculate the mix variance:

Two block diagrams are shown. The first block diagram shows two blocks connected to the third block below. The block on the left reads, Actual
volume times Standard C M and the block on the right reads, Total Actual Volume times Expected Mix percent times Standard C M. Both these
blocks are connected to a third block which reads, Mix Variance. The second block diagram shows two blocks connected to the third block below.
The block on the left reads, Product E: 6,000 times $4.50 equals $27,000; Product F: 6,000 times $10.00 equals 60,000; the amounts of Product E and
Product F is totaled as $87,000. The block on the right reads, Product E: 12,000 times 55 percent times $4.50 equals $29,700; Product F: 12,000 times
45 percent times $10.00 equals 54,000; the amounts of Product E and Product F is totaled as $83,700. Both these blocks are connected to a third
block which reads, Mix Variance equals $3,300 F.

Because the left-side result of the framework with the actual volume is higher than the right-side with the total actual volume × expected mix %,
this is a favorable (F) variance.

Second is the formula approach:

Before computing the variance, note that the actual sales mix percentage for Product E (50%) is lower than the expected mix percentage (55%),
which is unfavorable. Because Product E has the lower standard CM per unit, the overall sales mix variance will be favorable. The actual sales mix
percentage for Product F (50%) is higher than the expected mix percentage (45%), which means the variance for Product F is favorable and this is a
profitable trade-off in the sales mix.

Sales mix variance = Total actual volume × (Expected mix % − Actual mix %) × Standard CM

Product E: 12,000 × (55% − 50%) × $4.50 = $2,700 U

Product F: 12,000 Fixtures × (45% − 50%) × $10.00 = $6,000 F

Total sales mix variance: $2,700 U + $6,000 F = $3,300 F

Note that the computational solution for Product F is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution for Product E is
a positive value, the variance is actually unfavorable as determined before computing the size of the variances.
Third is the weighted contribution margin approach:

The budgeted sales mix for each product is calculated and multiplied by the standard contribution margin of each product and then added
together to get the weighted standard contribution margin based on the expected mix.

Product E: 5,500 ÷ (5,500 + 4,500) = 55% × $4.50 = $2.475

Product F: 4,500 ÷ (5,500 + 4,500) = 45% × $10.00 = $4.50

Weighted standard contribution margin based on the expected mix: $2.475 + $4.50 = $6.975

The same procedure is used to calculate the weighted standard contribution margin based on the actual mix.

Product E: 6,000 ÷ (6,000 + 6,000) = 50% × $4.50 = $2.25

Product F: 6,000 ÷ (6,000 + 6,000) = 50% × $10.00 = $5.00

Weighted standard contribution margin based on the actual mix: $2.25 + $5.00 = $7.25

Finally, to calculate the sales mix variance you can use the following formula:

Actual Quantity × (Weighted Standard CM Actual Mix − Weighted Standard CM Budgeted Mix)

12,000 × ($7.25 − $6.975) = 12,000 × 0.275 = $3,300 favorable

Note: CM = Contribution Margin

Rationale
 $3,300 unfavorable.
This answer is incorrect. While the company's sales mix variance was calculated correctly, it is not unfavorable.

Rationale
 $8,100 favorable.
This answer is incorrect. This answer used actual unit contribution margin instead of budgeted unit contribution margin when calculating the
company's sales mix variance.

Rationale
 $8,100 unfavorable.
This answer is incorrect. This answer used actual unit contribution margin instead of budgeted unit contribution margin when calculating the
company's sales mix variance. Additionally, this incorrect amount would not be unfavorable.
Question 5
1.C.1.f
aq.manex.srv.002_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4

Comfort Chairs (CC) is a manufacturer of reclining chairs. CC manufactures two different models of chair, the classic and deluxe model. Below is CC's
budget information and actual results for last year.

Budget Classic Chair Deluxe Chair

Expected Sales Volume 35,000 Chairs 20,000 Chairs
Standard Price per Chair $375 $500

Actual Classic Chair Deluxe Chair

Actual Sales Volume 34,000 Chairs 20,500 Chairs
Actual Price per Chair $380 $495

What is the sales volume variance based on the above information?

Correct

$125,000 Unfavorable
Your Answer

$125,000 Favorable

$67,500 Unfavorable

$67,500 Favorable

Rationale
 $125,000 Unfavorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume for Classic chairs (34,000 chairs) is lower than the expected volume (35,000
chairs). Hence, the sales volume variance for Classic chairs is unfavorable. In contrast, the actual sales volume for Deluxe chairs (20,500 chairs) is
higher than expected volume (20,000 chairs), which means the variance for Deluxe chairs is favorable.

Sales volume variance = (Expected volume − Actual volume) × Standard price

Classic : (35, 000 units − 34, 000 units) × $375 = $375, 000 U

Deluxe : (20, 000 units − 20, 500 units) × $500 = $250, 000 F

Total sales volume variance : $375, 000 U + $250, 000 F = $125, 000 U

Note that the computational solution for Deluxe chairs is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution for Classic
chairs is a positive value, the variance is actually unfavorable as can be determined before computing the size of the variances.

Rationale
 $125,000 Favorable
This answer is incorrect. This answer correctly calculates the sales volume variance. However, the sales volume variance is not favorable.

Rationale
 $67,500 Unfavorable
This answer is incorrect. This answer represents the sales price variance, not the sales volume variance. Additionally, the sales price variance would
not be unfavorable.

Rationale
 $67,500 Favorable
This answer is incorrect. This answer represents the sales price variance, not the sales volume variance.
Question 6
1.C.1.f
manex.srv.aq.008_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 5

Comfort Chairs (CC) is a manufacturer of reclining chairs. CC manufactures two different models of chair, the classic and the deluxe model. Below is CC’s
budget information and actual results for last year.

Budget Classic Chair Deluxe Chair

Expected Sales Volume 35,000 Chairs 20,000 Chairs
Standard Price per Chair $375 $500

Actual Classic Chair Deluxe Chair

Actual Sales Volume 34,000 Chairs 20,500 Chairs
Actual Price per Chair $380 $495

Based on the above information, what is the sales mix variance measured in terms of sales price?

$210,227.27 Unfavorable

$85,227.27 Unfavorable
Correct

85,227.27 Favorable

$125,000 Unfavorable

Rationale
 $210,227.27 Unfavorable
This answer is incorrect. This answer represents the sales quantity variance, not the sales mix variance.

Rationale
 $85,227.27 Unfavorable
This answer is incorrect. This answer correctly calculates the sales mix variance. However, this variance is not unfavorable.

Rationale
 85,227.27 Favorable

The sales mix variance formula can be calculated using either the framework approach or the formula approach. Note that standard sales price is
used to compute this sales mix variance. Alternatively, if desired by management, it could be computed using standard contribution margin per
unit.

Below is the framework approach.

Because the left-side result of the framework with the total actual volume is higher than the right-side with the actual volume × expected mix %,
this is a favorable (F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales mix percentage for Classic chairs (62.39%) is lower than the expected mix percentage
(63.64%), which is unfavorable. However, because Classic chairs have the lower standard price per unit, the overall mix variance will be favorable.
The actual sales mix percentage for Deluxe chairs (37.61%) is higher than the expected mix percentage (36.36%), which is favorable. And because
Deluxe chairs have the higher standard price per unit, this also indicates that the overall sales mix variance will be favorable. Remember to use the
precise mix percentages and not the rounded mix percentages when calculating this variance using the formula approach.

Sales mix variance = Total actual volume × (Expected mix% − Actual mix%) × Standard Price

Classic: 54,500 chairs × (63.64% − 62.39%) × $375 = $255,681.82 U

Deluxe: 54,500 chairs × (36.36% − 37.61%) × $500 = $340,909.09 F

Total sales mix variance: $255,681.82 U + $340,909.09 F = $85,227.27 F

Note that the computational solution for Deluxe chairs is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Similarly, even though the computation solution for Classic
chairs is a positive value, the variance is actually unfavorable as can be determined before computing the size of the variances.

Rationale
 $125,000 Unfavorable
This answer is incorrect. This answer correctly calculates the overall sales volume variance, not the specific sales mix variance.
Question 7
1.C.1.f
manex.srv.tb.011_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The HJU Company sells a simple product and a complex product. In 20X8, it expected to sell 9,000 simple units and earn a contribution margin of $10 per
unit and 3,000 complex units and earn a contribution margin of $24 per unit. In 20X8, it sold 12,600 simple units with a contribution margin of $8 per unit
and 2,400 complex units with a contribution margin of $27 per unit. What is the sales volume variance (measured in terms of contribution margin) for the
complex product in 20X8?
$36,000 favorable
Correct

$14,400 unfavorable
Your Answer

$18,000 favorable

$32,400 unfavorable

Rationale
 $36,000 favorable
This answer is incorrect. The sales volume variance in 20X8 for the simple product is $36,000 favorable.

Rationale
 $14,400 unfavorable

The sales volume variance formula (measured in terms of contribution margin) can be calculated using either the framework approach or the
formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (2,400) is lower than the expected sales volume (3,000). Hence, the sales volume
variance is unfavorable.

Sales volume variance: (Expected volume – Actual volume) × Standard contribution margin

Sales volume variance: (3,000 – 2,400) × $24.00 = $14,400 U

Note that the computational solution is a positive value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is positive, the variance is actually
unfavorable as we determined before computing the size of the variance.

Rationale
 $18,000 favorable
This answer is incorrect. The sales quantity variance in 20X8 for the complex product is $18,000 favorable.
Rationale
 $32,400 unfavorable
This answer is incorrect. The sales mix variance in 20X8 for the complex product is $32,400 unfavorable.
Question 8
1.C.1.f
aq.manex.srv.003_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4

Fantastic Fixtures (FF) manufactures light fixtures for commercial buildings. FF manufactures two different kinds of light fixtures, the small and large
model. Below is FF's budget information and actual results for last year.

Budget Small Fixture Large Fixture

Expected Sales Volume 60,000 Fixtures 90,000 Fixtures
Standard Price per Fixture $150 $300

Actual Small Fixture Large Fixture

Actual Sales Volume 62,000 Fixtures 88,000 Fixtures
Actual Price per Fixture $160 $290

What is the sales price variance based on the above information?

$560,000 Unfavorable
Your Answer

$560,000 Favorable

$260,000 Favorable
Correct

$260,000 Unfavorable

Rationale
 $560,000 Unfavorable
This answer is incorrect. This answer used expected volume × standard price instead of actual volume × standard price when calculating the sales
price variance.

Rationale
 $560,000 Favorable
This answer is incorrect. This answer used expected volume × standard price instead of actual volume × standard price when calculating the sales
price variance. Additionally, this variance would not be favorable.

Rationale
 $260,000 Favorable
This answer is incorrect. This answer correctly calculates the sales price variance. However, this variance would not be favorable.

Rationale
 $260,000 Unfavorable

The sales price variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales price is lower than the right-side with the standard sales price, this is an
unfavorable (U) variance.
Below is the formula approach.

Before computing the variance, note that the actual sales price for Small fixtures ($160) is higher than the standard price ($150). Hence, the sales
price variance for Small fixtures is favorable. In contrast, the actual sales price for Large fixtures ($290) is lower than its standard price ($300), which
means the variance for Large fixtures is unfavorable.

Sales price variance = Actual volume × (Standard price − Actual price)

Small : 62, 000 units × ($150. 00 − $160. 00) = $620, 000 F

Large : 88, 000 units × ($300. 00 − $290. 00) = $880, 000 U

Total sales price variance : $620, 000 F + $880, 000 U = $260, 000 U

Note that the computational solution for Small fixtures is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution for Large
fixtures is a positive value, the variance is actually unfavorable as can be determined before computing the size of the variances.
Question 9
1.C.1.f
manex.srv.tb.010_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The HJU Company sells a simple product and a complex product. In 20X8, it expected to sell 9,000 simple units and earn a contribution margin of $10 per
unit and 3,000 complex units and earn a contribution margin of $24 per unit. In 20X8, it sold 12,600 simple units with a contribution margin of $8 per unit
and 2,400 complex units with a contribution margin of $27 per unit. What is the sales volume variance (measured in terms of contribution margin) for the
simple product in 20X8?
Correct

$36,000 favorable

$14,400 unfavorable
Your Answer

$22,500 favorable

$13,500 favorable

Rationale
 $36,000 favorable

The sales volume variance formula (measured in terms of contribution margin) can be calculated using either the framework approach or the
formula approach

Below is the framework approach.

Because the left-side result the framework with the actual sales volume is higher than the right-side with the expected sales volume, this is a
favorable (F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (12,600) is higher than the expected sales volume (9,000). Hence, the sales volume
variance is favorable.

Sales volume variance: (Expected volume – Actual volume) × Standard contribution margin

Sales volume variance: (9,000 – 12,600) × $10.00 = $36,000 F

Note that the computational solution is a negative value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is negative, the variance is actually
favorable as we determined before computing the size of the variance.

Rationale
 $14,400 unfavorable
This answer is incorrect. The sales volume variance in 20X8 for the complex product is $14,400 unfavorable.

Rationale
 $22,500 favorable
This answer is incorrect. The sales quantity variance in 20X8 for the simple product is $22,500 favorable.
Rationale
 $13,500 favorable
This answer is incorrect. The sales mix variance in 20X8 for the simple product is $13,500 favorable.
Question 10
1.C.1.f
1C1-CQ27
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 6

The standard cost sheet for King Industries show the following unit costs for direct materials and direct labor for each package of wrapping paper made:

Direct materials: 100 square feet of paper at $.05 $ 5.00

Direct labor: 1 standard hours at $8 $ 8.00
Total standard materials and labor costs per package $ 13.00

During the month of November, 150,000 square feet of paper was used to produce 1,425 packages of wrapping paper, and the following actual costs
were incurred:

Paper purchased: 175,000 square feet at $.06 per square foot $ 10,500
Direct labor: 1,390 hours at $8.10 per hour $ 11,259

The standard selling price per package is $39. King expects to sell 1,100 packages during December. Actual revenue results from December are as follows:

Actual revenue: 1,065 packages sold at $40 per package = $42,600

What are the sales price and volume variances for King Industries? (The volume variance in this context means the effect on revenue, not the effect on
contribution margin)

Correct

$1,065 favorable and $1,365 unfavorable.

Your Answer

$1,065 unfavorable and $1,365 favorable.

$1,365 favorable and $1,065 unfavorable.

$1,365 unfavorable and $1,065 favorable.

Rationale
 $1,065 favorable and $1,365 unfavorable.

Compute the sales price and volume variances as follows:

Sales Price Variance:

Actual price $ 40.00
Standard price $ 39.00
Difference $ 1.00 favorable
Actual quantity of packages sold 1,065 units
Total sales price variance $ 1,065 favorable
Sales Volume Variance:
Actual quantity of packages sold 1,065 units
Expected quantity of packages sold 1,100 units
Difference (35) unfavorable units
Standard price $ 39.00
Total sales volume variance $ (1,365) unfavorable

Rationale
 $1,065 unfavorable and $1,365 favorable.
This answer is incorrect. This answer correctly calculates the sales price and volume variances. However, they are not unfavorable and favorable,
respectively.

Rationale
 $1,365 favorable and $1,065 unfavorable.
This answer is incorrect. This answer mixed up the sales price and sales volume variances. Additionally, the sales price variance is not unfavorable
and the sales volume variance is not favorable.

Rationale
 $1,365 unfavorable and $1,065 favorable.
This answer is incorrect. This answer mixed up the sales price and sales volume variances.
Question 11
1.C.1.f
aq.manex.srv.005_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 5

Comfort Chairs (CC) is a manufacturer of reclining chairs. CC manufactures two different models of chair, the classic and deluxe model. Below is CC's
budget information and actual results for last year.

Budget Classic Chair Deluxe Chair

Expected Sales Volume 35,000 Chairs 20,000 Chairs
Standard Price per Chair $375 $500
Standard Variable Cost ($200) ($300)
Standard Contribution Margin $175 $200

Actual Classic Chair Deluxe Chair

Actual Sales Volume 34,000 Chairs 20,500 Chairs
Actual Price per Chair $380 $495
Actual Variable Cost ($200) ($290)
Actual Contribution Margin $180 $205

What is the sales volume variance (measured in terms of contribution margin) based on the above information?

$272,500 Unfavorable

$272,500 Favorable
Correct

$75,000 Unfavorable

$75,000 Favorable

Rationale
 $272,500 Unfavorable
This answer is incorrect. This answer represents something that looks like a sales price variance, but measured in terms of contribution margin.
Further, a sale price variance like this wouldn't be unfavorable.

Rationale
 $272,500 Favorable
This answer is incorrect. This answer represents something that looks like a sales price variance, but measured in terms of contribution margin.

Rationale
 $75,000 Unfavorable

The sales volume variance formula (measured in terms of contribution margin) can be calculated using either the framework approach or the
formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume for Classic chairs (34,000 chairs) is lower than the expected volume (35,000
chairs). Hence, the sales volume variance for Classic chairs is unfavorable. In contrast, the actual sales volume for Deluxe chairs (20,500 chairs) is
higher than expected volume (20,000 chairs), which means the variance for Deluxe chairs is favorable.

Sales volume variance = (Expected volume − Actual volume) × Standard contribution margin

Classic : (35, 000 units − 34, 000 units) × $175 = $175, 000 U

Deluxe : (20, 000 units − 20, 500 units) × $200 = $100, 000 F

Total sales volume variance : $175, 000 U + $100, 000 F = $75, 000 U

Note that the computational solution for Deluxe chairs is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution for Classic
chairs is a positive value, the variance is actually unfavorable as can be determined before computing the size of the variances.

Rationale
 $75,000 Favorable
This answer is incorrect. This answer correctly calculates the sales volume variance (measured in terms of contribution margin). However, this
variance is not favorable.
Question 12
1.C.1.f
manex.srv.tb.007_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
A company expects to earn $1,000,000 in operating income on sales of 50,000 units. It actually earns $1,200,000 in operating income on sales of 54,000
units. If the flexible budget operating income for 54,000 units is $1,080,000, what is the sales volume variance?
$200,000 favorable
Correct

$80,000 favorable

$200,000 unfavorable
Your Answer

$120,000 favorable

Rationale
 $200,000 favorable
This answer is incorrect. The static budget variance is $200,000 ($1,200,000 − $1,000,000) favorable.

Rationale
 $80,000 favorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is higher than the right-side with the expected sales volume, this is a
favorable (F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (54,000) is higher than the expected sales volume (50,000). Hence, the sales
volume variance is favorable.

Sales volume variance: (Expected volume – Actual volume) × Standard price

Sales volume variance: (50,000 – 54,000) × $20.00 = $80,000 F

Note that the computational solution is a negative value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is negative, the variance is actually
favorable as we determined before computing the size of the variance.

Rationale
 $200,000 unfavorable
This answer is incorrect. The difference between static budget operating income and flexible budget operating income is $200,000 $1,000,000 −
$1,2000,000). However, flexible budget operating is higher than static budget operating income.
Rationale
 $120,000 favorable
This answer is incorrect. The flexible budget variance is $120,000 ($1,200,000 − $1,080,000) favorable.
Question 13
1.C.1.f
1C1-LS59
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: easy
Bloom Code: 2
Which of the following variances plus the flexible budget variance equals the total static budget variance?
Efficiency variance

Price variance

Sales mix variance

Correct

Sales volume variance

Rationale
 Efficiency variance
This answer is incorrect. The efficiency variance plus the flexible budget variance does not equal the total static budget variance.

Rationale
 Price variance
This answer is incorrect. The price variance plus the flexible budget variance does not equal the total static budget variance.

Rationale
 Sales mix variance
This answer is incorrect. The sales mix variance plus the flexible budget variance does not equal the total static budget variance.

Rationale
 Sales volume variance
The sales volume variance is the flexible budget amount adjusted for actual output minus the static budget amount.
Question 14
1.C.1.n
aq.manex.srv.007_0820
LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 6

Fantastic Fixtures (FF) manufactures light fixtures for commercial buildings. FF manufactures two different kinds of light fixtures, the small and large
model. Below is FF's budget information and actual results for last year.

Budget Small Fixture Large Fixture Total

Expected Sales Volume 60,000 Fixtures 90,000 Fixtures 150,000 Fixtures
Standard Price per Fixture $150 $300
Expected Mix Percentage 40% 60% 100%

Actual Small Fixture Large Fixture Total

Actual Sales Volume 62,000 Fixtures 88,000 Fixtures 150,000 Fixtures
Actual Price per Fixture $160 $290
Actual Mix Percentage 41.33% 58.67% 100%

What is the sales quantity variance based on the above information?

$300,000 Unfavorable

$300,000 Favorable
Your Answer

$260,000 Unfavorable
Correct

$0

Rationale
 $300,000 Unfavorable
This answer is incorrect. This answer represents the sales mix variance, not the sales quantity variance.

Rationale
 $300,000 Favorable
This answer is incorrect. This answer represents the sales mix variance, not the sales quantity variance. Additionally, the sales mix variance would
not be favorable.

Rationale
 $260,000 Unfavorable
This answer is incorrect. This answer represents the sales price variance, not the sales quantity variance.

Rationale
 $0

The sales quantity variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the total actual volume × expected mix % is the same as the right-side with the expected volume,
the variance is $0 and it is neither favorable nor unfavorable.

Below is the formula approach.

Before computing the variance, note that the actual sales volume for Large fixtures and Small fixtures combined is 150,000 (88,000 large fixtures +
62,000 small fixtures). Also, note that expected sales volume for Large fixtures and Small fixtures combined is 150,000 (90,000 large fixtures + 60,000
small fixtures). Because total actual sales volume and total expected sales volume equal each other, this means there will be no variance. See the
calculation below.

Sales quantity variance = (Total expected volume − Total actual volume) × Expected mix% × Standard price

Small : (150, 000 fixtures − 150, 000 fixtures) × 40% × $150 = $0

Large : (150, 000 fixtures − 150, 000 fixtures) × 60% × $300 = $0

Total sales quantity variance : $0 + $0 = $0

Question 15
1.C.1.f
manex.srv.tb.012_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: easy
Bloom Code: 4
The LPM Company expects to sell 20,000 units of its product for $10 per unit in 20X8. It ends up selling 22,000 units for $11 per unit. What is the sales price
variance for 20X8?
$42,000 favorable

$22,000 unfavorable
Correct

$22,000 favorable
Your Answer

$20,000 favorable

Rationale
 $42,000 favorable
This answer is incorrect. The static budget variance in 20X8 is $42,000 favorable.

Rationale
 $22,000 unfavorable
This answer is incorrect. When LPM’s $1 difference in selling price is multiplied by the 22,000 units sold, the result is $22,000. However, the actual
selling price is not lower than the budgeted selling price.

Rationale
 $22,000 favorable

The sales price variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales price is higher than the right-side with the expected sales price, this is a favorable
(F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales price ($11.00) is higher than the standard sales price ($10.00). Hence, the sales volume
variance is favorable.

Sales price variance: (Standard price – Actual price) × Actual volume

Sales price variance: ($10.00 – $11.00) × 22,000 = $22,000 F

Note that the computational solution is a negative value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is negative, the variance is actually
favorable as we determined before computing the size of the variance.

Rationale
 $20,000 favorable
This answer is incorrect. The sales volume variance in 20X8 is $20,000 favorable.
Question 16
1.C.1.n
manex.srv.tb.016_0820
LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The HJU Company sells a simple product and a complex product. In 20X8, it expected to sell 9,000 simple units and 3,000 complex units and earn a
contribution margin of $10 per unit and $24 per unit respectively. In 20X8, it sold 12,600 simple units with a contribution margin of $8 per unit and 2,400
complex units with a contribution margin of $27 per unit. What is the sales quantity variance for the simple product in 20X8?
Correct

$22,500 favorable

$18,000 favorable

$36,000 favorable
Your Answer

$13,500 favorable

Rationale
 $22,500 favorable

Below is the framework approach.

Because the left-side result of the framework with the total actual volume × expected mix % is higher than the right-side with the expected volume,
this is a favorable variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (15,000) is higher than total expected sales volume (12,000) which is favorable.

Sales quantity variance: (Total expected volume − Total actual volume) × Expected mix × Standard price

Sales quantity variance: (12,000 – 15,000) × 75% × $10.00 = $22,500 F

Note that the computational solution is actually a negative value, but the result is reported as an absolute value. Variances are not reported as
negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution a negative value, the
variance is actually favorable as we determined before computing the size of the variance.

Rationale
 $18,000 favorable
This answer is incorrect. The sales quantity variance in 20X8 for the complex product is $18,000 favorable.

Rationale
 $36,000 favorable
This answer is incorrect. The sales volume variance in 20X8 for the simple product is $36,000 favorable.

Rationale
 $13,500 favorable
This answer is incorrect. The sales mix variance in 20X8 for the simple product is $13,500 favorable.
Question 17
1.C.1.n
manex.srv.tb.002_0120
LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The OIU Company sells two different products. It expected to sell 20,000 units of Product A and 5,000 units of Product B, but it actually sold 21,000 units
of Product A and 4,000 units of Product B. If Product A sells for a higher price than Product B, what will be the impact on actual revenue relative to
budgeted revenue?
Correct

Actual sales revenue will be higher than budgeted sales revenue.

Actual sales revenue will be the same as budgeted sales revenue.

It is not possible to tell the impact on sales revenue without knowing the actual selling prices.
Your Answer

Actual sales revenue will be lower than budgeted sales revenue.

Rationale
 Actual sales revenue will be higher than budgeted sales revenue.
The sales mix variance for a product considers the difference in revenue caused by the product’s actual percentage of unit sales (sales mix) being
different from its budgeted percentage of unit sales. If the actual sales mix percentage is lower than expected, its sales mix variance is unfavorable.
If the actual sales mix percentage is higher than expected, its sales mix is favorable. In this problem, Product A’s sales mix variance will be favorable
and Product B’s sales mix variance will be unfavorable. Since Product A has the higher sales price, its favorable variance will be larger than Product
B’s unfavorable variance which means actual sales revenue will be higher than budgeted sales revenue.

Rationale
 Actual sales revenue will be the same as budgeted sales revenue.
This answer is incorrect. Even though actual total unit sales are the same as budgeted total unit sales, actual sales revenue will not be the same as
budgeted sales revenue because the products have different sales mixes and different selling prices.

Rationale
 It is not possible to tell the impact on sales revenue without knowing the actual selling prices.
This answer is incorrect. Even though specific selling prices are not provided, there is enough information in this problem to determine the impact
on sales revenue.

Rationale
 Actual sales revenue will be lower than budgeted sales revenue.
This answer is incorrect. Actual sales revenue will be lower than budgeted sales revenue if an unfavorable sales mix variance for one product more
than offsets a favorable sales mix variance for another product. The unfavorable sales mix variance in this problem does not more than offset the
favorable sales mix for the other product.
Question 18
1.C.1.f
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Lesson Reference: Sales Revenue Variances
Difficulty: easy
Bloom Code: 4
The FGT Company expects to sell 20,000 units of its product for $18 per unit in 20X8. It ends up selling 24,000 units for $16 per unit. What is the sales price
variance for 20X8?
$24,000 favorable

$48,000 favorable
Correct

$48,000 unfavorable
Your Answer

$72,000 favorable

Rationale
 $24,000 favorable
This answer is incorrect. The static budget variance in 20X8 is $24,000 favorable.

Rationale
 $48,000 favorable
This answer is incorrect. When FGT’s $2 difference in selling price is multiplied by the 24,000 units sold, the result is $48,000. However, the actual
selling price is not higher than the budgeted selling price.

Rationale
 $48,000 unfavorable

The sales price variance formula can be calculated using either the framework approach or the formula approach

Below is the framework approach.

Because the left-side result of the framework with the actual sales price is lower than the right-side with the expected sales price, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales price ($16.00) is lower than the standard sales price ($18.00). Hence, the sales volume
variance is favorable.

Sales price variance: (Standard price – Actual price) × Actual volume

Sales price variance: ($18.00 – $16.00) × 24,000 = $48,000 U

Note that the computational solution is a positive value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is negative, the variance is actually
unfavorable as we determined before computing the size of the variance.

Framework: Left side $384,000 (24,000 units × $16.00). Right side $432,000 (24,000 units × $18.00). Unfavorable $48,000

Formula: Actual quantity × (Standard price – Actual price) (24,000 × ($18.00 – $16.00))
Rationale
 $72,000 favorable
This answer is incorrect. The sales volume variance in 20X8 is $72,000 favorable.
Question 19
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LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
A company expects to earn $240,000 in operating income on sales of 30,000 units. It actually earns $180,000 in operating income on sales of 26,000 units.
If the flexible budget operating income for 26,000 units is $208,000, what is the sales volume variance?
$60,000 unfavorable
Correct

$32,000 unfavorable

$32,000 favorable
Your Answer

$28,000 unfavorable

Rationale
 $60,000 unfavorable
This answer is incorrect. The static budget variance is $60,000 ($180,000 − $240,000) unfavorable.

Rationale
 $32,000 unfavorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (26,000 units) is lower than the expected volume (30,000 units). Hence, the sales
volume variance is unfavorable.

Sales volume variance = (Expected volume – Actual volume) × Standard price

Sales volume variance: (30,000 – 26,000) × $8.00 = $32,000 U

Note that the computational solution is a positive value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is positive, the variance is actually
unfavorable as we determined before computing the size of the variance.

Rationale
 $32,000 favorable
This answer is incorrect. The difference between static budget operating income and flexible budget operating income is $32,000. However, flexible
budget operating is lower than static budget operating income.

Rationale
 $28,000 unfavorable
This answer is incorrect. The flexible budget variance is $28,000 unfavorable.
Question 20
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LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
A company expects to earn $800,000 in operating income on sales of 20,000 units. It actually earns $900,000 in operating income on sales of 18,000 units.
If the flexible budget operating income for 18,000 units is $720,000, what is the sales volume variance?
$100,000 favorable
Correct

$80,000 unfavorable

$80,000 favorable
Your Answer

$180,000 favorable

Rationale
 $100,000 favorable
This answer is incorrect. The static budget variance is $100,000 ($900,000 − $80,0000) favorable.

Rationale
 $80,000 unfavorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (18,000) is lower than the expected sales volume (20,000). Hence, the sales
volume variance is unfavorable.

Sales volume variance: (Expected volume – Actual volume) × Standard price

Sales volume variance: (20,000 – 18,000) × $40.00 = $80,000 U

Note that the computational solution is a positive value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is positive, the variance is actually
unfavorable as we determined before computing the size of the variance.

Rationale
 $80,000 favorable
This answer is incorrect. The difference between static budget operating income and flexible budget operating income is $80,000 ($800,000 −
$720,000). However, flexible budget operating is higher than static budget operating income.
Rationale
 $180,000 favorable
This answer is incorrect. The flexible budget variance is $180,000 ($900,000 − $720,000) favorable.
Question 21
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LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
The JKI Company sells two different products. It expected to sell 10,000 units of Product A and 5,000 units of Product B, but it actually sold 9,000 units of
Product A and 6,000 units of Product B. Which statement about the sales mix variance is correct?
Correct

The sales mix variance will be unfavorable for Product A and favorable for Product B.

The sales mix variance will be unfavorable for both products.

The sales mix variance will be favorable for both products.

Your Answer

The sales mix variance will be favorable for Product A and unfavorable for Product B.

Rationale
 The sales mix variance will be unfavorable for Product A and favorable for Product B.
The sales mix variance for a product takes into consideration the difference in contribution margin caused by the product’s actual percentage of
unit sales (sales mix) being different from its budgeted percentage of unit sales. If the actual sales mix percentage is lower than expected, its sales
mix variance is unfavorable. If the actual sales mix percentage is higher than expected, its sales mix is favorable. Product A’s budgeted sales mix is
66.7% (10,000 ÷ 15,000) and its actual sales mix is 60% (9,000 ÷ 15,000). This means its sales mix variance will be unfavorable. Product B’s budgeted
sales mix is 33.3% (5,000 ÷ 15,000) and its actual sales mix is 40% (6,000 ÷ 15,000). This means its sales mix variance will be favorable.

Rationale
 The sales mix variance will be unfavorable for both products.
This answer is incorrect. The sales mix variance cannot be unfavorable for both products.

Rationale
 The sales mix variance will be favorable for both products.
This answer is incorrect. The sales mix variance cannot be favorable for both products.

Rationale
 The sales mix variance will be favorable for Product A and unfavorable for Product B.
This answer is incorrect. The actual sales mix for Product A is lower than expected and the actual sales mix for Product B is higher than expected.
Question 22
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Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4

Comfort Chairs (CC) is a manufacturer of reclining chairs. CC manufactures two different models of chair, the classic and deluxe model. Below is CC's
budget information and actual results for last year.

Budget Classic Chair Deluxe Chair

Expected Sales Volume 35,000 Chairs 20,000 Chairs
Standard Price per Chair $375 $500

Actual Classic Chair Deluxe Chair

Actual Sales Volume 34,000 Chairs 20,500 Chairs
Actual Price per Chair $380 $495

What is the sales price variance based on the above information?

$57,500 Favorable
Correct

$67,500 Favorable

$57,500 Unfavorable

$67,500 Unfavorable

Rationale
 $57,500 Favorable
This answer is incorrect. This answer used expected volume × standard price instead of actual volume × standard price when calculating the sales
price variance. Additionally, the incorrect variance calculated would not be favorable.

Rationale
 $67,500 Favorable

The sales price variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales price is higher than the right-side with the standard sales price, this is a favorable
(F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales price for Classic chairs ($380) is higher than the standard price ($375). Hence, the sales
price variance for Classic chairs is favorable. In contrast, the actual sales price for Deluxe chairs ($495) is lower than its standard price ($500), which
means the variance for Deluxe chairs is unfavorable.

Sales price variance = Actual volume × (Standard price − Actual price)

Classic : 34, 000 units × ($375. 00 − $380. 00) = $170, 000 F

Deluxe : 20, 500 units × ($500. 00 − $495. 00) = $102, 500 U

Total sales price variance : $170, 000 F + $102, 500 U = $67, 500 F

Note that the computational solution for Classic chairs is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution for Deluxe
chairs is a positive value, the variance is actually unfavorable as can be determined before computing the size of the variances.
Rationale
 $57,500 Unfavorable
This answer is incorrect. This answer used expected volume × standard price instead of actual volume × standard price when calculating the sales
price variance.

Rationale
 $67,500 Unfavorable
This answer is incorrect. This answer correctly calculates the sales price variance. However, sales price variance would not be unfavorable.
Question 23
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LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
A company expects to earn $500,000 in operating income on sales of 100,000 units. It actually earns $480,000 in operating income on sales of 80,000
units. If the flexible budget operating income for 80,000 units is $400,000, what is the sales volume variance?
$20,000 unfavorable
Correct

$100,000 unfavorable

$100,000 favorable
Your Answer

$80,000 favorable

Rationale
 $20,000 unfavorable
This answer is incorrect. The static budget variance is $20,000 ($480,000 − $500,000) unfavorable.

Rationale
 $100,000 unfavorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side of result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (80,000) is lower than the expected sales volume (100,000). Hence, the sales
volume variance is unfavorable.

Sales volume variance: (Expected volume – Actual volume) × Standard price

Sales volume variance: (100,000 – 80,000) × $5.00 = $100,000 U

Note that the computational solution is a positive value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is positive, the variance is actually
unfavorable as we determined before computing the size of the variance.

Rationale
 $100,000 favorable
This answer is incorrect. The difference between static budget operating income and flexible budget operating income is $100,000 ($500,000 −
$400,000). However, flexible budget operating is higher than static budget operating income.
Rationale
 $80,000 favorable
This answer is incorrect. The flexible budget variance is $80,000 ($480,000 − $400,000) favorable.
Question 24
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LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 4
The HJU Company sells a simple product and a complex product. In 20X8, it expected to sell 9,000 simple units and 3,000 complex units and earn a
contribution margin of $10 per unit and $24 per unit respectively. In 20X8, it sold 12,600 simple units with a contribution margin of $8 per unit and 2,400
complex units with a contribution margin of $27 per unit. What is the sales quantity variance for the complex product in 20X8?
$22,500 favorable
Correct

$18,000 favorable

$14,400 unfavorable
Your Answer

$32,400 unfavorable

Rationale
 $22,500 favorable
This answer is incorrect. The sales quantity variance in 20X8 for the simple product is $22,500 favorable.

Rationale
 $18,000 favorable

Below is the framework approach.

Because the left-side result of the framework with the total actual volume × expected mix % is higher than the right-side with the expected volume,
this is a favorable variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (15,000) is higher than total expected sales volume (12,000), which is favorable.

Sales quantity variance: (Total expected volume − Total actual volume) × Expected mix × Standard price

Sales quantity variance: (12,000 – 15,000) × 25% × $24.00 = $18,000 F

Note that the computational solution is actually a negative value, but the result is reported as an absolute value. Variances are not reported as
negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is a negative value, the
variance is actually favorable, as we determined before computing the size of the variance.

Rationale
 $14,400 unfavorable
This answer is incorrect. The sales volume variance in 20X8 for the complex product is $14,400 unfavorable.

Rationale
 $32,400 unfavorable
This answer is incorrect. The sales mix variance in 20X8 for the complex product is $32,400 unfavorable.
Question 25
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LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 5

Comfort Chairs (CC) is a manufacturer of reclining chairs. CC manufactures two different models of chair, the classic and deluxe model. Below is CC’s
budget information and actual results for last year.

Budget Classic Chair Deluxe Chair

Expected Sales Volume 35,000 Chairs 20,000 Chairs
Standard Price per Chair $375 $500

Actual Classic Chair Deluxe Chair

Actual Sales Volume 34,000 Chairs 20,500 Chairs
Actual Price per Chair $380 $495

Based on the above information, what is the sales quantity variance measured in terms of sales price?

85,227.27 Favorable
Your Answer

85,227.27 Unfavorable

$210,227.27 Favorable
Correct

$210,227.27 Unfavorable

Rationale
 85,227.27 Favorable
This answer is incorrect. This answer represents the sales mix variance, not the sales quantity variance.

Rationale
 85,227.27 Unfavorable
This answer is incorrect. This answer represents the sales mix variance computation, though it is incorrectly labeled as unfavorable. It is not the
sales quantity variance.

Rationale
 $210,227.27 Favorable
This answer is incorrect. This answer correctly calculates the sales quantity variance. However, this variance is not favorable.

Rationale
 $210,227.27 Unfavorable

The sales quantity variance formula can be calculated using either the framework approach or the formula approach. Note that standard sales
price is used to compute this sales quantity variance. Alternatively, if desired by management, it could be computed using standard contribution
margin per unit.

Below is the framework approach.

Because the left-side result of the framework with the actual volume is lower than the right side with the total actual volume × expected mix %, this
is an unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume for Classic chairs and Deluxe chairs is 54,500 (34,000 + 20,500). Also, note that
expected sales volume for Classic chairs and Deluxe chairs combined is 55,000 (35,000 + 20,000). Because CC sold 500 fewer chairs (55,000 – 54,500)
than expected, the overall sales quantity variance will be unfavorable (U). Remember to use the precise mix percentages and not the rounded mix
percentages when calculating this variance using the formula approach.

Sales quantity variance = (Total expected volume − Total actual volume) × Expected mix% × Standard price

Classic: (55,000 chairs – 54,500 chairs) × 63.64% × $375 = $119,318.18 U

Deluxe: (55,000 chairs – 54,500 chairs) × 36.36% × $500 = $90,909.09 U

Total sales mix variance: $119,318.18 U + $90,909.09 U = $210,227.27 U

Note that even though the computation solution for both Classic and Deluxe chairs is a positive value, the variance is actually unfavorable as can be
determined before computing the size of the variance.
Question 26
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Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
A company expects to earn $600,000 in operating income on sales of 48,000 units. It actually earns $630,000 in operating income on sales of 52,000 units.
If the flexible budget operating income for 52,000 units is $650,000, what is the sales volume variance?
$30,000 favorable
Correct

$50,000 favorable

$50,000 unfavorable
Your Answer

$20,000 unfavorable

Rationale
 $30,000 favorable
This answer is incorrect. The static budget variance is $30,000 ($630,000 − $600,000) favorable.

Rationale
 $50,000 favorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is higher than the right-side with the expected sales volume, this is a
favorable (F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (52,000) is higher than the expected sales volume (48,000). Hence, the sales
volume variance is favorable.

Sales volume variance: (Expected volume – Actual volume) × Standard price

Sales volume variance: (48,000 – 52,000) × $12.50 = $50,000 F

Note that the computational solution is a negative value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is negative, the variance is actually
favorable as we determined before computing the size of the variance.

Rationale
 $50,000 unfavorable
This answer is incorrect. The difference between static budget operating income and flexible budget operating income is $50,000. However, flexible
budget operating is higher than static budget operating income.

Rationale
 $20,000 unfavorable
This answer is incorrect. The flexible budget variance is $20,000 ($630,000 − $650,000) unfavorable.
Question 27
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LOS: 1.C.1.n
Lesson Reference: Sales Revenue Variances
Difficulty: hard
Bloom Code: 6

Fantastic Fixtures (FF) manufactures light fixtures for commercial buildings. FF manufactures two different kinds of light fixtures, the small and large
model. Below is FF's budget information and actual results for last year.

Budget Small Fixture Large Fixture Total

Expected Sales Volume 60,000 Fixtures 90,000 Fixtures 150,000 Fixtures
Standard Price per Fixture $150 $300
Expected Mix Percentage 40% 60% 100%

Actual Small Fixture Large Fixture Total

Actual Sales Volume 62,000 Fixtures 88,000 Fixtures 150,000 Fixtures
Actual Price per Fixture $160 $290
Actual Mix Percentage 41.33% 58.67% 100%

What is the sales mix variance based on the above information?

$0
Correct

$300,000 Unfavorable
Your Answer

$300,000 Favorable

Not enough information to calculate.

Rationale
 $0
This answer is incorrect. This answer represents the sales quantity variance, not the sales mix variance.

Rationale
 $300,000 Unfavorable

The sales mix variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual volume is lower than the right-side with the total actual volume × expected mix %, this
is an unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales mix percentage for Large fixtures (58.67%) is lower than the expected mix percentage
(60%), which is unfavorable. Because Large fixtures have the higher standard price per unit, the overall sales mix variance will be unfavorable. The
actual sales mix percentage for Small fixtures (41.33%) is higher than the expected mix percentage (40%), which means the variance for Small
fixtures is favorable, but this is an unprofitable trade-off in the sales mix. Remember to use the precise mix percentages and not the rounded mix
percentages when calculating this variance using the formula approach.
 Sales mix variance = Total actual volume × (Expected mix% − Actual mix%) × Standard Price

Small : 150, 000 Fixtures × (40% − 41. 33%) × $150 = $300, 000 F

Large : 150, 000 Fixtures × (60% − 58. 67%) × $300 = $600, 000 U

Total sales mix variance : $300, 000 F + $600, 000 U = $300, 000 U

Note that the computational solution for Small fixtures is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution for Large
fixtures is a positive value, the variance is actually unfavorable as can be determined before computing the size of the variances.

Rationale
 $300,000 Favorable
This answer is incorrect. This answer correctly calculates the sales mix variance. However, this variance is not favorable.

Rationale
 Not enough information to calculate.
This answer is incorrect. There is enough information to calculate the sales mix variance. The actual and expected sales mixes were calculated and
provided as well as total expected quantity and standard price for both small and large fixtures.
Question 28
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LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4

At the beginning of the year, a company budgeted to sell 600,000 units at a price of $12 per unit. It actually sold 585,000 units at a price of $12.50 per unit.
The sales-volume variance is

*Source: Retired ICMA CMA Exam Questions.

$112,500 favorable.
Correct

$180,000 unfavorable.

$187,500 unfavorable.
Your Answer

$292,500 favorable.

Rationale
 $112,500 favorable.
This answer is incorrect. $112,500 is the difference between actual sales (585,000 × $12.50) and budgeted sales (600,000 × $12), which is known as
the static variance, not the sales volume variance. The sales volume variance is the difference between the budgeted sales and the flexible budget
sales.

Rationale
 $180,000 unfavorable.

Sales-volume variance is the difference between budgeted unit sales and the actual unit sales multiplied by the budgeted selling price.

Sales-volume variance = (Budgeted unit sales − Actual unit sales)× budgeted price

Sales-volume variance = (600, 000 − 585, 000)×$12

Sales-volume variance = $180, 000

This is unfavorable because actual units sold is less than budgeted units sold.

Rationale
 $187,500 unfavorable.
This answer is incorrect. $187,500 is the difference between actual units sold and budgeted units sold at the actual sales price. Sales-volume
variance is the difference between the actual units sold and the budgeted units sold at the budgeted sales price.

Rationale
 $292,500 favorable.
This answer is incorrect. $292,500 is the sales price variance, not the sales-volume variance. The sales price variance is the difference between
actual units sold at the actual sales price (585,000 × $12.50) and the actual units sold at the budgeted sales price (585,000 × $12.00). The sales-
volume variance is the difference between the actual units sold at the budgeted sales price and the budgeted units sold at the budgeted sales price.
Question 29
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LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
A company expects to earn $400,000 in operating income on sales of 40,000 units. It actually earns $360,000 in operating income on sales of 45,000 units.
If the flexible budget operating income for 45,000 units is $450,000, what is the sales volume variance?
$40,000 unfavorable
Correct

$50,000 favorable

$50,000 unfavorable
Your Answer

$90,000 unfavorable

Rationale
 $40,000 unfavorable
This answer is incorrect. The static budget variance is $40,000 ($360,000 − $400,000) unfavorable.

Rationale
 $50,000 favorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is higher than the right-side with the expected sales volume, this is a
favorable (F) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (45,000) is higher than the expected sales volume (40,000). Hence, the sales
volume variance is favorable.

Sales volume variance: (Expected volume – Actual volume) × Standard price

Sales volume variance: (40,000 – 45,000) × $10.00 = $50,000 F

Note that the computational solution is a negative value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is negative, the variance is actually
favorable as we determined before computing the size of the variance.

Rationale
 $50,000 unfavorable
This answer is incorrect. The difference between static budget operating income and flexible budget operating income is $50,000 ($400,000 −
$450,000). However, flexible budget operating is higher than static budget operating income.
Rationale
 $90,000 unfavorable
This answer is incorrect. The flexible budget variance is $90,000 ($360,000 − $450,000) unfavorable.
Question 30
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LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4
A company expects to earn $300,000 in operating income on sales of 50,000 units. It actually earns $230,000 in operating income on sales of 32,000 units.
If the flexible budget operating income for 32,000 units is $192,000, what is the sales volume variance?
$70,000 unfavorable
Correct

$108,000 unfavorable
Your Answer

$108,000 favorable

$38,000 favorable

Rationale
 $70,000 unfavorable
This answer is incorrect. The static budget variance is $70,000 ($230,000 − $300,000) unfavorable.

Rationale
 $108,000 unfavorable

Below is the framework approach:

Because the left-side result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume (32,000 units) is lower than the expected volume (50,000 units). Hence, the sales
volume variance is unfavorable.

Sales volume variance = (Expected volume – Actual volume) × Standard price

Sales volume variance: (50,000 – 32,000) × $6.00 = $108,000 U

Note that the computational solution is a positive value, but the result is reported as an absolute value. Variances are not reported as negative or
positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution is positive, the variance is actually
unfavorable as we determined before computing the size of the variance.

Rationale
 $108,000 favorable
This answer is incorrect. The difference between static budget operating income and flexible budget operating income is $108,000. However,
flexible budget operating is lower than static budget operating income.

Rationale
 $38,000 favorable
This answer is incorrect. The flexible budget variance is $38,000 favorable.
Question 31
1.C.1.f
1C1-AT34
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: easy
Bloom Code: 1
The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is:
sales mix variance.
Correct

sales volume variance.

Your Answer

flexible budget variance.

static budget variance.

Rationale
 sales mix variance.
This answer is incorrect. The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is not the
sales mix variance.

Rationale
 sales volume variance.
The sales volume variance is the difference between the budgeted contribution margin at the actual volume and the original (static budget)
budgeted contribution margin. It measures the change in profit that would be expected from an actual volume that differs from the original
budgeted volume.

Rationale
 flexible budget variance.
This answer is incorrect. The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is not the
flexible budget variance.

Rationale
 static budget variance.
This answer is incorrect. The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is not the
static budget variance.
Question 32
1.C.1.f
aq.manex.srv.004_0820
LOS: 1.C.1.f
Lesson Reference: Sales Revenue Variances
Difficulty: medium
Bloom Code: 4

Fantastic Fixtures (FF) manufactures light fixtures for commercial buildings. FF manufactures two different kinds of light fixtures, the small and large
model. Below is FF's budget information and actual results for last year.

Budget Small Fixture Large Fixture

Expected Sales Volume 60,000 Fixtures 90,000 Fixtures
Standard Price per Fixture $150 $300

Actual Small Fixture Large Fixture

Actual Sales Volume 62,000 Fixtures 88,000 Fixtures
Actual Price per Fixture $160 $290

What is the sales volume variance based on the above information?

$260,000 Favorable

$260,000 Unfavorable
Correct

$300,000 Unfavorable

$300,000 Favorable

Rationale
 $260,000 Favorable
This answer is incorrect. This answer represents the sales price variance, not the sales volume variance. Additionally, the sales price variance would
not be favorable.

Rationale
 $260,000 Unfavorable
This answer is incorrect. This answer represents the sales price variance, not the sales volume variance.

Rationale
 $300,000 Unfavorable

The sales volume variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Because the left-side result of the framework with the actual sales volume is lower than the right-side with the expected sales volume, this is an
unfavorable (U) variance.

Below is the formula approach.

Before computing the variance, note that the actual sales volume for Large fixtures (88,000 fixtures) is lower than the expected volume (90,000
fixtures). Hence, the sales volume variance for Large fixtures is unfavorable. In contrast, the actual sales volume for Small fixtures (62,000 fixtures) is
higher than expected volume (60,000 fixtures), which means the variance for Small fixtures is favorable.
 Sales volume variance = (Expected volume − Actual volume) × Standard price

Small : (60, 000 units − 62, 000 units) × $150 = $300, 000 F

Large : (90, 000 units − 88, 000 units) × $300 = $600, 000 U

Total sales volume variance : $300, 000 F + $600, 000 U = $300, 000 U

Note that the computational solution for Small fixtures is actually a negative value, but the result is reported as an absolute value. Variances are not
reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation solution for Large
fixtures is a positive value, the variance is actually unfavorable as can be determined before computing the size of the variances.

Rationale
 $300,000 Favorable
This answer is incorrect. This answer correctly calculates the sales volume variance. However, this variance is not favorable.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.1.j
1B2-LS45
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3

All of the following statements concerning standard costs are correct except:

*Source: Retired ICMA CMA Exam Questions.

time and motion studies are often used to determine standard costs.
Your Answer

standard costs are usually set for one year.

Correct

standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.

standard costs can be used in costing inventory accounts.

Rationale
 time and motion studies are often used to determine standard costs.
This answer is incorrect. Time and motion studies are often used to determine standard costs is a correct statement.

Rationale
 standard costs are usually set for one year.
This answer is incorrect. Standard costs are usually set for one year is a correct statement.

Rationale
 standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit basis.
In a standard costing system, time and motion studies are often used to determine standard costs, are usually set for one year, and can be used in
costing inventory accounts. Standard costs are never stated in total, but rather on a per-unit basis, where the budgeted costs are states in total.

Rationale
 standard costs can be used in costing inventory accounts.
This answer is incorrect. Standard costs can be used in costing inventory accounts is a correct statement.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.1.j
1B2-CQ11
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2
If 0.7 manufacturing labor hours of input are allowed for producing one output unit and labor hours cost $27, then the standard cost of labor would be:
Correct

$18.90 per output unit.

$8.10 per output unit.

$35.10 per output unit.

Your Answer

$45.90 per output unit.

Rationale
 $18.90 per output unit.
Direct cost items such as direct materials and direct labor are measured by determining the number of units of each type of input required to get
one unit of output. This amount (0.7) is multiplied by the standard cost per input unit ($27), thus 0.7 labor hours per unit × $27 labor cost per hour =
$18.90 labor cost per unit.

Rationale
 $8.10 per output unit.
This answer is incorrect. This answer was calculated by multiplying the labor hour cost by 0.3, instead of 0.7.

Rationale
 $35.10 per output unit.
This answer is incorrect. This answer was calculated by multiplying the labor hour cost by 1.3, instead of 0.7.

Rationale
 $45.90 per output unit.
This answer is incorrect. This answer was calculated by multiplying the labor hour cost by 1.7, instead of 0.7.
Question 3
1.C.1.p
dirmat.dlcv.tb.036_0120
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4
What is the correct interpretation of a favorable materials yield variance?
Fewer of each type of material were used than were “allowed” to be used for actual production.
Correct

Fewer total units of materials were used than were “allowed” to be used for actual production.

Actual material prices were lower than standard material prices.

Your Answer

The cost of the actual mix of labor (based on standard wage rates) was lower than the cost of the standard mix of labor (based on standard wage
rates).

Rationale
 Fewer of each type of material were used than were “allowed” to be used for actual production.
This answer is incorrect. The materials yield variance focuses on total units of materials used, not the units of each type of materials used. Using
fewer units of one type of material can offset the effect of using more units of another type of material to give a favorable materials yield variance.

Rationale
 Fewer total units of materials were used than were “allowed” to be used for actual production.
If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
materials yield variance arises when the total units of materials used differs from the total units “allowed” to be used for actual production. If the
total units used is less than the total units “allowed” to be used, the materials yield variance is favorable as this indicates that less is spent on
materials than expected.

Rationale
 Actual material prices were lower than standard material prices.
This answer is incorrect. The materials price variance is based on the difference between actual and standard material prices, not the materials
yield variance.

Rationale
 The cost of the actual mix of labor (based on standard wage rates) was lower than the cost of the standard mix of labor (based on
standard wage rates).
This answer is incorrect. The materials mix variance is based on comparing the cost of the actual mix of materials used (based on standard material
prices) to the cost of the standard mix of materials (based on standard material prices), not the materials yield variance.
Question 4
1.C.1.k
aq.dirmat.dlcv.006_1807
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 5

Chair Company (CC) has provided the following standard cost sheet.

Chair Company
Standard Cost Sheet - Plastic Chair Input Quantity Cost per Input Cost per Chair
Direct materials (plastic) - pounds 4.0 pounds $12 per pound $48.00
Direct labor (molders) - direct labor hours 0.5 DLH $20.00 per DLH $10.00
Direct labor (finishers) - direct labor hours 1.0 DLH $25.00 per DLH $25.00
Variable manufacturing overhead - total DLH 1.5 DLH $5.00 per DLH $7.50
Fixed manufacturing overhead - total DLH 1.5 DLH $7.50 per DLH $11.25
Total Cost to Manufacture $101.75
Variable selling overhead - chairs 1 chair $5.00 per chair $5.00
Total Cost to Deliver $106.75

Note that the input quantity multiplied by the cost per input equals cost per chair. Also note in this case that manufacturing overhead (MOH) costs are
being allocated on the basis of total direct labor hours (DLH).

CC also disclosed the following actual information:

5,000 pounds of plastic was purchased for $63,750, of which 4,600 was used in production.
Molders were paid a total of $10,500 to work 575 hours and finishers were paid a total of $29,000 to work 1,050 hours.
1,100 plastic chairs were produced and sold during the year.

What is the direct labor rate variance based on the above information?

Correct

$1,750 Unfavorable
Your Answer

$1,750 Favorable

$750 Unfavorable

$750 Favorable

Rationale
 $1,750 Unfavorable

The direct labor rate variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Note that we can compute the actual rate paid per hour for molders as $18.26 per hour ($10,500 ÷ 575 hours). Additionally, we can compute the
actual rate paid per hour for finishers as $27.62 per hour ($29,000 ÷ 1,050 hours). Since the left side of the framework, which is based on actual labor
rates, is larger than the right side, this variance is unfavorable (U).

Below is the formula approach.

Note that the molders’ actual labor rate is lower than standard ($18.26 versus $20.00, respectively), which indicates a favorable (F) rate variance.
The finishers’ actual labor rate is higher than standard ($27.62 versus $25.00, respectively), which indicates an unfavorable (U) direct labor rate
variance. When calculating this variance, use the unrounded actual labor rate amounts. In this rationale five decimal places are used for the actual
labor rates.

Direct labor rate variance = Actual quantity × (Standard rate − Actual rate)

Molders: 575 hours × ($20.00 − $18.26087) = $1,000 F

Finishers: 1,050 hours × ($25.00 − $27.61905) = $2,750 U

Total labor rate variance: $1,000 F + $2,750 U = $1,750 U

Note that the computational solution for finishers is a negative value, but the result is reported as an absolute value. Variances are not reported as
negative or positive values, but as unfavorable (U) or favorable (F) values. Molders is favorable and finishers is unfavorable as we determined before
the calculation.

Rationale
 $1,750 Favorable
This answer is incorrect. This answer correctly calculates the direct labor rate variance; however, this variance is not favorable.

Rationale
 $750 Unfavorable
This answer is incorrect. This answer represents the direct labor efficiency variance, not the direct labor rate variance. Additionally, the direct labor
efficiency variance would not be unfavorable.

Rationale
 $750 Favorable
This answer is incorrect. This answer represents the direct labor efficiency variance, not the direct labor rate variance.
Question 5
1.C.1.k
dirmat.dlcv.tb.016_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Newport Bottling Company made 500,000 bottles of soda. The company used 400,000 pounds of direct materials that cost them $250,000. The standard
quantity of materials is 0.75 pounds per unit and $0.65 per pound. The materials price variance is:
Correct

$10,000, favorable.

$10,000, unfavorable.

$16,250, unfavorable.
Your Answer

$16,250, favorable.

Rationale
 $10,000, favorable.
The direct materials price variance measures the difference between the actual amount paid for direct materials and the amount that “should”
have been paid for the actual amount of materials purchased. Newport “should” have paid $260,000 for 400,000 pounds of materials (400,000
pounds × $0.65 per pound). Since the actual amount paid ($250,000) is $10,000 lower than the amount that “should” have been paid, the variance is
favorable.

Rationale
 $10,000, unfavorable.
This answer is incorrect. The direct materials price variance is $10,000. However, it is not unfavorable.

Rationale
 $16,250, unfavorable.
This answer is incorrect. The direct materials quantity variance is $16,250 unfavorable, not the direct materials price variance.

Rationale
 $16,250, favorable.
This answer is incorrect. The direct materials quantity variance is $16,250, but it is not favorable. In addition, this is not the same as the direct
materials price variance. Therefore, this is an incorrect answer.
Question 6
1.C.1.o
1C1-LS60
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 1
Which of the following results from substituting one direct material for another?
Efficiency variance

Yield variance
Your Answer

Sales mix variance

Correct

Mix variance

Rationale
 Efficiency variance
This answer is incorrect. The efficiency variance does not result from substituting one direct material for another.

Rationale
 Yield variance
This answer is incorrect. The yield variance does not result from substituting one direct material for another.

Rationale
 Sales mix variance
This answer is incorrect. The sales mix variance does not result from substituting one direct material for another.

Rationale
 Mix variance
When a product has two or more ingredients that can be substituted for one another, the product can have a mix variance or a variance in the usage
of the substitutable materials.
Question 7
1.C.1.o
1C1-LS73
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 5
A paint manufacturing plant has two white pigments that are substitutable for the same product. Natural pigment costs $3/gallon, and artificial pigment
costs $1/gallon. Standards call for 60% natural and 40% synthetic, but the actual ratio used was 50% of each. The actual total quantity of both
ingredients was 30,000 gallons while the budgeted total quantity was 32,000 gallons. What is the mix variance for these ingredients?
Correct

$6,000 favorable

$10,400 favorable

$10,400 unfavorable

$6,000 unfavorable

Rationale
 $6,000 favorable

The mix variance is calculated in five steps.

1. Multiply the budgeted cost per unit times the actual total quantity times the actual mix ratio for each item:

natural = $3/gallon × 30,000 gallons × 0.5 = $45,000

artificial = $1/gallon × 30,000 gallons × 0.5 = $15,000

2. Add these two amounts: $45,000 + $15,000 = $60,000

3. Multiply the budgeted cost/unit times the actual total quantity used times the budgeted mix ratio for each item:

natural = $3/gallon × 30,000 gallons × 0.6 = $54,000

artificial = $1/gallon × 30,000 gallons × 0.4 = $12,000

4. Add these two amounts: $54,000 + $12,000 = $66,000

5. The first sum less the second sum equals the mix variance: $60,000 − $66,000 = $6,000 favorable.

Rationale
 $10,400 favorable
This answer is incorrect. This answer used budgeted total quantity instead of actual total quantity when calculating the mix variance.

Rationale
 $10,400 unfavorable
This answer is incorrect. This answer used budgeted total quantity instead of actual total quantity when calculating the mix variance. Additionally,
this incorrect amount would not be unfavorable.

Rationale
 $6,000 unfavorable
This answer is incorrect. While this answer correctly calculated the mix variance, it is not unfavorable.
Question 8
1.C.1.l
cma11.p1.t1.me.0051_0820
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

A company's master budget indicated that 50,000 units of finished goods should be produced using 25,000 feet of materials at $4 per foot. The company
actually produced 48,000 units of finished goods, purchased 27,000 feet of materials at $4.25 per foot, and used 25,000 feet of materials in production.
The direct material efficiency variance is

*Source: Retired ICMA CMA Exam Questions.

Your Answer

$0.
Correct

$4,000 unfavorable.

$6,000 unfavorable.

$8,000 unfavorable.

Rationale
 $0.
This answer is incorrect. The direct materials efficiency variance does not compare the materials expected to be used for budgeted production to
the materials actually used for actual production.

Rationale
 $4,000 unfavorable.

Material efficiency variance = standard price × (actual quantity of material used – standard quantity of material allowed for actual production
volume)

Material efficiency variance = $4 × (25,000 − (. 5 × 48,000))

Material efficiency variance = $4 × 1,000

Material efficiency variance = $4,000 unfavorable

It is an unfavorable variance because more material was used than the standard quantity of material allowed for actual production. The standard
quantity allowed was calculated by determining the budgeted quantity per unit, (25,000 ft. ÷ 50,000 units) = .5

Rationale
 $6,000 unfavorable.
This answer is incorrect. The standard price for materials is not used to calculate the direct materials efficiency variance.

Rationale
 $8,000 unfavorable.
This answer is incorrect. The direct materials efficiency variance does not compare the materials actually used to the materials purchased.
Question 9
1.C.1.k
tb.dirmat.dlcv.004_1808
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

Waneta received a report from the production and purchasing departments with the following values for April:

Actual materials quantity: 14,000 pounds

Total actual cost: $18,450
Standard materials quantity: 2.7 pounds/unit
Standard price: $1.35/pound
Units made: 5,200

Three days later, she got a correction report from the purchasing department that they forgot to add shipping to the price of the materials. Shipping for
April cost $585. How much would Waneta's materials price variance change for the month of April? Do not round any calculations.

Correct

$585 unfavorable.
Your Answer

$585 favorable.

$135 unfavorable.

$135 favorable.

Rationale
 $585 unfavorable.
Correct. The materials price variance measures the impact of the actual materials price being different from the standard materials price on
material costs for a period. To calculate it, one multiplies the difference between the standard material price and the actual material price by the
actual quantity of materials. The original actual materials price is $1.317857 (rounded for display purposes) per pound ($18,450 ÷ 14,000 pounds).
Using this figure, the original materials price variance is $450 favorable (($1.35 – $1.317857) × 14,000 pounds). The revised actual materials price is
$1.359643 (rounded for display purposes) per pound ($19,035 ÷ 14,000). Using this figure, the revised materials price variance is $135 unfavorable
(($1.35 – $1.359643) × 14,000 pounds). This is a change of $585 ($450 + $135) and it is unfavorable since the actual material price increased.

Rationale
 $585 favorable.
Incorrect. Adding in new costs (the $585 from the purchasing department) would not be favorable, but unfavorable.

Rationale
 $135 unfavorable.
Incorrect. The revised actual materials price is $1.359643 (rounded for display purposes) per pound ($19,035 ÷ 14,000). Using this figure, the revised
materials price variance is $135 unfavorable (($1.35 – $1.359643) × 14,000 pounds) since the actual price is higher than the standard price. However,
the question asks for the change in the variance, not the revised variance.

Rationale
 $135 favorable.
Incorrect. The revised actual materials price is $1.359643 (rounded for display purposes) per pound ($19,035 ÷ 14,000). Using this figure, the revised
materials price variance is $135 (($1.35 – $1.359643) × 14,000 pounds), but it is unfavorable, not favorable, since the actual price is higher than the
standard price. In addition, the question asks for the change in the variance, not the revised variance.
Question 10
1.C.1.o
dirmat.dlcv.tb.039_0820
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The VFG Company uses two different materials to produce its product. In 20X8, VFG expected to produce 5,500 units but it actually produced 5,000 units.
Information about material usage is as follows:

Material Standard Price Standard Usage Actual Price Actual Pounds

123 $10.00 6 pounds / unit $9.00 32,000 pounds
456 $18.00 4 pounds / unit $23.00 18,000 pounds

Based on this information, what is VFG’s material mix variance for 20X8?

$10,400 unfavorable
Your Answer

$26,400 unfavorable
Correct

$16,000 favorable

$32,000 favorable

Rationale
 $10,400 unfavorable
This answer is incorrect. The total material quantity variance is $10,400 unfavorable.

Rationale
 $26,400 unfavorable
This answer is incorrect. The material yield variance is $26,400 unfavorable.

Rationale
 $16,000 favorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
mix variance arises when the individual components are used in a different mix than is called for by the standards. The first step is to calculate the
cost of the “standard” mix of the components based on the standard costs of the components. The second step is to calculate the cost of the
“actual” mix of the components based on the standard costs of the components. The actual costs are not used as the quantity variance is based on
standard costs, not actual costs. The third step is to multiply the difference in the costs by the total amount of the inputs used. In this example, the
cost of the standard mix is $13.20 per pound {(28,800 pounds × $10.00 + 19,200 pounds × $18.00) ÷ 48,000 pounds} and the cost of the actual mix is
$12.88 per pound {(32,000 pounds × $10.00 + 18,000 pounds × $18.00) ÷ 50,000 pounds}. Based on these figures, VFG’s material mix variance is
$16,000 favorable as the actual mix is less costly than the standard mix {($13.20 − $12.88) × 50,000 pounds}.

Below is the framework approach.

This mix variance is favorable (F) because VFG’s actual mix of expensive material #456 (36%) is lower than its standard mix percentage (40%)
relative to the mix percentage of cheaper material #123. This shift in relative labor inputs has a favorable effect on operating profit.

Below is the formula approach.

Before computing the variance, note that the actual material mix percentage for material #123 (64%) is higher than the expected mix percentage
(60%), which is unfavorable. The actual material mix percentage for material #456 (36%) is lower than the expected mix percentage (40%), which is
favorable. Because material #456 has the higher standard price, the overall material mix variance will be favorable. Remember to use the precise
mix percentages and not the rounded mix percentages when calculating this variance using the formula approach.

Material mix variance = Total actual volume × (Expected mix − Actual mix) × Standard Price

Material #123: 50,000 × (60% − 64%) × $10.00 = $20,000U

Material #456: 50,000 × (40% − 36%) × $18.00 = $36,000F

Total material mix variance: $20,000U + $36,000F = $16,000F

Note variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation
solutions for material #123 is a negative value and material #456 is a positive value, the respective variances are actually unfavorable and favorable
as we determined before computing the size of the variances.

Rationale
 $32,000 favorable
This answer is incorrect. The price variance for Material 123 is $32,000 favorable.
Question 11
1.C.1.j
dirmat.dlcv.tb.011_0120
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2
Which of the following statements is correct concerning a standard cost system?
Correct

A standard cost system enables an organization to identify variances between actual and expected performance.

A standard cost system uses price data but not quantity data.
Your Answer

A standard cost system calculates cost information after actual costs are available.

A standard cost system uses quantity data but not price data.

Rationale
 A standard cost system enables an organization to identify variances between actual and expected performance.
A standard cost system uses estimates of the price to be paid for inputs, the quantity of each input to be used per unit of service, and the service
level for a period to predict costs for that period. These predicted costs can be compared with actual costs to identify variances between actual and
expected costs.

Rationale
 A standard cost system uses price data but not quantity data.
This answer is incorrect. A standard cost system uses both price and quantity data to predict costs.

Rationale
 A standard cost system calculates cost information after actual costs are available.
This answer is incorrect. A standard cost system uses estimates of the price to be paid for inputs, the quantity of each input to be used per unit of
service, and the service level for a period to predict costs for that period. As a result, it does not calculate costs after actual costs are available.

Rationale
 A standard cost system uses quantity data but not price data.
This answer is incorrect. A standard cost system uses both price and quantity data to predict costs.
Question 12
1.C.1.k
dirmat.dlcv.tb.020_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Fox Run Co. produces a product which requires 6 hours of direct labor at $25.60 per hour. During October, Fox Run’s actual payroll was $314,496 and the
company used 12,600 direct labor hours to produce 2,000 units of the product. What is Fox Run’s direct labor price variance?
Correct

$8,064, favorable

$8,064, unfavorable

$7,296, unfavorable
Your Answer

$15,360, unfavorable

Rationale
 $8,064, favorable
The direct labor price variance measures the difference between the actual amount paid for direct labor and the amount that “should” have been
paid for the actual number of hours worked. Fox “should” have paid $322,560 for 12,600 direct labor hours (12,600 hours × $25.60 per hour). Since
the actual amount paid ($314,496) is $8,064 lower than the amount that “should” have been paid, the variance is favorable.

Rationale
 $8,064, unfavorable
This answer is incorrect. The direct labor price variance is $8,064. However, it is not unfavorable.

Rationale
 $7,296, unfavorable
This answer is incorrect. Based on the standard usage of 6 hours of labor per unit and the standard price of $25.60 per hour, Fox “should” have paid
$307,200 for direct labor to produce 2,000 units (2,000 × 6 × $25.60). However, the $7,296 unfavorable variance is the flexible budget direct labor
variance, not the direct labor price variance.

Rationale
 $15,360, unfavorable
This answer is incorrect. The direct labor quantity variance is $15,360 unfavorable, not the direct labor price variance.
Question 13
1.C.1.p
dirmat.dlcv.tb.042_0820
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The LKO Company uses two different types of labor to produce its product. In 20X8, LKO expected to produce 10,000 units but it actually produced 10,800
units. Information about labor usage is as follows:

Labor Type Standard Wage Rate Standard Usage Actual Wage Rate Actual Hours
A $12.00 5 hours / unit $14.00 51,000 hours
B $20.00 3 hours / unit $19.00 34,000 hours

Based on this information, what is LKO’s labor yield variance for 20X8?

$4,000 favorable
Correct

$21,000 favorable

$17,000 unfavorable

$32,000 unfavorable

Rationale
 $4,000 favorable
This answer is incorrect. The total labor quantity variance is $4,000 favorable.

Rationale
 $21,000 favorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
yield variance arises when the total inputs used differs from the total inputs “allowed” to be used for actual production. The first step is to
determine the total inputs used in production. The second step is to determine the total inputs “allowed” to be used for actual production. The
third step is to calculate the cost of the “standard” mix of the components based on the standard costs of the components. The last step is to
multiply the difference in the amounts by the cost of the standard mix of the components. In this example, 85,000 total hours were used to produce
the 10,800 units (51,000 of A and 34,000 of B), while a total of 86,400 hours (54,000 of A and 32,400 of B) were “allowed” to be used to produce the
10,800 units. The cost of the standard mix is $15.00 per hour {(54,000 hours × $12.00 + 32,400 hours × $20.00) ÷ 86,400 hours}. Based on these figures,
LKO’s labor yield variance is $21,000 favorable as fewer total hours were used than were “allowed” to be used {(86,400 − 85,000) × $15.00 per hour}.

Below is the framework approach.

Based on the standard amount of 5 hours of type A labor per unit and actual production and sales of 10,800 units, LKO should have used 54,000
type A labor hours for its actual production (5 hours × 10,800 units). Similarly, based on the standard amount of 3 hours of type B labor per unit and
actual production and sales of 10,800 units, LKO should have used 15,000 type B labor hours for its actual production (3 hours × 10,800 units).

The direct labor yield variance is favorable (F) because LKO’s total actual direct labor hours (85,000 hours) is fewer than total standard hours
allowed (86,400 hours). This computation isolates the effect of the direct labor yield variance by holding constant each of the standard labor mix
percentages in both boxes above.

Below is the formula approach.

As mentioned above, the direct labor yield variance is favorable (F) because LKO’s total actual direct labor hours (85,000 hours) is fewer than total
standard hours allowed (86,400 hours).

Direct labor yield variance = (Total standard qty allowed − Total actual qty) × Standard mix% × Standard rate

Type A: (86,400 hrs – 85,000 hrs) × 62.5% × $12.00 = $10,500 F Type B: (86,400 hrs – 85,000 hrs) × 37.5% × $20.00 = $10,500 F

Total direct labor yield variance: $10,500F + $10,500F = $21,000 F

Rationale
 $17,000 unfavorable
This answer is incorrect. The labor mix variance is $17,000 unfavorable.

Rationale
 $32,000 unfavorable
This answer is incorrect. The quantity variance for Labor Class B is $32,000 unfavorable.
Question 14
1.C.1.l
tb.dirmat.dlcv.006_1808
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

Brent received a report from the production and purchasing departments with the following values for August:

Actual materials quantity: 6,200 pounds

Total actual cost: $9,250
Standard materials quantity: 1.25 pounds/unit
Standard price: $1.50/pound
Units made: 4,800

Two days later, Brent received a correction from the production department that they found a missing order for 200 units, which means they made 5,000
units in August. How much would Brent's materials quantity variance change for the month of August?

Correct

$375 favorable.

$375 unfavorable.
Your Answer

$75 favorable.

$75 unfavorable.

Rationale
 $375 favorable.
Correct. The materials quantity variance measures the impact of the actual materials used being different from the standard materials allowed to
be used on material costs for a period. To calculate it, one multiplies the difference between the standard materials allowed to be used and the
actual materials used by the standard price of the materials. The original standard materials allowed is 6,000 pounds (4,800 units × 1.25 pounds per
unit). Using this figure, the original materials quantity variance is $300 unfavorable ((6,200 – 6,000) × $1.50 per pound). The revised standard
materials allowed is 6,250 pounds (5,000 units × 1.25 pounds per unit). Using this figure, the revised materials quantity variance is $75 favorable
((6,200 – 6,250) × $1.50 per pound). This is a change of $375 ($300 + $75) and it is favorable since more units were produced with the same amount
of materials.

Rationale
 $375 unfavorable.
Incorrect. The original standard materials allowed is 6,000 pounds (4,800 units × 1.25 pounds per unit). Using this figure, the original materials
quantity variance is $300 unfavorable ((6,200 – 6,000) × $1.50 per pound). The revised standard materials allowed is 6,250 pounds (5,000 units × 1.25
pounds per unit). Using this figure, the revised materials quantity variance is $75 favorable ((6,200 – 6,250) × $1.50 per pound). This is a change of
$375 ($300 + $75) and it is favorable, not unfavorable, since more units, not fewer units, were produced with the same amount of materials.

Rationale
 $75 favorable.
Incorrect. The revised standard materials allowed is 6,250 pounds (5,000 units × 1.25 pounds per unit). Using this figure, the revised materials
quantity variance is $75 favorable ((6,200 – 6,250) × $1.50 per pound). However, the question asks for the change in the variance, not the revised
variance.

Rationale
 $75 unfavorable.
Incorrect. The revised standard materials allowed is 6,250 pounds (5,000 units × 1.25 pounds per unit). Using this figure, the revised materials
quantity variance is $75 ((6,200 – 6,250) × $1.50 per pound) but it is favorable, not unfavorable, since the actual materials used is lower than the
standard amount allowed. In addition, the question asks for the change in the variance, not the revised variance.
Question 15
1.C.1.l
dirmat.dlcv.tb.025_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Noah’s Boat Supplies used 25,200 pounds of direct materials when the standard is 24,000 pounds. Noah paid $4.40 per pound when the standard is $4.00
per pound. What is Noah’s direct materials quantity variance?
$5,280, unfavorable
Correct

$4,800, unfavorable

$9,600, unfavorable
Your Answer

$10,080, unfavorable

Rationale
 $5,280, unfavorable
This answer is incorrect. If the 1,200 more pounds used is multiplied by the actual price of $4.40 per pound, then the direct materials quantity
variance would appear to be $5,280 unfavorable. However, this mixes the quantity variance and price variance.

Rationale
 $4,800, unfavorable
The direct materials quantity variance measures the impact of the actual materials used being different from the standard materials allowed to be
used on material costs for a period. It is calculated by multiplying the difference between the standard materials that “should” be used and the
actual materials used by the standard price of the materials. Since Noah used 1,200 extra pounds and the standard price is $4.00 per pound, the
direct materials quantity variance is $4,800 ($4.00 × 1,200) unfavorable.

Rationale
 $9,600, unfavorable
This answer is incorrect. If the 24,000 square feet that Noah “should” have used is multiplied by the $0.40 difference between the actual price and
standard price, the result is $9,600 unfavorable. However, this is not the formula for the direct materials quantity variance.

Rationale
 $10,080, unfavorable
This answer is incorrect. The direct materials price variance is $10,080 unfavorable, not the direct materials quantity variance.
Question 16
1.C.1.j
1B2-LS48
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4

Jura Corporation is developing standards for the next year. Currently XZ-26, one of the material components, is being purchased for $36.45 per unit. It is
expected that the component's cost will increase by approximately 10% next year and the price could range from $38.75 to $44.18 per unit depending on
the quantity purchased. The appropriate standard for XZ-26 for next year should be set at the:

*Source: Retired ICMA CMA Exam Questions.

current actual cost plus the forecasted 10% price increase.

highest price in the anticipated range to insure that there are only favorable purchase price variances.
Correct

price agreed upon by the purchasing manager and the appropriate level of company management.
Your Answer

lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest price range.

Rationale
 current actual cost plus the forecasted 10% price increase.
This answer is incorrect. The appropriate standard for XZ-26 for next year should not be set at the current actual cost plus the forecasted 10% price
increase.

Rationale
 highest price in the anticipated range to insure that there are only favorable purchase price variances.
This answer is incorrect. The appropriate standard for XZ-26 for next year should not be set at the highest price in the anticipated range to insure
that there are only favorable purchase price variances.

Rationale
 price agreed upon by the purchasing manager and the appropriate level of company management.
When setting price standards, an agreement must take place between the purchasing manager and the appropriate level of company management.
During this process, it needs to be assured that the price meeting corporate strategic and operating objectives.

Rationale
 lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest price range.
This answer is incorrect. The appropriate standard for XZ-26 for next year should not be set at the lowest purchase price in the anticipated range to
keep pressure on purchasing to always buy in the lowest price range.
Question 17
1.C.1.l
dirmat.dlcv.tb.023_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
In the Hayden Company, the standard material cost for the silk used in making a dress is $27.00 based on 3 square feet of silk at a cost of $9.00 per square
foot. The production of 1,000 dresses resulted in the use of 3,400 square feet of silk at a cost of $9.20 per square foot. The materials quantity variance is:
$600, unfavorable.

$680, unfavorable.

$3,680, unfavorable.
Correct

$3,600, unfavorable.

Rationale
 $600, unfavorable.
This answer is incorrect. If the 3,000 square feet that Hayden “should” have used to produce 1,000 dresses is multiplied by the $0.20 difference
between the actual price and standard price, the result is $600 unfavorable. However, this is not the formula for the materials quantity variance.

Rationale
 $680, unfavorable.
This answer is incorrect. The materials price variance is $680 unfavorable, not the materials quantity variance.

Rationale
 $3,680, unfavorable.
This answer is incorrect. If the 400 more square feet used is multiplied by the actual price of $9.20 per square foot, then the materials quantity
variance would appear to be $3,680 unfavorable. However, this mixes the quantity variance and price variance.

Rationale
 $3,600, unfavorable.
The materials quantity variance measures the impact of the actual materials used being different from the standard materials allowed to be used
on material costs for a period. It is calculated by multiplying the difference between the standard materials that “should” be used and the actual
materials used by the standard price of the materials. Hayden “should” have used 3,000 square feet of silk to produce 1,000 dresses (1,000 dresses ×
3 square feet per dress). It used 400 more square feet than allowed to produce these dresses. Based on the standard price of $9.00 per square foot,
the materials quantity variance is $3,600 ($9.00 × 400) unfavorable since more square feet than allowed were used.
Question 18
1.C.1.p
dirmat.dlcv.tb.043_0820
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The VFG Company uses two different materials to produce its product. In 20X8, VFG expected to produce 5,500 units but it actually produced 4,800 units.
Information about material usage is as follows:

Material Standard Price Standard Usage Actual Price Actual Pounds

123 $10.00 6 pounds / unit $9.00 32,000 pounds
456 $18.00 4 pounds / unit $23.00 18,000 pounds

Based on this information, what is VFG’s material yield variance for 20X8?

$10,400 unfavorable
Correct

$26,400 unfavorable

$16,000 favorable
Your Answer

$32,000 favorable

Rationale
 $10,400 unfavorable
This answer is incorrect. The total material quantity variance is $10,400 unfavorable.

Rationale
 $26,400 unfavorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
yield variance arises when the total inputs used differs from the total inputs “allowed” to be used for actual production. The first step is to
determine the total inputs used in production. The second step is to determine the total inputs “allowed” to be used for actual production. The
third step is to calculate the cost of the “standard” mix of the components based on the standard costs of the components. The last step is to
multiply the difference in the amounts by the cost of the standard mix of the components. In this example, 50,000 total pounds were used to
produce the 4,800 units (32,000 of 123 and 18,000 of 456) while a total of 48,000 pounds (28,800 of 123 and 19,200 of 456) were “allowed” to be used
to produce the 4,800 units. The cost of the standard mix is $13.20 per pound {(28,800 pounds × $10.00 + 19,200 pounds × $18.00) ÷ 48,000 pounds}.
Based on these figures, VFG’s material yield variance is $26,400 unfavorable as more total pounds were used than were “allowed” to be used
{(50,000 − 48,000) × $13.20 per pound}.

Below is the framework approach.

Based on the standard amount of 6 pounds of material #123 per unit and actual production and sales of 4,800 units, VFG should have used 28,800
pounds of material #123 for its actual production (6 pounds × 4,800 units). Similarly, based on the standard amount of 4 pounds of material #456
per unit and actual production and sales of 4,800 units, VFG should have used 19,200 pounds of material #456 for its actual production (4 pounds ×
4,800 units).

The material yield variance is favorable (U) because VFG’s total actual pounds of material used (50,000 pounds) is greater than total standard
pounds allowed (48,000 pounds). This computation isolates the effect of the material yield variance by holding constant each of the standard labor
mix percentages in both boxes above.
Below is the formula approach.

As mentioned above, the material yield variance is unfavorable (U) because VFG’s total actual pounds of material (50,000 hours) is greater than
total standard pounds allowed (48,000 hours).

Material yield variance = (Total standard qty allowed − Total actual qty) × Standard mix% × Standard rate

#123: (48,000 lbs. – 50,000 lbs.) × 60% × $10.00 = $12,000 U

#456: (48,000 lbs. – 50,000 lbs.) × 40% × $18.00 = $14,400 U

Total material yield variance: $12,000 U + $14,400 U = $26,400 U

Rationale
 $16,000 favorable
This answer is incorrect. The material mix variance is $16,000 favorable.

Rationale
 $32,000 favorable
This answer is incorrect. The price variance for Material 123 is $32,000 favorable.
Question 19
1.C.1.j
aq.dirmat.dlcv.002_1807
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4

The following direct labor information pertains to the manufacturing of product Glu:

Time required to make one unit 2 direct labor hours

Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker $500
Workers’ benefits treated as direct labor costs 20% of wages

What is the standard direct labor cost per unit of Glu?

Correct

$30

$25

$15
Your Answer

$12.5

Rationale
 $30

The standard direct labor cost per unit of Glu is calculated as follows:

Weekly wages per worker $ 500

Add: Benefits treated as direct labor 100
$ 600
# of productive hours per week, per worker ÷ 40
Standard direct labor costs per hour $ 15
# hours required per unit ×2
Standard direct labor costs per unit $ 30

Rationale
 $25
This answer is incorrect. This answer did not consider that 20% of workers’ benefits are treated as direct labor costs and should be added to weekly
wages per worker.

Rationale
 $15
This answer is incorrect. This answer represents standard direct labor costs per hour. However, each unit of Glu requires two direct labor hours, not
one.

Rationale
 $12.5
This answer is incorrect. This answer did not consider that 20% of workers’ benefits are treated as direct labor costs and should be added to weekly
wages per worker. Additionally, each unit of Glu requires two direct labor hours, not one.
Question 20
1.C.1.p
dirmat.dlcv.tb.044_0820
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The YTR Company uses two different materials to produce its product. In 20X8, YTR expected to produce 18,000 units but it actually produced 20,000
units. Information about material usage is as follows:

Material Standard Price Standard Usage Actual Price Actual Pounds

123 $12.00 8 pounds / unit $14.00 165,000 pounds
456 $18.00 4 pounds / unit $17.00 85,000 pounds

Based on this information, what is YTR’s material yield variance for 20X8?

$150,000 unfavorable
Correct

$140,000 unfavorable

$10,000 unfavorable
Your Answer

$90,000 unfavorable

Rationale
 $150,000 unfavorable
This answer is incorrect. The total material quantity variance is $150,000 unfavorable.

Rationale
 $140,000 unfavorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
yield variance arises when the total inputs used differ from the total inputs “allowed” to be used for actual production. The first step is to determine
the total inputs used in production. The second step is to determine the total inputs “allowed” to be used for actual production. The third step is to
calculate the cost of the “standard” mix of the components based on the standard costs of the components. The last step is to multiply the
difference in the amounts by the cost of the standard mix of the components. In this example, 250,000 total pounds were used to produce the
20,000 units (165,000 of 123 and 85,000 of 456) while a total of 240,000 pounds (160,000 of 123 and 80,000 of 456) were “allowed” to be used to
produce the 20,000 units. The cost of the standard mix is $14.00 per pound {(160,000 pounds × $12.00 + 80,000 pounds × $18.00) ÷ 240,000 pounds}.
Based on these figures, YTR’s material yield variance is $140,000 unfavorable as more total pounds were used than were “allowed” to be used
{(250,000 − 240,000) × $14.00 per pound}.

Below is the framework approach.

Based on the standard amount of 8 pounds of material #123 per unit and actual production and sales of 20,000 units, YTR should have used 160,000
pounds of material #123 for its actual production (8 pounds × 20,000 units). Similarly, based on the standard amount of 4 pounds of material #456
per unit and actual production and sales of 20,000 units, YTR should have used 80,000 pounds of material #456 for its actual production (4 pounds ×
20,000 units).

The material yield variance is favorable (U) because YTR’s total actual pounds of material used (250,000 pounds) is greater than total standard
pounds allowed (240,000 pounds). This computation isolates the effect of the material yield variance by holding constant each of the standard
labor mix percentages in both boxes above.
Below is the formula approach.

As mentioned above, the material yield variance is unfavorable (U) because YTR’s total actual pounds of material (250,000 hours) is greater than
total standard pounds allowed (240,000 hours).

Material yield variance = (Total standard qty allowed − Total actual qty) × Standard mix% × Standard rate

#123: (240,000 lbs. – 250,000 lbs.) × 66.67% × $12.00 = $80,000 U

#456: (240,000 lbs. – 250,000 lbs.) × 33.3% × $18.00 = $60,000 U

Total material yield variance: $80,000 U + $60,000 U = $140,000 U

Rationale
 $10,000 unfavorable
This answer is incorrect. The material mix variance is $10,000 unfavorable.

Rationale
 $90,000 unfavorable
This answer is incorrect. The quantity variance for Material 456 is $90,000 unfavorable.
Question 21
1.C.1.l
aq.dirmat.dlcv.007_0820
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 5

Chair Company (CC) has provided the following standard cost sheet.

Chair Company
Standard Cost Sheet - Plastic Chair Input Quantity Cost per Input Cost per Chair
Direct materials (plastic) - pounds 4.0 pounds $12 per pound $48.00
Direct labor (molders) - direct labor hours 0.5 DLH $20.00 per DLH $10.00
Direct labor (finishers) - direct labor hours 1.0 DLH $25.00 per DLH $25.00
Variable manufacturing overhead - total DLH 1.5 DLH $5.00 per DLH $7.50
Fixed manufacturing overhead - total DLH 1.5 DLH $7.50 per DLH $11.25
Total Cost to Manufacture $101.75
Variable selling overhead - chairs 1 chair $5.00 per chair $5.00
Total Cost to Deliver $106.75

Note that the input quantity multiplied by the cost per input equals cost per chair. Also note in this case that manufacturing overhead (MOH) costs are
being allocated on the basis of total direct labor hours (DLH).

CC also disclosed the following actual information:

5,000 pounds of plastic was purchased for $63,750 of which 4,600 was used in production.
Molders were paid a total of $10,500 to work 575 hours and finishers were paid a total of $29,000 to work 1,050 hours.
1,100 plastic chairs were produced and sold during the year.

What is the direct materials usage variance based on the above information?

Your Answer

$3,750 Unfavorable
Correct

$2,400 Unfavorable

$2,400 Favorable

$3,750 Favorable

Rationale
 $3,750 Unfavorable
This answer is incorrect. This answer represents the direct materials price variance, not the direct materials usage variance.

Rationale
 $2,400 Unfavorable

The direct materials usage variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Based on the standard quantity of 4.0 pounds of plastic per plastic chair and actual production and sales of 1,100 chairs, CC should have used 4,400
pounds of plastic for its actual production (4.0 pounds × 1,100 chairs). Since the actual quantity reported (4,600 pounds) is more than the standard
quantity allowed (4,400 pounds), the direct materials usage variance is unfavorable (U).
Below is the formula approach.

Direct materials usage variance = (Standard qty allowed − Actual qty used) × Standard price

Direct materials usage variance: (4,400 pounds − 4,600 pounds) × $12.00 = $2,400 U

Note that the computational solution for the direct materials usage variance is a negative value, but the result is reported as an absolute value.
Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual quantity
reported is more than the standard quantity allowed, the direct materials usage variance is unfavorable (U).

Rationale
 $2,400 Favorable
This answer is incorrect. This answer correctly calculated the direct materials usage variance; however, this variance is not favorable.

Rationale
 $3,750 Favorable
This answer is incorrect. This answer represents the direct materials price variance, not the direct materials usage variance. Additionally, the direct
materials price variance would not be favorable.
Question 22
1.C.1.k
dirmat.dlcv.tb.021_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
Whispering Pines Manufacturing produced 2,500 units and had a $21,000 unfavorable direct labor price variance. The company’s standard rate of pay is
$24 per hour and the actual number of direct labor hours worked was 10,500. If the standard direct labor hours per unit is 4 hours, what was the actual
rate of pay for direct labor?
$22 per direct labor hour
Correct

$26 per direct labor hour

$18 per direct labor hour

Your Answer

$24 per direct labor hour

Rationale
 $22 per direct labor hour
This answer is incorrect. The difference between Whispering’s actual labor price per hour and the standard labor price per hour is $2 per hour.
However, the actual price is not lower than the standard price as the price variance is unfavorable, not favorable.

Rationale
 $26 per direct labor hour
The direct labor price variance measures the difference between the actual amount paid for direct labor and the amount that “should” have been
paid for the actual number of hours worked. It is calculated by multiplying the actual hours worked by the difference between the actual labor price
per hour and the standard labor price per hour. Rearranging the formula results in the actual labor price per hour being calculated as “Price
Variance ÷ Actual Hours + Standard Rate.” Using Whispering’s figures results in an actual labor price of $26 per hour ($21,000 ÷ 10,500 + $24).

Rationale
 $18 per direct labor hour
This answer is incorrect. If the actual labor price is lower than the standard labor price, then the labor price variance would be favorable, not
unfavorable.

Rationale
 $24 per direct labor hour
This answer is incorrect. If the actual labor price and standard labor price are the same, then the labor price variance would be zero.
Question 23
1.C.1.p
dirmat.dlcv.tb.041_0820
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The JLB Company uses two different types of labor to produce its product. In 20X8, JLB expected to produce 5,500 units but it actually produced 5,000
units. Information about labor usage is as follows:

Labor Type Standard Wage Rate Standard Usage Actual Wage Rate Actual Hours
A $9.00 6 hours / unit $8.00 36,000 hours
B $15.00 3 hours / unit $18.00 12,000 hours

Based on this information, what is JLB’s labor yield variance for 20X8?

$9,000 unfavorable
Correct

$33,000 unfavorable

$24,000 favorable
Your Answer

$36,000 unfavorable

Rationale
 $9,000 unfavorable
This answer is incorrect. The total labor quantity variance is $9,000 unfavorable.

Rationale
 $33,000 unfavorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
yield variance arises when the total inputs used differs from the total inputs “allowed” to be used for actual production. The first step is to
determine the total inputs used in production. The second step is to determine the total inputs “allowed” to be used for actual production. The
third step is to calculate the cost of the “standard” mix of the components based on the standard costs of the components. The last step is to
multiply the difference in the amounts by the cost of the standard mix of the components. In this example, 48,000 total hours were used to produce
the 5,000 units (36,000 of A and 12,000 of B), while a total of 45,000 hours (30,000 of A and 15,000 of B) were “allowed” to be used to produce the
5,000 units. The cost of the standard mix is $11.00 per hour {(30,000 hours × $9.00 + 15,000 hours × $15.00) ÷ 45,000 hours}. Based on these figures,
JLB’s labor yield variance is $33,000 unfavorable as more total hours were used than were “allowed” to be used {(48,000 − 45,000) × $11.00 per
hour}.

Below is the framework approach.

Based on the standard amount of 6 hours of type A labor per unit and actual production and sales of 5,000 units, JLB should have used 30,000 type
A labor hours for its actual production (6 hours × 5,000 units). Similarly, based on the standard amount of 3 hours of type B labor per unit and actual
production and sales of 5,000 units, JLB should have used 15,000 type B labor hours for its actual production (3 hours × 5,000 units).

The direct labor yield variance is unfavorable (U) because JLB’s total actual direct labor hours (48,000 hours) is greater than total standard hours
allowed (45,000 hours). This computation isolates the effect of the direct labor yield variance by holding constant each of the standard labor mix
percentages in both boxes above.
Below is the formula approach.

As mentioned above, the direct labor yield variance is unfavorable (U) because JLB’s total actual direct labor hours (48,000 hours) is greater than
total standard hours allowed (45,000 hours).

Direct labor yield variance = (Total standard qty allowed − Total actual qty) × Standard mix% × Standard rate

Type A: (45,000 hrs – 48,000 hrs) × 66.67% × $9.00 = $18,000 U Type B: (45,000 hrs – 48,000 hrs) × 33.33% × $15.00 = $15,000 U

Total direct labor yield variance: $33,000U + $18,000U = $33,000 U

Rationale
 $24,000 favorable
This answer is incorrect. The labor mix variance is $24,000 favorable.

Rationale
 $36,000 unfavorable
This answer is incorrect. The price (rate) variance for Labor Class B is $36,000 unfavorable.
Question 24
1.C.1.k
dirmat.dlcv.tb.014_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3

Elk Creek Company’s most popular product requires specialized labor. These individuals are highly productive, but also highly paid. The following
standards have been developed for the product:

3 direct labor hours/unit

$45/direct labor hour

During November, Elk Creek produced 3,600 units and used 7,000 direct labor hours. The company’s direct labor cost was $378,000. For Elk Creek, what is
the difference between the actual amount paid and the amount that should have been paid for the number of hours worked, and is the difference
favorable or unfavorable?

Correct

$63,000, unfavorable

$171,000, favorable

$108,000, favorable
Your Answer

$171,000, unfavorable

Rationale
 $63,000, unfavorable
The direct labor price variance measures the difference between the actual amount paid for direct labor and the amount that “should” have been
paid for the actual number of hours worked. Elk “should” have paid $315,000 for 7,000 direct labor hours (7,000 hours × $45 per hour). Since the
actual amount paid ($378,000) is $63,000 higher than the amount that “should” have been paid, the variance is unfavorable.

Rationale
 $171,000, favorable
This answer is incorrect. The direct labor quantity variance is $171,000 favorable, not the direct labor price variance.

Rationale
 $108,000, favorable
This answer is incorrect. Based on the standard usage of 3 direct labor hours per unit and the standard wage rate of $45 per hour, Elk “should” have
paid $486,000 for direct labor to produce 3,600 units (3,600 × 3 × $45). However, this is not the same as the amount that should have been paid for
the number of hours worked.

Rationale
 $171,000, unfavorable
This answer is incorrect. The direct labor quantity variance is $171,000, not the direct labor price variance. Additionally, it is favorable, not
unfavorable.
Question 25
1.C.1.l
tb.dirmat.dlcv.008_1808
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
Sanderson Manufacturing makes paint-brushes and other paint supplies. Their 3" paint-brush has a standard of 0.28 pounds of bristles, and one pound
of bristles costs Sanderson $3.45 to purchase. In March, Sanderson made 12,000 3"paint-brushes and used 3,400 pounds of bristles. This cost the
company $11,730. What was the difference in the number of pounds of bristles Sanderson should have used compared to the number of pounds they
actually used?
They used 40 pounds less than they should have.
Correct

They used 40 pounds more than they should have.

Your Answer

They used 138 pounds more than they should have.

They used 138 pounds less than they should have.

Rationale
 They used 40 pounds less than they should have.
Incorrect. To produce 12,000 3” paint-brushes Sanderson should have used 3,360 pounds of bristles based on the standard of 0.28 pounds of
bristles per 3” paint-brush (12,000 × 0.28). It actually used 3,400 pounds of bristles to produce 12,000 3” paint-brushes. The difference between what
Sanderson used and what it should have used is 40 pounds (3,400 – 3,360), but it is 40 pounds more, not less.

Rationale
 They used 40 pounds more than they should have.
Correct. To produce 12,000 3” paint-brushes Sanderson should have used 3,360 pounds of bristles based on the standard of 0.28 pounds of bristles
per 3” paint-brush (12,000 × 0.28). It actually used 3,400 pounds of bristles to produce 12,000 3” paint-brushes. This means Sanderson used 40 more
pounds (3,400 – 3,360) than it should have to produce the brushes.

Rationale
 They used 138 pounds more than they should have.
Incorrect. To produce 12,000 3” paint-brushes Sanderson should have used 3,360 pounds of bristles based on the standard of 0.28 pounds of
bristles per 3” paint-brush (12,000 × 0.28). It actually used 3,400 pounds of bristles to produce 12,000 3” paint brushes. This means Sanderson used
40 more pounds (3,400 – 3,360) than it should have to produce the brushes. These 40 extra pounds cost an extra $138 (40 pounds × $3.45 per
pound). However, the option says 138 pounds, not dollars.

Rationale
 They used 138 pounds less than they should have.
Incorrect. To produce 12,000 3” paint-brushes Sanderson should have used 3,360 pounds of bristles based on the standard of 0.28 pounds of
bristles per 3” paint-brush (12,000 × 0.28). It actually used 3,400 pounds of bristles to produce 12,000 3” paint-brushes. The difference between what
Sanderson used and what it should have used is 40 pounds (3,400 – 3,360), but it is 40 pounds more, not less. In addition, these 40 pounds cost $138
(40 pounds × $3.45 per pound). However, the option says 138 pounds, not dollars.
Question 26
1.C.1.o
cma11.p1.t1.me.0065_0820
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4
A paint manufacturing plant has two white pigments that are substitutable for the same product. Natural pigment costs $3/gallon, and artificial pigment
costs $1/gallon. Standards call for 60% natural and 40% synthetic, but the actual ratio used was 50% of each. The actual total quantity of both
ingredients was 30,000 gallons while the budgeted total quantity was 32,000 gallons. What is the mix variance for these ingredients?
Correct

$6,000 favorable

$6,400 favorable

$12,000 favorable
Your Answer

$6,000 unfavorable

Rationale
 $6,000 favorable

The mix variance is calculated as the difference between the standard costs at the actual mix (∑AQ × A%i × SP) and standard costs at the standard
mix (∑AQ × S%i × SP). The variance is favorable if costs at the actual mix are less than costs at the standard mix.

Standard Cost at Actual Mix Standard Cost at Standard Mix

Natural pigment: 30,000 × 50% × $3 = $45,000 Natural pigment: 30,000 × 60% × $3 = $54,000
Artificial pigment: 30,000 × 50% × $1 = $15,000 Artificial pigment: 30,000 × 40% × $1 = $12,000
Total: $60,000 Total: $66,000

Variance: $6,000 favorable

Rationale
 $6,400 favorable
This answer is incorrect. The mix variance is based on the actual materials used, not the budgeted materials to be used.

Rationale
 $12,000 favorable
This answer is incorrect. 30,000 total gallons were used, not 30,000 gallons of each type of pigment.

Rationale
 $6,000 unfavorable
This answer is incorrect. The mix variance is not unfavorable because the cost of the actual mix is less than the cost of the standard mix.
Question 27
1.C.1.l
tb.dirmat.dlcv.007_1808
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

Natalie received a report from the production and purchasing departments with the following values for October:

Actual materials quantity: 18,000 pounds

Total actual cost: $8,700
Standard materials quantity: 1.05 pounds/unit
Standard price: $0.50/pound
Units made: 16,000

Four days later, Natalie received a correction from the production department that they found an error in their calculations, and they actually only used
17,800 pounds of raw materials. How much would Natalie's materials quantity variance change for the month of October?

$100 unfavorable.
Correct

$100 favorable.
Your Answer

$500 favorable.

$500 unfavorable.

Rationale
 $100 unfavorable.
Incorrect. The original standard materials allowed is 16,800 pounds (16,000 units × 1.05 pounds per unit). Using this figure, the original materials
quantity variance is $600 unfavorable ((18,000 – 16,800) × $0.50 per pound). Using the revised amount of materials actually used, the revised
materials quantity variance is $500 unfavorable ((17,800 – 16,800) × $0.50 per pound). This is a change of $100 and it is favorable, not unfavorable,
since fewer pounds, not more pounds, were used the produce the same level of output.

Rationale
 $100 favorable.
Correct. The materials quantity variance measures the impact of the actual materials used being different from the standard materials allowed to
be used on material costs for a period. To calculate it, one multiplies the difference between the standard materials allowed to be used and the
actual materials used by the standard price of the materials. The original standard materials allowed is 16,800 pounds (16,000 units × 1.05 pounds
per unit). Using this figure, the original materials quantity variance is $600 unfavorable ((18,000 – 16,800) × $0.50 per pound). Using the revised
amount of materials actually used, the revised materials quantity variance is $500 unfavorable ((17,800 – 16,800) × $0.50 per pound). This is a
change of $100 and it is favorable since fewer pounds were used to produce the same level of output.

Rationale
 $500 favorable.
Incorrect. Using the revised amount of materials actually used, the revised materials quantity variance is $500 ((17,800 – 16,800) × $0.50 per pound)
but it is unfavorable, not favorable, since the actual materials used is higher than the standard amount allowed. In addition, the question asks for
the change in the variance, not the revised variance.

Rationale
 $500 unfavorable.
Incorrect. Using the revised amount of materials actually used, the revised materials quantity variance is $500 unfavorable ((17,800 – 16,800) × $0.50
per pound). However, the question asks for the change in the variance, not the revised variance.
Question 28
1.C.1.k
dirmat.dlcv.tb.015_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Garza Toys made 4,000 teddy bears for the Christmas season. The company used 3,800 pounds of direct materials that cost Garza $6,308. The standard
quantity of materials is 1 pound per unit and $1.50 per pound. The materials price variance is:
$608, favorable.
Correct

$608, unfavorable.

$308, unfavorable.
Your Answer

$300, favorable.

Rationale
 $608, favorable.
This answer is incorrect. The direct materials price variance is $608. However, it is not favorable.

Rationale
 $608, unfavorable.
The direct materials price variance measures the difference between the actual amount paid for direct materials and the amount that “should”
have been paid for the actual amount of materials purchased. Garza “should” have paid $5,700 for 3,800 pounds of materials (3,800 pounds × $1.50
per pound). Since the actual amount paid ($6,308) is $608 higher than the amount that “should” have been paid, the variance is unfavorable.

Rationale
 $308, unfavorable.
This answer is incorrect. Based on the standard usage of 1 pound per unit and the standard price of $1.50 per pound, Garza “should” have paid
$6,000 for direct materials to produce 4,000 units (4,000 × 1 × $1.50). However, the $308 unfavorable variance is the flexible budget direct materials
variance, not the direct materials price variance.

Rationale
 $300, favorable.
This answer is incorrect. The direct materials quantity variance is $300 favorable, not the direct materials price variance.
Question 29
1.C.1.k
dirmat.dlcv.tb.019_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Ramble Wood, Inc. produces a product which requires 6 hours of direct labor at $32 per hour. During February, Ramble Wood’s actual payroll was
$393,120 and the company used 12,600 direct labor hours to produce 2,000 units of the product. What is Ramble Wood’s direct labor price variance?
$10,080, unfavorable

$9,120, unfavorable

$19,200, unfavorable
Correct

$10,080, favorable

Rationale
 $10,080, unfavorable
This answer is incorrect. The direct labor price variance is $10,080. However, it is not unfavorable.

Rationale
 $9,120, unfavorable
This answer is incorrect. Based on the standard usage of 6 hours of labor per unit and the standard price of $32 per hour, Ramble “should” have
paid $384,000 for direct labor to produce 2,000 units (2,000 × 6 × $32). However, the $9,120 unfavorable variance is the flexible budget direct labor
variance, not the direct labor price variance.

Rationale
 $19,200, unfavorable
This answer is incorrect. The direct labor quantity variance is $19,200 unfavorable, not the direct labor price variance.

Rationale
 $10,080, favorable
The direct labor price variance measures the difference between the actual amount paid for direct labor and the amount that “should” have been
paid for the actual number of hours worked. Ramble “should” have paid $403,200 for 12,600 direct labor hours (12,600 hours × $32 per hour). Since
the actual amount paid ($393,120) is $10,080 lower than the amount that “should” have been paid, the variance is favorable.
Question 30
1.C.1.p
1C1-AT43
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
When there are multiple inputs of either labor or material, the efficiency variance for either labor or material can be subdivided into:
Correct

yield variance and mix variance.

Your Answer

mix variance and price variance.

yield variance and price variance.

volume variance and mix variance.

Rationale
 yield variance and mix variance.
When there are multiple inputs of either labor or material, the efficiency of usage is affected by the mix of the inputs, creating a mix component in
the efficiency variance. The remainder of the efficiency variance is the yield component.

Rationale
 mix variance and price variance.
This answer is incorrect. When there are multiple inputs of either labor or material, the efficiency variance for either labor or materials can be
subdivided, but not into mix variance and price variance.

Rationale
 yield variance and price variance.
This answer is incorrect. When there are multiple inputs of either labor or material, the efficiency variance for either labor or materials can be
subdivided, but not into yield variance and price variance.

Rationale
 volume variance and mix variance.
This answer is incorrect. When there are multiple inputs of either labor or material, the efficiency variance for either labor or materials can be
subdivided, but not into volume variance and mix variance.
Question 31
1.C.1.j
1B2-CQ02
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2
If 0.6 manufacturing labor hours of input are allowed for producing one output unit and labor hours cost $15, then the standard cost of labor would be:
Correct

$9 per output unit.

$15 per output unit.

Your Answer

$90 per output unit.

$6 per output unit.

Rationale
 $9 per output unit.
Direct cost items such as direct materials and direct labor are measured by determining the number of units of each type of input required to get
one unit of output. This amount (0.6) is multiplied by the standard cost per input unit ($15), thus 0.6 labor hours per unit × $15 labor cost per hour =
$9 labor cost per unit.

Rationale
 $15 per output unit.
This answer is incorrect. Labor hours cost $15, but $15 per output unit does not represent the standard cost of labor.

Rationale
 $90 per output unit.
This answer is incorrect. 0.6 manufacturing labor hours of input are allowed for producing one output unit, not 6 manufacturing labor hours.

Rationale
 $6 per output unit.
This answer is incorrect. 0.6 manufacturing labor hours of input are allowed for producing one output unit, but $6 per output unit does not
represent the standard cost of labor.
Question 32
1.C.1.l
dirmat.dlcv.tb.030_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Wood Ridge Company’s standard rate of pay is $24 per direct labor hour. The actual payroll for 4,000 direct labor hours was $94,080. The standard hours
for the amount produced was 4,100 hours. What is Wood Ridge Company’s direct labor quantity variance?
$1,920, unfavorable
Correct

$2,400, favorable
Your Answer

$2,400, unfavorable

$1,920, favorable

Rationale
 $1,920, unfavorable
This answer is incorrect. The direct labor price variance is $1,920. However, it is not unfavorable. In addition, the question asks for the direct labor
quantity variance.

Rationale
 $2,400, favorable
The direct labor quantity variance measures the impact of the actual labor used being different from the standard labor allowed to be used on labor
costs for a period. It is calculated by multiplying the difference between the standard labor that “should” be used and the actual labor used by the
standard labor price. Since Wood Ridge used 100 fewer hours and the standard price is $24 per hour, the direct labor quantity variance is $2,400
($24 × 100) favorable.

Rationale
 $2,400, unfavorable
This answer is incorrect. The direct labor quantity variance is $2,400. However, it is not unfavorable.

Rationale
 $1,920, favorable
This answer is incorrect. The direct labor price variance is $1,920 favorable, not the direct labor quantity variance.
Question 33
1.C.1.l
1C1-LS37d
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4

Richter Company has an unfavorable materials efficiency (usage) variance for a particular month. All of the following could be the cause of this variance
except:

* Source: Retired ICMA CMA Exam Questions.

inadequate training of the direct labor employees.

poor quality of the raw materials.

Correct

poor performance of the shipping employees.

poor design of the production process or product.

Rationale
 inadequate training of the direct labor employees.
This answer is incorrect. Inadequate training of the direct labor employees could be the cause of an unfavorable materials efficiency (usage)
variance.

Rationale
 poor quality of the raw materials.
This answer is incorrect. Poor quality of the raw materials could be the cause of an unfavorable materials efficiency (usage) variance.

Rationale
 poor performance of the shipping employees.
A materials efficiency usage variance would be affected by a poor quality of raw materials, poor design of the product process or product, or lack of
skilled direct labor. A materials efficiency variance would not be affected by those employees, or indirect labor, associated with the production and
shipping of the end product.

Rationale
 poor design of the production process or product.
This answer is incorrect. Poor design of the production process or product could be the cause of an unfavorable materials efficiency (usage)
variance.
Question 34
1.C.1.k
1D1-AT37
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4

Ardmore Enterprises uses a standard cost system in its small appliance division. The standard cost of manufacturing one unit of Zeb is:

Materials—60 pounds at $1.50 per pound $90

Labor—3 hours at $12 per hour 36
Factory overhead—3 hours at $8 per hour 24
Total standard cost per unit $150

The budgeted variable factory overhead rate is $3 per labor hour, and the budgeted fixed factory overhead is $27,000 per month. During May, Ardmore
produced 1,650 units of Zeb compared to a normal capacity of 1,800 units. The actual cost per unit was:

Materials (purchased and used)—58 pounds at $1.65 per pound $95.70

Labor—3.1 hours at $12 per hour 37.20
Factory overhead—$39,930 per 1,650 units 24.2
Total actual cost per unit $157.10

The labor rate variance for May is:

$5,400 favorable.
Your Answer

$1,980 unfavorable.

$1,980 favorable.
Correct

$0.

Rationale
 $5,400 favorable.
This answer is incorrect. This answer represents the labor volume variance.

Rationale
 $1,980 unfavorable.
This answer is incorrect. This answer represents the labor efficiency variance, not the labor rate variance.

Rationale
 $1,980 favorable.
This answer is incorrect. This answer represents the labor efficiency variance, not the labor rate variance. Additionally, the labor efficiency variance
would be unfavorable.

Rationale
 $0.

The labor rate variance is calculated as follows:

Labor rate variance = (the actual hours worked and paid for)(the actual labor rate paid − the standard labor rate used)

Labor rate variance = [(3.1 hours per unit)(1,650 units)]($12 −$12) = (5,115)($0) = $0.

The actual rate is equal to the standard rate, so there is no labor rate variance.
Question 35
1.C.1.j
dirmat.dlcv.tb.012_0120
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 1
Each of the following terms is another name for a standard cost, except:
expected cost.

planned cost.
Your Answer

predicted cost.
Correct

optimal cost.

Rationale
 expected cost.
This answer is incorrect. Expected cost is another term for standard cost.

Rationale
 planned cost.
This answer is incorrect. Planned cost is another term for standard cost.

Rationale
 predicted cost.
This answer is incorrect. Predicted cost is another term for standard cost.

Rationale
 optimal cost.
In a standard cost system, the expected cost and use of inputs is not the same as the “optimal” cost and use of inputs.
Question 36
1.C.1.p
dirmat.dlcv.tb.035_0120
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4
What is the correct interpretation of an unfavorable labor yield variance?
More of each type of labor were used than were “allowed” to be used for actual production.
Correct

More total hours were used than were “allowed” to be used for actual production.

Actual wage rates were higher than standard wage rates.

Your Answer

The cost of the actual mix of labor (based on standard wage rates) was higher than the cost of the standard mix of labor (based on standard wage
rates).

Rationale
 More of each type of labor were used than were “allowed” to be used for actual production.
This answer is incorrect. The labor yield variance focuses on total hours used, not hours of each type of labor used. Using more hours of one type of
labor can offset the effect of using fewer hours of another type of labor to give an unfavorable labor yield variance.

Rationale
 More total hours were used than were “allowed” to be used for actual production.
If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
labor yield variance arises when the total hours used differs from the total hours “allowed” to be used for actual production. If the total hours used
exceed the total hours “allowed” to be used, the labor yield variance is unfavorable as this indicates that more is spent on labor than expected.

Rationale
 Actual wage rates were higher than standard wage rates.
This answer is incorrect. The labor rate (or price) variance is based on the difference between actual and standard wage rates, not the labor yield
variance.

Rationale
 The cost of the actual mix of labor (based on standard wage rates) was higher than the cost of the standard mix of labor (based on
standard wage rates).
This answer is incorrect. The labor mix variance is based on comparing the cost of the actual mix of labor used (based on standard wage rates) to
the cost of the standard mix of labor (based on standard wage rates), not the labor yield variance.
Question 37
1.C.1.l
dirmat.dlcv.tb.031_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Rock Loop Manufacturing’s standard rate of pay is $28.80 per direct labor hour. The actual payroll for 4,000 direct labor hours was $112,896. The
standard hours for the amount produced was 4,100 hours. What is Rock Loop’s direct labor quantity variance?
$2,304, unfavorable

$2,880, unfavorable

$2,304, favorable
Correct

$2,880, favorable

Rationale
 $2,304, unfavorable
This answer is incorrect. The direct labor price variance is $2,304. However, it is not unfavorable. In addition, the question asks for the direct labor
quantity variance.

Rationale
 $2,880, unfavorable
This answer is incorrect. The direct labor quantity variance is $2,880. However, it is not unfavorable.

Rationale
 $2,304, favorable
This answer is incorrect. The direct labor price variance is $2,304 favorable, not the direct labor quantity variance.

Rationale
 $2,880, favorable
The direct labor quantity variance measures the impact of the actual labor used being different from the standard labor allowed to be used on labor
costs for a period. It is calculated by multiplying the difference between the standard labor that “should” be used and the actual labor used by the
standard labor price. Since Rock Loop used 100 fewer hours and the standard price is $28.80 per hour, the direct labor quantity variance is $2,880
($28.80 × 100) favorable.
Question 38
1.C.1.j
aq.dirmat.dlcv.001_1807
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3

Data on Goodman Company's direct labor costs are given below:

Standard direct labor hours 30,000

Actual direct labor hours 29,000
Direct labor usage (efficiency) variance $4,000 Favorable
Direct labor rate variance $5,800 Favorable
Total payroll $110,200

What was Goodman's standard direct labor rate?

$3.60

$3.80

$3.67
Correct

$4.00

Rationale
 $3.60
This answer is incorrect. Because the rate variance is favorable, the standard rate must be more than the actual rate, not less.

Rationale
 $3.80
This answer is incorrect. This answer represents the actual direct labor rate, not the standard direct labor rate.

Rationale
 $3.67
This answer is incorrect. This answer was calculated by dividing total payroll by standard direct labor hours. This is not, however, the standard
direct labor rate.

Rationale
 $4.00

The standard direct labor rate is calculated as follows:

Labor rate variance = actual hours × the difference between the standard and actual labor rates, designated as “D”.

$5,800 = 29,000(D)

D = $0.20 per hour

Because the rate variance is favorable, the standard rate must be $0.20 more than the actual rate of $3.80 ($110,200 ÷ 29,000).

$3.80 + $0.20 = $4.00

Question 39
1.C.1.k
1C1-CQ19
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4

A company isolates its raw material price variance in order to provide the earliest possible information to the manager responsible for the variance. The
budgeted amount of material usage for the year was computed as follows:

150,000 units of finished goods × 3 pounds/unit × $2.00/pound = $900,000

Actual results for the year were the following:

Finished goods produced 160,000 units

Raw materials purchased 500,000 pounds
Raw materials used 490,000 pounds
Cost per pound $2.02

The raw material price variance for the year was:

$20,000 unfavorable.
Correct

$10,000 unfavorable.

$60,000 unfavorable.
Your Answer

$9,800 unfavorable.

Rationale
 $20,000 unfavorable.
This answer is incorrect. This answer represents the raw materials efficiency variance, not the raw materials price variance.

Rationale
 $10,000 unfavorable.

The raw material price variance is calculated as follows:

Raw material price variance = (actual quantity purchased)(standard price − actual price).

Raw material price variance = (500,000)($2.00 − $2.02) = −$10,000 or $10,000 unfavorable.

Rationale
 $60,000 unfavorable.
This answer is incorrect. This answer represents the raw materials volume variance, not the raw materials price variance.

Rationale
 $9,800 unfavorable.
This answer is incorrect. This answer used raw materials used instead of raw materials purchased in the calculation of the raw material price
variance.
Question 40
1.C.1.l
aq.dirmat.dlcv.008_0820
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 5

Chair Company (CC) has provided the following standard cost sheet.

Chair Company
Standard Cost Sheet - Plastic Chair Input Quantity Cost per Input Cost per Chair
Direct materials (plastic) - pounds 4.0 pounds $12 per pound $48.00
Direct labor (molders) - direct labor hours 0.5 DLH $20.00 per DLH $10.00
Direct labor (finishers) - direct labor hours 1.0 DLH $25.00 per DLH $25.00
Variable manufacturing overhead - total DLH 1.5 DLH $5.00 per DLH $7.50
Fixed manufacturing overhead - total DLH 1.5 DLH $7.50 per DLH $11.25
Total Cost to Manufacture $101.75
Variable selling overhead - chairs 1 chair $5.00 per chair $5.00
Total Cost to Deliver $106.75

Note that the input quantity multiplied by the cost per input equals cost per chair. Also note in this case that manufacturing overhead (MOH) costs are
being allocated on the basis of total direct labor hours (DLH).

CC also disclosed the following actual information:

5,000 pounds of plastic was purchased for $63,750 of which 4,600 was used in production.
Molders were paid a total of $10,500 to work 575 hours and finishers were paid a total of $29,000 to work 1,050 hours.
1,100 plastic chairs were produced and sold during the year.

What is the direct labor efficiency variance based on the above information?

$1,750 Favorable
Your Answer

$1,750 Unfavorable
Correct

$750 Favorable

$750 Unfavorable

Rationale
 $1,750 Favorable
This answer is incorrect. This answer represents the direct labor rate variance, not the direct labor efficiency variance. Additionally, the direct labor
rate variance would not be favorable.

Rationale
 $1,750 Unfavorable
This answer is incorrect. This answer represents the direct labor rate variance, not the direct labor efficiency variance.

Rationale
 $750 Favorable

The direct labor efficiency variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Based on the standard amount of 0.5 molders’ hours per plastic chair and actual production and sales of 1,100 chairs, CC should have used 550
molders’ hours for its actual production (0.5 hours × 1,100 chairs). Similarly, based on the standard amount of 1.0 finishers’ hours per plastic chair
and actual production and sales of 1,100 chairs, CC should have used 1,100 finishers’ hours for its actual production (1.0 hours × 1,100 chairs). Since
the left side of the framework, which represents the actual quantity of labor hours, is smaller than the right side, this variance is favorable (F).

Below is the formula approach.

Note that the molders’ actual total hours are higher than standard hours allowed for actual production (575 hours versus 550 hours, respectively),
which indicates an unfavorable (U) efficiency variance. The finishers’ actual hours are lower than standard allowed (1,050 hours versus 1,100 hours,
respectively), which indicates a favorable (F) efficiency variance.

Direct labor efficiency variance = (Standard hours allowed − Actual hours used) × Standard rate

Molders: (550 hours − 575 hours) × $20.00 = $500 U

Finishers: (1,100 hours − 1,050 hours) × $25.00 = $1,250 F

Total direct labor efficiency variance: $500 U + $1,250 F = $750 F

Note that the computational solution for molders is a negative value, but the result is reported as an absolute value. Variances are not reported as
negative or positive values, but as unfavorable (U) or favorable (F) values. Molders are unfavorable and finishers are favorable as can be determined
before the calculation.

Rationale
 $750 Unfavorable
This answer is incorrect. This answer correctly calculated the direct labor efficiency variance; however, this variance is not unfavorable.
Question 41
1.C.1.k
dirmat.dlcv.tb.017_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
The standard cost sheet for Skyline Company’s most popular product shows 3 pounds of material at $5.00 per pound and 1.5 hours at $24 per hour.
During the most recent period, Skyline produced 500 units and incurred direct materials cost of $8,384 when it purchased 1,600 pounds and $17,480 for
direct labor costs for 760 hours of labor. What is Skyline’s materials price variance for the period?
$884, unfavorable
Correct

$384, unfavorable

$500, unfavorable

$9,096, unfavorable

Rationale
 $884, unfavorable
This answer is incorrect. Based on the standard usage of 3 pounds per unit and the standard price of $5.00 per pound, Skyline “should” have paid
$7,500 for direct materials to produce 500 units (500 × 3 × $5.00). However, the $884 unfavorable variance is the flexible budget direct materials
variance, not the direct materials price variance.

Rationale
 $384, unfavorable
The direct materials price variance measures the difference between the actual amount paid for direct materials and the amount that “should”
have been paid for the actual amount of materials purchased. Skyline “should” have paid $8,000 for 1,600 pounds of materials (1,600 pounds ×
$5.00 per pound). Since the actual amount paid ($8,384) is $384 more than the amount that “should” have been paid, the variance is unfavorable.

Rationale
 $500, unfavorable
This answer is incorrect. The direct materials quantity variance is $500 unfavorable, not the direct materials price variance.

Rationale
 $9,096, unfavorable
This answer is incorrect. $9,096 is the difference between actual spending for direct labor and actual spending for direct labor. This is not the same
as the direct materials price variance.
Question 42
1.C.1.l
dirmat.dlcv.tb.026_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
The standard cost sheet for Skyline Company’s most popular product shows 3 pounds of material at $5.00 per pound and 1.5 hours at $24 per hour.
During the most recent period, Skyline produced 500 units and incurred direct materials cost of $8,384 when it purchased 1,600 pounds and $17,480 for
direct labor costs for 760 hours of labor. What is Skyline’s materials quantity variance for the period?
$884, unfavorable

$384, unfavorable
Correct

$500, unfavorable
Your Answer

$9,096, unfavorable

Rationale
 $884, unfavorable
This answer is incorrect. Based on the standard usage of 3 pounds per unit and the standard price of $5.00 per pound, Skyline “should” have paid
$7,500 for direct materials to produce 500 units (500 × 3 × $5.00). However, the $884 unfavorable variance is the flexible budget direct materials
variance, not the direct materials quantity variance.

Rationale
 $384, unfavorable
This answer is incorrect. The direct materials price variance is $384 unfavorable, not the direct materials quantity variance.

Rationale
 $500, unfavorable
The direct materials quantity variance measures the impact of the actual materials used being different from the standard materials allowed to be
used on material costs for a period. It is calculated by multiplying the difference between the standard materials that “should” be used and the
actual materials used by the standard price of the materials. Skyline “should” have used 1,500 pounds of material to produce 500 units (500 units ×
3 pounds per unit). Since Skyline used 100 extra pounds and the standard price is $5.00 per pound, the direct materials quantity variance is $500
($5.00 × 100) unfavorable.

Rationale
 $9,096, unfavorable
This answer is incorrect. $9,096 is the difference between actual spending for direct labor and actual spending for direct labor. This is not the same
as the direct materials quantity variance.
Question 43
1.C.1.o
dirmat.dlcv.tb.034_0120
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4
What is the correct interpretation of an unfavorable materials mix variance?
The cost of the actual mix of materials (based on actual material prices) was higher than the cost of the standard mix of materials (based on standard
material prices).

More total pounds were used than were “allowed” to be used for actual production.

Actual material prices were higher than standard material prices.

Correct

The cost of the actual mix of materials (based on standard material prices) was higher than the cost of the standard mix of materials (based on
standard material prices).

Rationale
 The cost of the actual mix of materials (based on actual material prices) was higher than the cost of the standard mix of materials
(based on standard material prices).
This answer is incorrect. Actual material prices are not used to calculate the materials mix variance.

Rationale
 More total pounds were used than were “allowed” to be used for actual production.
This answer is incorrect. The materials yield variance is based on comparing the total pounds used to the total pounds “allowed” to be used for
actual production, not the materials mix variance.

Rationale
 Actual material prices were higher than standard material prices.
This answer is incorrect. The materials price variance is based on the difference between actual and standard material prices, not the materials mix
variance.

Rationale
 The cost of the actual mix of materials (based on standard material prices) was higher than the cost of the standard mix of materials
(based on standard material prices).
If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
materials mix variance arises when the individual categories of materials are used in a different mix than is called for by the standards. If the actual
mix is more costly than the standard mix, the variance is unfavorable as this indicates that more is spent on materials than expected.
Question 44
1.C.1.o
dirmat.dlcv.tb.037_0820
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The JLB Company uses two different types of labor to produce its product. In 20X8, JLB expected to produce 5,500 units but it actually produced 5,000
units. Information about labor usage is as follows:

Labor Type Standard Wage Rate Standard Usage Actual Wage Rate Actual Hours
A $9.00 6 hours / unit $8.00 36,000 hours
B $15.00 3 hours / unit $18.00 12,000 hours

Based on this information, what is JLB’s labor mix variance for 20X8?

$9,000 unfavorable

$33,000 unfavorable
Correct

$24,000 favorable
Your Answer

$36,000 favorable

Rationale
 $9,000 unfavorable
This answer is incorrect. The total labor quantity variance is $9,000 unfavorable.

Rationale
 $33,000 unfavorable
This answer is incorrect. The labor yield variance is $33,000 unfavorable.

Rationale
 $24,000 favorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
mix variance arises when the individual components are used in a different mix than is called for by the standards. The first step is to calculate the
cost of the “standard” mix of the components based on the standard costs of the components. The second step is to calculate the cost of the
“actual” mix of the components based on the standard costs of the components. The actual costs are not used because the quantity variance is
based on standard costs, not actual costs. The third step is to multiply the difference in the costs by the total amount of the inputs used. In this
example, the cost of the standard mix is $11.00 per hour {(30,000 hours × $9.00 + 15,000 hours × $15.00) ÷ 45,000 hours} and the cost of the actual
mix is $10.50 per hour {(36,000 hours × $9.00 + 12,000 hours × $15.00) ÷ 48,000 hours}. Based on these figures, JLB’s labor mix variance is $24,000
favorable because the actual mix is less costly than the standard mix {($11.00 − $10.50) × 48,000 hours}.

Below is the framework approach.

This mix variance is favorable (F) because JLB’s actual mix of expensive type B labor hours (25%) is lower than its standard mix percentage (33.33%)
relative to the mix percentage of cheaper type A labor hours. This shift in relative labor inputs has a favorable effect on operating profit.
Below is the formula approach.

Note that the type A labor’s actual mix percentage is higher than the standard mix percentage (75% versus 66.67%, respectively), which indicates an
unfavorable (U) mix variance. The type B labor’s actual mix percentage is lower than the standard mix percentage (25% versus 33.33%,
respectively), which indicates a favorable (F) efficiency variance.

Direct labor mix variance = Total actual quantity × (Standard mix % − Actual mix %) × Standard Rate

Type A labor: 48,000 × (66.67% − 75%) × $9.00 = $36,000U

Type B labor: 48,000 × (33.33% − 25%) × $15.00 = $60,000F

Total direct labor mix variance: $36,000U + $60,000F = $24,000F

Note variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation
solutions are Type A labor is a negative value and Type B labor is a positive value, the respective variances are actually unfavorable and favorable
as we determined before computing the size of the variances.

Rationale
 $36,000 favorable
This answer is incorrect. The price (rate) variance for Labor Class A is $36,000 favorable.
Question 45
1.C.1.k
dirmat.dlcv.tb.013_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3

Village Manufacturing’s most popular product has the following standards:

3 direct labor hours/unit

$30/direct labor hour

During September, Village produced 2,400 units and used 7,000 direct labor hours. The company’s direct labor cost was $252,000. For Village, what is the
difference between the actual amount paid and the amount that should have been paid for the number of hours worked, and is the difference favorable
or unfavorable?

$6,000, unfavorable

$36,000, unfavorable
Your Answer

$6,000, favorable
Correct

$42,000, unfavorable

Rationale
 $6,000, unfavorable
This answer is incorrect. The direct labor quantity variance is $6,000, not the direct labor price variance. Additionally, it is favorable, not
unfavorable.

Rationale
 $36,000, unfavorable
This answer is incorrect. Based on the standard usage of 3 direct labor hours per unit and the standard wage rate of $30 per hour, Village “should”
have paid $216,000 for direct labor to produce 2,400 units (2,400 × 3 × $30). However, this is not the same as the amount that should have been paid
for the number of hours worked.

Rationale
 $6,000, favorable
This answer is incorrect. The direct labor quantity variance is $6,000 favorable, not the direct labor price variance.

Rationale
 $42,000, unfavorable
The direct labor price variance measures the difference between the actual amount paid for direct labor and the amount that “should” have been
paid for the actual number of hours worked. Village “should” have paid $210,000 for 7,000 direct labor hours (7,000 hours × $30 per hour). Since the
actual amount paid ($252,000) is $42,000 higher than the amount that “should” have been paid, the variance is unfavorable.
Question 46
1.C.1.l
1C1-LS93
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2

Randall Company uses standard costing and flexible budgeting and is evaluating its direct labor. The total direct labor budget variance can usually be
broken down into two other variances identified as the:

* Source: Retired ICMA CMA Exam Questions.

direct labor cost variance and the direct labor volume variance.

direct labor rate variance and direct labor volume variance.

Your Answer

direct labor cost variance and direct labor efficiency variance.

Correct

direct labor rate variance and direct labor efficiency variance.

Rationale
 direct labor cost variance and the direct labor volume variance.
This answer is incorrect. The total direct labor budget variance can usually be broken down into two other variances, but they are not the direct
labor cost variance and the direct labor volume variance.

Rationale
 direct labor rate variance and direct labor volume variance.
This answer is incorrect. The total direct labor budget variance can usually be broken down into two other variances. Direct labor rate variance is
one, but direct labor volume variance is not the other.

Rationale
 direct labor cost variance and direct labor efficiency variance.
This answer is incorrect. The total direct labor budget variance can usually be broken down into two other variances. Direct labor efficiency
variance is one, but direct labor cost variance is not the other.

Rationale
 direct labor rate variance and direct labor efficiency variance.
The labor rate variance and labor efficiency variances are two components of the total direct labor budget variance which must be analyzed to
better understand the true cause of the overall direct labor variance.
Question 47
1.C.1.l
cma11.p1.t1.me.0055_0820
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

A company established its annual direct material budget to produce 300,000 units as follows:

150,000 pounds of material @ $0.75 per pound = $112,500

Throughout the year, the company produced 310,000 units of finished goods using 0.48 pounds per unit at a cost of $0.76 per pound. The direct material
efficiency variance is

*Source: Retired ICMA CMA Exam Questions.

$588 unfavorable.

$900 favorable.
Your Answer

$1,488 unfavorable.
Correct

$4,650 favorable.

Rationale
 $588 unfavorable.
This answer is incorrect. The direct materials efficiency variance is not calculated as the difference between the total budgeted cost of materials to
be used for a period and the actual cost of materials used in a period.

Rationale
 $900 favorable.
This answer is incorrect. The materials budgeted to be used for actual production is not used to calculate the direct materials efficiency variance.

Rationale
 $1,488 unfavorable.
This answer is incorrect. The materials price variance (MPV) is $1,488 unfavorable. MPV = actual quantity × (actual price – budgeted price)

Rationale
 $4,650 favorable.
Material efficiency variance = Standard or budgeted price × (Actual quantity of material used – Standard quantity of material allowed for the actual
production)

Material efficiency variance = $0.75 × ((310,000 × 0.48) − (310,000 × 0.50))

Material efficiency variance = $0.75 × (148,800 − 155,000)

Material efficiency variance = −4,650

Material efficiency variance = $4,650 favorable

Question 48
1.C.1.k
aq.dirmat.dlcv.005_1807
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 5

Chair Company (CC) has provided the following standard cost sheet.

Chair Company
Standard Cost Sheet - Plastic Chair Input Quantity Cost per Input Cost per Chair
Direct materials (plastic) - pounds 4.0 pounds $12 per pound $48.00
Direct labor (molders) - direct labor hours 0.5 DLH $20.00 per DLH $10.00
Direct labor (finishers) - direct labor hours 1.0 DLH $25.00 per DLH $25.00
Variable manufacturing overhead - total DLH 1.5 DLH $5.00 per DLH $7.50
Fixed manufacturing overhead - total DLH 1.5 DLH $7.50 per DLH $11.25
Total Cost to Manufacture $101.75
Variable selling overhead - chairs 1 chair $5.00 per chair $5.00
Total Cost to Deliver $106.75

Note that the input quantity multiplied by the cost per input equals cost per chair. Also note in this case that manufacturing overhead (MOH) costs are
being allocated on the basis of total direct labor hours (DLH).

CC also disclosed the following actual information:

5,000 pounds of plastic was purchased for $63,750 of which 4,600 was used in production.
Molders were paid a total of $10,500 to work 575 hours and finishers were paid a total of $29,000 to work 1,050 hours.
1,100 plastic chairs were produced and sold during the year.

What is the direct materials price variance based on the above information?

$2,400 Favorable
Your Answer

$2,400 Unfavorable

$3,750 Favorable
Correct

$3,750 Unfavorable

Rationale
 $2,400 Favorable
This answer is incorrect. This answer represents the direct materials usage variance, not the direct materials price variance. Additionally, the direct
materials usage variance would not be favorable.

Rationale
 $2,400 Unfavorable
This answer is incorrect. This answer represents the direct materials usage variance, not the direct materials price variance.

Rationale
 $3,750 Favorable
This answer is incorrect. This answer correctly calculates the direct materials price variance; however, this variance is not favorable.

Rationale
 $3,750 Unfavorable

The direct materials price variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Note that we can compute the actual price paid for pounds of plastic as $12.75 per pound ($63,750 ÷ 5,000 pounds). Since the actual price is more
than the standard price, the direct materials price variance is unfavorable (U).

Below is the formula approach.

Direct materials price variance = Actual quantity purchased × (Standard price − Actual price)

5,000 units × ($12.00 − $12.75) = $3,750 U

Note that the computational solution for the direct materials price variance is a negative value, but the result is reported as an absolute value.
Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual price is
more than the standard price, the direct materials price variance is unfavorable (U).
Question 49
1.C.1.k
dirmat.dlcv.tb.018_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
The standard cost sheet for Eiger Mountain Manufacturing’s (EMM) most popular product shows 3 pounds of material at $6.00 per pound and 1.5 hours at
$28.80 per hour. During the most recent period, EMM produced 500 units and incurred direct materials cost of $10,060 when it purchased 1,600 pounds
and $20,976 for direct labor costs for 760 hours of labor. What is EMM’s materials price variance for the period?
$1,060, unfavorable

$600, unfavorable
Correct

$460, unfavorable
Your Answer

$10,916, unfavorable

Rationale
 $1,060, unfavorable
This answer is incorrect. Based on the standard usage of 3 pounds per unit and the standard price of $6.00 per pound, EMM “should” have paid
$9,000 for direct materials to produce 500 units (500 × 3 × $6.00). However, the $1,060 unfavorable variance is the flexible budget direct materials
variance, not the direct materials price variance.

Rationale
 $600, unfavorable
This answer is incorrect. The direct materials quantity variance is $600 unfavorable, not the direct materials price variance.

Rationale
 $460, unfavorable
The direct materials price variance measures the difference between the actual amount paid for direct materials and the amount that “should”
have been paid for the actual amount of materials purchased. EMM “should” have paid $9,600 for 1,600 pounds of materials (1,600 pounds × $6.00
per pound). Since the actual amount paid ($10,060) is $460 more than the amount that “should” have been paid, the variance is unfavorable.

Rationale
 $10,916, unfavorable
This answer is incorrect. $10,916 is the difference between actual spending for direct labor and actual spending for direct labor. This is not the same
as the direct materials price variance.
Question 50
1.C.1.o
aq.dirmat.dlcv.009_0820
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 6

Chair Company (CC) has provided the following standard cost sheet.

Chair Company
Standard Cost Sheet - Plastic Chair Input Quantity Cost per Input Cost per Chair
Direct materials (plastic) - pounds 4.0 pounds $12 per pound $48.00
Direct labor (molders) - direct labor hours 0.5 DLH $20.00 per DLH $10.00
Direct labor (finishers) - direct labor hours 1.0 DLH $25.00 per DLH $25.00
Variable manufacturing overhead - total DLH 1.5 DLH $5.00 per DLH $7.50
Fixed manufacturing overhead - total DLH 1.5 DLH $7.50 per DLH $11.25
Total Cost to Manufacture $101.75
Variable selling overhead - chairs 1 chair $5.00 per chair $5.00
Total Cost to Deliver $106.75

Note that the input quantity multiplied by the cost per input equals cost per chair. Also note in this case that manufacturing overhead (MOH) costs are
being allocated on the basis of total direct labor hours (DLH).

CC also disclosed the following actual information:

5,000 pounds of plastic was purchased for $63,750 of which 4,600 was used in production.
Molders were paid a total of $10,500 to work 575 hours and finishers were paid a total of $29,000 to work 1,050 hours.
1,100 plastic chairs were produced and sold during the year.

CC also provided the standard and actual direct labor mix percentages.

Flexible Budget Molders Finishers Total

Actual sales volume 1,100 chairs 1,100 chairs 1,100 chairs
Standard hours per chair × 0.5 hours × 1.0 hours × 1.5 hours
Standard hours allowed 550 hours 1,100 hours 1,650 hours
Standard mix percentage 33.33% 66.67% 100.00%

Actual Molders Finishers Total

Actual quantity of hours 575 hours 1,050 hours 1,625 hours
Actual mix percentage 35.38% 64.62%

What is the direct labor mix variance based on the above information?

(Note: Keep the mix percentages precise in your computations. For example, use 0.666667 in your computations, not 0.67.)

Correct

$166 Favorable

$166 Unfavorable

$584 Favorable

$584 Unfavorable

Rationale
 $166 Favorable

The direct labor mix variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

This mix variance is favorable (F) because CC's actual mix of expensive finisher labor hours (64.62%) is lower than its standard mix percentage
(66.67%) relative to the mix percentage of cheaper molder hours. This shift in relative labor inputs has a favorable effect on operating profit.

Below is the formula approach.

Note that the molders’ actual mix percentage is higher than the standard mix percentage (35.38% versus 33.33%, respectively), which indicates an
unfavorable (U) mix variance. The finishers’ actual mix percentage is lower than the standard mix percentage (35.38% versus 33.33%, respectively),
which indicates a favorable (F) efficiency variance.

Direct labor mix variance = Total actual qty× (Standard mix% − Actual mix%) × Standard rate

Molders: 1,625 hours × (33.33% − 35.38%) × $20.00 = $667 U

Finishers: 1,625 hours × (66.67% − 64.62%) × $25.00 = $833 F

Total direct labor mix variance: $667 U + $833 F = $166 F

Note that the computational solution for molders is a negative value, but the result is reported as an absolute value. Variances are not reported as
negative or positive values, but as unfavorable (U) or favorable (F) values. Molders are unfavorable and finishers are favorable as can be determined
before the calculation.

Rationale
 $166 Unfavorable
This answer is incorrect. This answer correctly calculated the direct labor mix variance; however, this variance is not unfavorable.

Rationale
 $584 Favorable
This answer is incorrect. This answer represents the direct labor yield variance, not the direct labor mix variance.

Rationale
 $584 Unfavorable
This answer is incorrect. This answer represents the direct labor yield variance, not the direct labor mix variance. Additionally, the direct labor yield
variance would not be unfavorable.
Question 51
1.C.1.l
1C1-CQ20
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3

At the beginning of the year, Douglas Company prepared the following monthly budget for direct materials for Month 1 and Month 2:

Direct Materials Budget Month 1 Month 2

Units produced and sold 10,000 15,000
Direct material $15,000 $22,500

At the end of Month 1, the company's records showed that 12,000 units were produced and sold and $20,000 was spent for direct materials. The flexible
budget variance for direct materials for Month 1 is:

$2,000 favorable.

$5,000 favorable.
Correct

$2,000 unfavorable.
Your Answer

$5,000 unfavorable.

Rationale
 $2,000 favorable.
This answer is incorrect. This answer correctly calculates the direct material flexible budget variance; however, it is not favorable.

Rationale
 $5,000 favorable.
This answer is incorrect. This answer represents the static budget variance for direct materials, not the direct materials flexible budget variance.
This incorrect answer would not, however, be favorable.

Rationale
 $2,000 unfavorable.

The flexible budget variance for direct materials for Month 1 is calculated as:

Flexible budget variance for direct materials = (actual direct material cost) − (budgeted direct material cost at actual level of production)

Flexible budget variance for direct materials = ($20,000) − (12,000 units)($15,000 ÷ 10,000)

Flexible budget variance for direct materials = $20,000 − $18,000 = $2,000 unfavorable

Rationale
 $5,000 unfavorable.
This answer is incorrect. This answer represents the static budget variance for direct materials, not the direct materials flexible budget variance.
Question 52
1.C.1.j
1C1-LS81
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2

Use of a standard cost system can include all of the following advantages except that it:

* Source: Retired ICMA CMA Exam Questions.

permits development of flexible budgeting.

allows employees to better understand what is expected of them.

Correct

emphasizes qualitative characteristics.

assists in performance evaluation.

Rationale
 permits development of flexible budgeting.
This answer is incorrect. Use of a standard cost system can include permitting development of flexible budgeting.

Rationale
 allows employees to better understand what is expected of them.
This answer is incorrect. Use of a standard cost system can include allowing employees to better understand what is expected of them.

Rationale
 emphasizes qualitative characteristics.
Under a standard cost system, advantages include that it assists in performance evaluations, permits development of flexible budgeting, and
allows employees to better understand what is expected of them.

Rationale
 assists in performance evaluation.
This answer is incorrect. Use of a standard costs system can include assisting in performance evaluation.
Question 53
1.C.1.k
dirmat.dlcv.tb.022_0120
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
Twisted Trails Company produced 2,500 units and had a $29,400 unfavorable direct labor price variance. The company’s standard rate of pay is $33.60
per hour and the actual number of direct labor hours worked was 10,500. If the standard direct labor hours per unit is 4 hours, what was the actual rate of
pay for direct labor?
$30.80 per direct labor hour

$25.20 per direct labor hour

Correct

$36.40 per direct labor hour

Your Answer

$33.60 per direct labor hour

Rationale
 $30.80 per direct labor hour
This answer is incorrect. The difference between Twisted’s actual labor price per hour and the standard labor price per hour is $2.80 per hour.
However, the actual price is not lower than the standard price as the price variance is unfavorable, not favorable.

Rationale
 $25.20 per direct labor hour
This answer is incorrect. If the actual labor price is lower than the standard labor price, then the labor price variance would be favorable, not
unfavorable.

Rationale
 $36.40 per direct labor hour
The direct labor price variance measures the difference between the actual amount paid for direct labor and the amount that “should” have been
paid for the actual number of hours worked. It is calculated by multiplying the actual hours worked by the difference between the actual labor price
per hour and the standard labor price per hour. Rearranging the formula results in the actual labor price per hour being calculated as “Price
Variance ÷ Actual Hours + Standard Rate.” Using Twisted’s figures results in an actual labor price of $36.40 per hour ($29,400 ÷ 10,500 + $33.60).

Rationale
 $33.60 per direct labor hour
This answer is incorrect. If the actual labor price and standard labor price are the same, then the labor price variance would be zero.
Question 54
1.C.1.o
dirmat.dlcv.tb.033_0120
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4
What is the correct interpretation of a favorable labor mix variance?
The cost of the actual mix of labor (based on actual wage rates) was lower than the cost of the standard mix of labor (based on standard wage rates).

Fewer total hours were used than were “allowed” to be used for actual production.

Actual wage rates were lower than standard wage rates.

Correct

The cost of the actual mix of labor (based on standard wage rates) was lower than the cost of the standard mix of labor (based on standard wage
rates).

Rationale
 The cost of the actual mix of labor (based on actual wage rates) was lower than the cost of the standard mix of labor (based on standard
wage rates).
This answer is incorrect. Actual wage rates are not used to calculate the labor mix.

Rationale
 Fewer total hours were used than were “allowed” to be used for actual production.
This answer is incorrect. The labor yield variance is based on comparing the total hours used to the total hours “allowed” to be used for actual
production, not the labor mix variance.

Rationale
 Actual wage rates were lower than standard wage rates.
This answer is incorrect. The labor rate (or price) variance is based on the difference between actual and standard wage rates, not the labor mix
variance.

Rationale
 The cost of the actual mix of labor (based on standard wage rates) was lower than the cost of the standard mix of labor (based on
standard wage rates).
If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
labor mix variance arises when the individual categories of labor are used in a different mix than is called for by the standards. If the actual mix is
less costly than the standard mix, the variance is favorable as this indicates that less is spent on labor than expected.
Question 55
1.C.1.k
1C1-LS91
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4

Marten Company has a cost-benefit policy to investigate any variance that is greater than $1,000 or 10% of budget, whichever is larger. Actual results for
the previous month indicate the following:

Budget Actual
Raw Material $100,000 $89,000
Direct Labor $50,000 $54,000
The company should investigate:

* Source: Retired ICMA CMA Exam Questions.

neither the material variance nor the labor variance.

the labor variance only.

Your Answer

both the material variance and the labor variance.

Correct

the material variance only.

Rationale
 neither the material variance nor the labor variance.
This answer is incorrect. Based on actual results for the previous month, the company should investigate the material variance, but not the labor
variance.

Rationale
 the labor variance only.
This answer is incorrect. Based on actual results for the previous month, the company should not investigate the labor variance.

Rationale
 both the material variance and the labor variance.
This answer is incorrect. Based on actual results for the previous month, the company should investigate the material variance, but not the labor
variance.

Rationale
 the material variance only.
The material variance should be investigated since it is $11,000 which is greater than 10% of the budget ($100,000 × 0.1 = $10,000). The direct labor
variance is $4,000 which is less than 10% of budget ($50,000 × 0.1 = $5,000), so it would not be investigated under the company policy. The question
prompt tells us to investigate any variance that is greater than $1,000 or 10% of budget, whichever is larger. 10% of budget for both raw materials
($10,000) and direct labor ($5,000) is larger than the $1,000 threshold, so the thresholds to determine what variances need investigation would be
based on 10% of budget instead of being greater than $1,000.
Question 56
1.C.1.l
dirmat.dlcv.tb.028_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Ramble Wood, Inc. produces a product which requires 6 hours of direct labor at $32 per hour. During February, Ramble Wood’s actual payroll was
$393,120 and the company used 12,600 direct labor hours to produce 2,000 units of the product. What is Ramble Wood’s direct labor quantity variance?
Correct

$19,200, unfavorable

$10,080, unfavorable
Your Answer

$9,120, unfavorable

$10,080, favorable

Rationale
 $19,200, unfavorable
The direct labor quantity variance measures the impact of the actual labor used being different from the standard labor allowed to be used on labor
costs for a period. It is calculated by multiplying the difference between the standard labor that “should” be used and the actual labor used by the
standard labor price. Ramble “should” have used 12,000 hours of labor to produce 2,000 units (2,000 units × 6 hours per unit). Since Ramble used
600 extra hours and the standard price is $32 per hour, the direct labor quantity variance is $19,200 ($32 × 600) unfavorable.

Rationale
 $10,080, unfavorable
This answer is incorrect. The direct labor price variance is $10,080. However, it is not unfavorable. In addition, the question asks for the direct labor
quantity variance.

Rationale
 $9,120, unfavorable
This answer is incorrect. Based on the standard usage of 6 hours of labor per unit and the standard price of $32 per hour, Ramble “should” have
paid $384,000 for direct labor to produce 2,000 units (2,000 × 6 × $32). However, the $9,120 unfavorable variance is the flexible budget direct labor
variance, not the direct labor quantity variance.

Rationale
 $10,080, favorable
This answer is incorrect. The direct labor price variance is $10,080 favorable, not the direct labor quantity variance.
Question 57
1.C.1.o
dirmat.dlcv.tb.040_0820
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The YTR Company uses two different materials to produce its product. In 20X8, YTR expected to produce 18,000 units but it actually produced 20,000
units. Information about material usage is as follows:

Material Standard Price Standard Usage Actual Price Actual Pounds

123 $12.00 8 pounds / unit $14.00 165,000 pounds
456 $18.00 4 pounds / unit $17.00 85,000 pounds

Based on this information, what is YTR’s material mix variance for 20X8?

$150,000 unfavorable

$140,000 unfavorable
Correct

$10,000 unfavorable

$60,000 unfavorable

Rationale
 $150,000 unfavorable
This answer is incorrect. The total material quantity variance is $150,000 unfavorable.

Rationale
 $140,000 unfavorable
This answer is incorrect. The material yield variance is $140,000 unfavorable.

Rationale
 $10,000 unfavorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
mix variance arises when the individual components are used in a different mix than is called for by the standards. The first step is to calculate the
cost of the “standard” mix of the components based on the standard costs of the components. The second step is to calculate the cost of the
“actual” mix of the components based on the standard costs of the components. The actual costs are not used because the quantity variance is
based on standard costs, not actual costs. The third step is to multiply the difference in the costs by the total amount of the inputs used. In this
example, the cost of the standard mix is $14.00 per pound {(160,000 pounds × $12.00 + 80,000 pounds × $18.00) ÷ 240,000 pounds} and the cost of
the actual mix is $14.04 per pound {(165,000 pounds × $12.00 + 85,000 pounds × $18.00) ÷ 250,000 pounds}. Based on these figures, YTR’s material
mix variance is $10,000 unfavorable because the actual mix is more costly than the standard mix {($14.04 − $14.00) × 250,000 pounds}.

Below is the framework approach.

This mix variance is unfavorable (U) because YTR’s actual mix of expensive material #456 (34%) is higher than its standard mix percentage (33.33%)
relative to the mix percentage of cheaper material #123. This shift in relative labor inputs has an unfavorable effect on operating profit.

Below is the formula approach.

Before computing the variance, note that the actual labor mix percentage for material #123 (66%) is lower than the expected mix percentage
(66.67%), which is favorable. The actual labor mix percentage for material #456 (34%) is higher than the expected mix percentage (33.33%), which is
unfavorable. Because material #456 has the higher standard price, the overall labor mix variance will be unfavorable. Remember to use the precise
mix percentages and not the rounded mix percentages when calculating this variance using the formula approach.

Material mix variance = Total actual volume × (Expected mix − Actual mix) × Standard Price

Material #123: 250,000 × (66.67% − 66%) × $12.00 = $20,000F

Material #456: 250,000 × (33.33% − 34%) × $18.00 = $30,000U

Total material mix variance: $20,000F + $30,000U = $10,000U

Note variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation
solutions for material #123 is a positive value and material #456 is a negative value, the respective variances are actually favorable and unfavorable
as we determined before computing the size of the variances.

Rationale
 $60,000 unfavorable
This answer is incorrect. The quantity variance for Material 123 is $60,000 unfavorable.
Question 58
1.C.1.j
1B2-LS46
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2

One approach for developing standard costs incorporates communication, bargaining, and interaction among product line managers; the immediate
supervisors for whom the standards are being developed; and the accountants and engineers before the standards are accepted by top management.
This approach would best be characterized as a(n):

*Source: Retired ICMA CMA Exam Questions.

authoritative approach.

engineering approach.

imposed approach.
Correct

participative approach.

Rationale
 authoritative approach.
This answer is incorrect. An approach for developing standard costs that incorporates communication, bargaining, and interaction among product
line managers; the immediate supervisors for whom the standards are being developed; and the accountants and engineers before the standards
are accepted by top management would not be best characterized as an authoritative approach.

Rationale
 engineering approach.
This answer is incorrect. An approach for developing standard costs that incorporates communication, bargaining, and interaction among product
line managers; the immediate supervisors for whom the standards are being developed; and the accountants and engineers before the standards
are accepted by top management would not be best characterized as an engineering approach.

Rationale
 imposed approach.
This answer is incorrect. An approach for developing standard costs that incorporates communication, bargaining, and interaction among product
line managers; the immediate supervisors for whom the standards are being developed; and the accountants and engineers before the standards
are accepted by top management would not be best characterized as an imposed approach.

Rationale
 participative approach.
A participative approach incorporates communication, bargaining, and interaction among all parties involved in a division, including product line
managers, immediate supervisors, accountants, and engineers.
Question 59
1.C.1.l
dirmat.dlcv.tb.032_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
The standard cost sheet for Skyline Company’s most popular product shows 3 pounds of material at $5.00 per pound and 1.5 hours at $24 per hour.
During the most recent period, Skyline produced 500 units and incurred direct materials cost of $8,384 when it purchased 1,600 pounds and $17,480 for
direct labor costs for 760 hours of labor. What is Skyline’s labor quantity variance for the period?
Correct

$240, unfavorable

$760, favorable
Your Answer

$520, favorable

$5,480, unfavorable

Rationale
 $240, unfavorable
The direct labor quantity variance measures the impact of the actual labor used being different from the standard labor allowed to be used on labor
costs for a period. It is calculated by multiplying the difference between the standard labor that “should” be used and the actual labor used by the
standard labor price. Skyline “should” have used 750 hours of labor to produce 500 units (500 units × 1.5 hours per unit). Since Skyline used 10 more
hours and the standard price is $24 per hour, the direct labor quantity variance is $240 ($24 × 10) unfavorable.

Rationale
 $760, favorable
This answer is incorrect. The direct labor price variance is $760 favorable, not the direct labor quantity variance.

Rationale
 $520, favorable
This answer is incorrect. Based on the standard usage of 1.5 hours of labor per unit and the standard price of $24 per hour, Skyline “should” have
paid $18,000 for direct labor to produce 500 units (500 × 1.5 × $24). However, the $520 favorable variance is the flexible budget direct labor variance,
not the direct labor quantity variance.

Rationale
 $5,480, unfavorable
This answer is incorrect. If 500 hours (instead of 750 hours) are assumed to be needed to produce 500 units, it will appear that Skyline “should” have
paid $12,000 for direct labor (500 hours × $24). This gives an unfavorable variance of $5,480. However, this is not the correct number of hours and
this would be the flexible budget direct labor variance, not the direct labor quantity variance.
Question 60
1.C.1.j
tb.dirmat.dlcv.001_1808
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
Garrett and Liam manage two different divisions of the same company. Garrett uses ideal standards to gauge his employees’ performance, while Liam
uses normal standards to gauge his employees’ performance. Whose employees are likely to perform better? Why?
Liam's employees would perform better, because normal standards allow employees the opportunity to set their own performance levels.
Correct

Liam's employees would perform better, because normal standards are better for morale, as they are rigorous but attainable.

Garrett's employees would perform better, because ideal standards stimulate workers to ever-increasing improvement.
Your Answer

Garrett's employees would perform better, because ideal standards are accompanied by pay-for-performance bonuses.

Rationale
 Liam's employees would perform better, because normal standards allow employees the opportunity to set their own performance
levels.
Incorrect. Normal standards do not automatically allow employees to set their own performance levels. In addition, allowing employees the
opportunity to set their own performance levels may reduce performance since employees have the chance to “low-ball” expected performance in
order to increase the likelihood of reaching performance targets.

Rationale
 Liam's employees would perform better, because normal standards are better for morale, as they are rigorous but attainable.
Correct. One use of standards is to establish expected levels of performance. Employees can be motivated to achieve expected levels of
performance identified by standards and organizations can evaluate performance relative to these expectations. Two types of standards are ideal
standards and normal standards. Ideal standards represent performance that can be achieved by operating at peak efficiency throughout the
entire period. No time for breaks, training, production problems, or other slow-downs is expected. Normal standards represent performance that is
“expected” to be achieved under normal (or expected) operating conditions. It builds expected events like holidays, preventative maintenance, and
training time into expected performance. Normal standards are typically considered better for morale as they represent performance levels that are
rigorous but can actually be achieved. Ideal standards tend to reduce morale as employees view them as unattainable even under excellent
circumstances. This means Liam's employees are likely to have better morale and perform better than Garrett's employees.

Rationale
 Garrett's employees would perform better, because ideal standards stimulate workers to ever-increasing improvement.
Incorrect. Garrett's employees are not likely to perform better since ideal standards often reduce morale and motivation. This is because
employees view these goals as unattainable no matter what they do. This leads to lower performance.

Rationale
 Garrett's employees would perform better, because ideal standards are accompanied by pay-for-performance bonuses.
Incorrect. Garrett's employees are not likely to perform better since ideal standards often reduce morale and motivation. This is because
employees view these goals as unattainable no matter what they do. This leads to lower performance. Pay-for-performance is not likely to change
this since performance targets based on ideal standards are often practically impossible to achieve.
Question 61
1.C.1.j
1B2-CQ07
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2
If four input units of direct material are allowed for producing one output unit and an input unit costs $20, then the standard direct material cost would
be:
Correct

$80 per output unit.

$20 per output unit.

$40 per output unit.

Your Answer

$5 per output unit.

Rationale
 $80 per output unit.
Direct cost items such as direct materials and direct labor are measured by determining the number of units of each type of input required to get
one unit of output. This amount (4) is multiplied by the standard cost per input ($20) unit, thus 4 input units × $20 per input unit = $80 standard cost
per unit.

Rationale
 $20 per output unit.
This answer is incorrect. This answer does not consider that four input units of direct material, not one, are allowed for producing one output unit.

Rationale
 $40 per output unit.
This answer is incorrect. This answer does not consider that four input units of direct material, not two, are allowed for producing one output unit.

Rationale
 $5 per output unit.
This answer is incorrect. This answer was calculated by dividing the input unit cost by four input units of direct material, instead of multiplying the
input unit cost by the same amount.
Question 62
1.C.1.j
dirmat.dlcv.tb.010_0120
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 1
A standard that represents the optimum level of performance under perfect operating conditions is called a(n):
normal standard.

controllable standard.
Correct

ideal standard.
Your Answer

materials price standard.

Rationale
 normal standard.
This answer is incorrect. Normal standards represent performance that is “expected” to be achieved under normal (or expected) operating
conditions, which are almost always different from perfect operating conditions.

Rationale
 controllable standard.
This answer is incorrect. Controllable standards are standards over which a manager has control or influence. A manager is not likely to be able to
control all operating conditions to create perfect operating conditions.

Rationale
 ideal standard.
One use of standards is to establish expected levels of performance. One type of standard is an ideal standard. Ideal standards represent
performance that can be achieved by operating at peak efficiency throughout the entire period. No time for breaks, training, production problems,
or other slow-downs is expected. Perfect operating conditions are assumed to occur 100% of the time, which would result in optimum
performance.

Rationale
 materials price standard.
This answer is incorrect. A materials price standard represents the price expected to be paid for materials under normal operating conditions,
which are almost always different from perfect operating conditions.
Question 63
1.C.1.k
tb.dirmat.dlcv.002_1808
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
The labor price variance is the difference between the:
Standard and actual rate multiplied by standard hours.

Standard and actual hours multiplied by actual rate.

Your Answer

Standard and actual hours multiplied by the difference between standard and actual rate.
Correct

Standard and actual rate multiplied by actual hours.

Rationale
 Standard and actual rate multiplied by standard hours.
Incorrect. The labor price (rate) variance measures the impact of the actual wage rate being different from the standard wage rate on labor costs for
a period. To calculate it, one multiplies the difference between the standard wage rate and the actual wage rate by the actual hours worked, not the
standard hours.

Rationale
 Standard and actual hours multiplied by actual rate.
Incorrect. The labor price (rate) variance measures the impact of the actual wage rate being different from the standard wage rate on labor costs for
a period. To calculate it, one multiplies the difference between the standard wage rate and the actual wage rate by the actual hours worked. The
difference between the standard and actual hours multiplied by actual rate is not a variance.

Rationale
 Standard and actual hours multiplied by the difference between standard and actual rate.
Incorrect. The labor price (rate) variance measures the impact of the actual wage rate being different from the standard wage rate on labor costs for
a period. To calculate it, one multiplies the difference between the standard wage rate and the actual wage rate by the actual hours worked. The
difference between the standard and actual hours multiplied by the difference between standard and actual rate is not a variance.

Rationale
 Standard and actual rate multiplied by actual hours.
Correct. The labor price (rate) variance measures the impact of the actual wage rate being different from the standard wage rate on labor costs for a
period. To calculate it, one multiplies the difference between the standard wage rate and the actual wage rate by the actual hours worked.
Question 64
1.C.1.o
dirmat.dlcv.tb.038_0820
LOS: 1.C.1.o
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

The LKO Company uses two different types of labor to produce its product. In 20X8, LKO expected to produce 10,000 units but it actually produced 10,800
units. Information about labor usage is as follows:

Labor Type Standard Wage Rate Standard Usage Actual Wage Rate Actual Hours
A $12.00 5 hours / unit $14.00 51,000 hours
B $20.00 3 hours / unit $19.00 34,000 hours

Based on this information, what is LKO’s labor mix variance for 20X8?

$4,000 favorable

$21,000 favorable
Correct

$17,000 unfavorable

$102,000 unfavorable

Rationale
 $4,000 favorable
This answer is incorrect. The total labor quantity variance is $4,000 favorable.

Rationale
 $21,000 favorable
This answer is incorrect. The labor yield variance is $21,000 favorable.

Rationale
 $17,000 unfavorable

If two or more types of material or labor are used, the total quantity (or efficiency) variance can be broken down into mix and yield variances. The
mix variance arises when the individual components are used in a different mix than is called for by the standards. The first step is to calculate the
cost of the “standard” mix of the components based on the standard costs of the components. The second step is to calculate the cost of the
“actual” mix of the components based on the standard costs of the components. The actual costs are not used because the quantity variance is
based on standard costs, not actual costs. The third step is to multiply the difference in the costs by the total amount of the inputs used. In this
example, the cost of the standard mix is $15.00 per hour {(54,000 hours × $12.00 + 32,400 hours × $20.00) ÷ 86,400 hours} and the cost of the actual
mix is $15.20 per hour {(51,000 hours × $12.00 + 34,000 hours × $20.00) ÷ 85,000 hours}. Based on these figures, LKO’s labor mix variance is $17,000
unfavorable as the actual mix is more costly than the standard mix {($15.20 − $15.00) × 85,000 hours}.

Below is the framework approach.

This mix variance is unfavorable (U) because LKO’s actual mix of expensive type B labor hours (40%) is higher than its standard mix percentage
(37.5%) relative to the mix percentage of cheaper type A labor hours. This shift in relative labor inputs has an unfavorable effect on operating profit.

Below is the formula approach.

Note that the type A labor’s actual mix percentage is lower than the standard mix percentage (60% versus 62.5%, respectively), which indicates a
favorable (F) mix variance. The type B labor’s actual mix percentage is higher than the standard mix percentage (40% versus 37.5%, respectively),
which indicates an unfavorable (U) efficiency variance.

Direct labor mix variance = Total actual quantity × (Standard mix % − Actual mix %) × Standard Rate

Type A labor: 85,000 × (62.5% − 60%) × $12.00 = $25,500F

Type B labor: 85,000 × (37.5% − 40%) × $20.00 = $42,500U

Total direct labor mix variance: $25,500F + $42,500U = $17,000U

Note variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Hence, even though the computation
solutions are that Type A labor is a positive value and Type B labor is a negative value, the respective variances are actually favorable and
unfavorable, as we determined before computing the size of the variances.

Rationale
 $102,000 unfavorable
This answer is incorrect. The price (rate) variance for Labor Class A is $102,000 unfavorable.
Question 65
1.C.1.k
tb.dirmat.dlcv.005_1808
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 4

James received a report from the production and purchasing departments with the following values for January:

Actual materials quantity: 90,000 pounds

Total actual cost: $47,200
Standard materials quantity: 5.5 pounds/unit
Standard price: $0.55/pound
Units made: 16,300

Two days later, he got a correction report from the purchasing department that they found another invoice for $6,200. How much would James’s
materials price variance change for the month of January?

$6,200 favorable.
Correct

$6,200 unfavorable.

$3,900 unfavorable.

$3,900 favorable.

Rationale
 $6,200 favorable.
Incorrect. Adding in new costs (the $6,200 from the purchasing department) the revised materials price variance would not be favorable, but
unfavorable.

Rationale
 $6,200 unfavorable.
Correct. The materials price variance measures the impact of the actual materials price being different from the standard materials price on
material costs for a period. To calculate it, one multiplies the difference between the standard material price and the actual material price by the
actual quantity of materials. The original actual materials price is $0.52444 per pound ($47,200 ÷ 90,000 pounds). Using this figure, the original
materials price variance is $2,300 favorable (($0.55 – $0.52444) × 90,000 pounds). The revised actual materials price is $0.59333 per pound ($53,400
÷ 90,000). Using this figure, the revised materials price variance is $3,900 unfavorable (($0.55 – $0.59333) × 90,000 pounds). This is a change of
$6,200, ($2,300 + $3,900) and it is unfavorable since the actual material price increased.

Rationale
 $3,900 unfavorable.
Incorrect. The revised actual materials price is $0.59333 per pound ($53,400 ÷ 90,000). Using this figure, the revised materials price variance is
$3,900 unfavorable (($0.55 – $0.59333) × 90,000 pounds) since the actual price is higher than the standard price. However, the question asks for the
change in the variance, not the revised variance.

Rationale
 $3,900 favorable.
Incorrect. The revised actual materials price is $0.59333 per pound ($53,400 ÷ 90,000). Using this figure, the revised materials price variance is
$3,900 (($0.55 – $0.59333) × 90,000 pounds), but it is unfavorable, not favorable, since the actual price is higher than the standard price. In addition,
the question asks for the change in the variance, not the revised variance.
Question 66
1.C.1.k
tb.dirmat.dlcv.003_1808
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
Joe is trying to calculate the materials price variance for the month of November. He has received a report from the production and purchasing
departments with the actual quantity and actual price of materials used. What other value does he need to finish his calculation?
Standard quantity of materials.

Standard price of labor.

Standard quantity of labor.

Correct

Standard price of materials.

Rationale
 Standard quantity of materials.
Incorrect. To calculate the materials price variance, one multiplies the difference between the standard material price and the actual material price
by the actual quantity of materials. Since Joe already has the actual quantity and actual price of materials, he only needs to know the standard
price of materials. He does not need to know the standard quantity of materials.

Rationale
 Standard price of labor.
Incorrect. To calculate the materials price variance, one multiplies the difference between the standard material price and the actual material price
by the actual quantity of materials. Since Joe already has the actual quantity and actual price of materials, he only needs to know the standard
price of materials. He does not need to know the standard price of labor.

Rationale
 Standard quantity of labor.
Incorrect. To calculate the materials price variance, one multiplies the difference between the standard material price and the actual material price
by the actual quantity of materials. Since Joe already has the actual quantity and actual price of materials, he only needs to know the standard
price of materials. He does not need to know the standard quantity of labor.

Rationale
 Standard price of materials.
Correct. The materials price variance measures the impact of the actual materials price being different from the standard materials price on
material costs for a period. To calculate it, one multiplies the difference between the standard material price and the actual material price by the
actual quantity of materials. Since Joe already has the actual quantity and actual price of materials, he only needs to know the standard price of
materials.
Question 67
1.C.1.l
aq.dirmat.dlcv.004_1807
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2
What type of direct material variances for price and usage will arise if the actual number of pounds of materials used exceeds standard pounds allowed,
but at the same time actual price was less than standard price?
Usage: Favorable, Price: Unfavorable

Usage: Favorable, Price: Favorable

Correct

Usage: Unfavorable, Price: Favorable

Usage: Unfavorable, Price: Unfavorable

Rationale
 Usage: Favorable, Price: Unfavorable
This answer is incorrect. If the actual number of pounds of materials used exceeds standard pounds allowed, this will not result in a favorable usage
variance. Additionally, if actual price of materials is less than standard price, this will not result in an unfavorable price variance.

Rationale
 Usage: Favorable, Price: Favorable
This answer is incorrect. If the actual number of pounds of materials used exceeds standard pounds allowed, this will not result in a favorable usage
variance.

Rationale
 Usage: Unfavorable, Price: Favorable
If the actual number of pounds of materials used exceeds standard pounds allowed, this will result in an unfavorable usage variance. Additionally, if
actual price of material is less than standard price, this will result in a favorable price variance.

Rationale
 Usage: Unfavorable, Price: Unfavorable
This answer is incorrect. If actual price of materials is less than standard price, this will not result in an unfavorable price variance.
Question 68
1.C.1.l
dirmat.dlcv.tb.027_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
The standard cost sheet for Eiger Mountain Manufacturing’s (EMM) most popular product shows 3 pounds of material at $6.00 per pound and 1.5 hours at
$28.80 per hour. During the most recent period, EMM produced 500 units and incurred direct materials cost of $10,060 when it purchased 1,600 pounds
and $20,976 for direct labor costs for 760 hours of labor. What is EMM’s materials quantity variance for the period?
$1,060, unfavorable

$460, unfavorable
Your Answer

$10,916, unfavorable
Correct

$600, unfavorable

Rationale
 $1,060, unfavorable
This answer is incorrect. Based on the standard usage of 3 pounds per unit and the standard price of $6.00 per pound, EMM “should” have paid
$9,000 for direct materials to produce 500 units (500 × 3 × $6.00). However, the $1,060 unfavorable variance is the flexible budget direct materials
variance, not the direct materials price variance.

Rationale
 $460, unfavorable
This answer is incorrect. The direct materials price variance is $460 unfavorable, not the direct materials quantity variance.

Rationale
 $10,916, unfavorable
This answer is incorrect. $10,916 is the difference between actual spending for direct labor and actual spending for direct labor. This is not the same
as the direct materials quantity variance.

Rationale
 $600, unfavorable
The direct materials quantity variance measures the impact of the actual materials used being different from the standard materials allowed to be
used on material costs for a period. It is calculated by multiplying the difference between the standard materials that “should” be used and the
actual materials used by the standard price of the materials. EMM “should” have used 1,500 pounds of material to produce 500 units (500 units × 3
pounds per unit). Since EMM used 100 extra pounds and the standard price is $6.00 per pound, the direct materials quantity variance is $600 ($6.00
× 100) unfavorable.
Question 69
1.C.1.k
1C1-CQ18
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3

Christopher Akers is the chief executive officer of SBL Inc., a masonry contractor. The financial statements have just arrived showing a $3,000 loss on the
new stadium job that was budgeted to show a $6,000 profit. Actual and budget information relating to the materials for the job are as follows:

Actual Budget
Bricks - number of bundles 3,000 2,850
Bricks - cost per bundle $7.90 $8.00

Which one of the following is a correct statement regarding the stadium job for SBL?

The flexible budget variance was unfavorable by $900.

The material price variance was unfavorable by $300.

Correct

The material price variance was favorable by $300.

The material efficiency variance was favorable by $1,200.

Rationale
 The flexible budget variance was unfavorable by $900.
This answer is incorrect. This answer did not specify the materials price variance. The flexible budget variance includes all variable cost variances
(materials, direct labor, and variable overhead) as well as the fixed overhead budget variance.

Rationale
 The material price variance was unfavorable by $300.
This answer is incorrect. While the number of the material price variance is correct, it is not unfavorable.

Rationale
 The material price variance was favorable by $300.

The material price variance is calculated as follows:

Material price variance = (actual quantity purchased)(actual price - standard price)Material price variance = (3,000)($7.90 − $8.00) = $(300)
favorable.

The other available answer choices are incorrect. Note that the flexible budget variance includes all variable cost variances (material, direct labor,
and variable overhead) as well as the fixed overhead budget variance.

Rationale
 The material efficiency variance was favorable by $1,200.
This answer is incorrect. While the number of the material efficiency variance is correct, it is not favorable.
Question 70
1.C.1.p
aq.dirmat.dlcv.010_0820
LOS: 1.C.1.p
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 6

Chair Company (CC) has provided the following standard cost sheet.

Chair Company
Standard Cost Sheet - Plastic Chair Input Quantity Cost per Input Cost per Chair
Direct materials (plastic) - pounds 4.0 pounds $12 per pound $48.00
Direct labor (molders) - direct labor hours 0.5 DLH $20.00 per DLH $10.00
Direct labor (finishers) - direct labor hours 1.0 DLH $25.00 per DLH $25.00
Variable manufacturing overhead - total DLH 1.5 DLH $5.00 per DLH $7.50
Fixed manufacturing overhead - total DLH 1.5 DLH $7.50 per DLH $11.25
Total Cost to Manufacture $101.75
Variable selling overhead - chairs 1 chair $5.00 per chair $5.00
Total Cost to Deliver $106.75

Note that the input quantity multiplied by the cost per input equals cost per chair. Also note in this case that manufacturing overhead (MOH) costs are
being allocated on the basis of total direct labor hours (DLH).

CC also disclosed the following actual information:

5,000 pounds of plastic was purchased for $63,750 of which 4,600 was used in production.
Molders were paid a total of $10,500 to work 575 hours and finishers were paid a total of $29,000 to work 1,050 hours.
1,100 plastic chairs were produced and sold during the year.

CC also provided the standard and actual direct labor mix percentages.

Flexible Budget Molders Finishers Total

Actual sales volume 1,100 chairs 1,100 chairs 1,100 chairs
Standard hours per chair × 0.5 hours × 1.0 hours × 1.5 hours
Standard hours allowed 550 hours 1,100 hours 1,650 hours
Standard mix percentage 33.33% 66.67% 100.00%

Actual Molders Finishers Total

Actual quantity of hours 575 hours 1,050 hours 1,625 hours
Actual mix percentage 35.38% 64.62%

What is the direct labor yield variance based on the above information?

(Note: Keep the mix percentages precise in your computations. For example, use 0.666667 in your computations, not 0.67.)

$584 Unfavorable
Correct

$584 Favorable
Your Answer

$166 Unfavorable

$166 Favorable

Rationale
 $584 Unfavorable
This answer is incorrect. This answer correctly calculated the direct labor yield variance; however, this variance is not unfavorable.

Rationale
 $584 Favorable

The direct labor yield variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Based on the standard amount of 0.5 molders’ hours per plastic chair and actual production and sales of 1,100 chairs, CC should have used 550
molders’ hours for its actual production (0.5 hours × 1,100 chairs). Similarly, based on the standard amount of 1.0 finishers’ hours per plastic chair
and actual production and sales of 1,100 chairs, CC should have used 1,100 finishers’ hours for its actual production (1.0 hours × 1,100 chairs).

The direct labor yield variance is favorable (F) because CC's total actual direct labor hours (1,625 hours) is fewer than total standard hours allowed
(1,650 hours). This computation isolates the effect of the direct labor yield variance by holding constant each of the standard labor mix percentages
in both boxes above.

Below is the formula approach.

As mentioned above, the direct labor yield variance is favorable (F) because CC's total actual direct labor hours (1,625 hours) is fewer than total
standard hours allowed (1,650 hours).

Direct labor yield variance = (Total standard qty allowed − Total actual qty) × Standard mix % × Standard rate

Molders: (1,650 hours − 1,625 hours) × 33.33% × $20.00 = $167 F

Finishers: (1,650 hours − 1,625 hours) × 66.67% × $25.00 = $417 F

Total direct labor yield variance: $167 F + $417 F = $584 F

Rationale
 $166 Unfavorable
This answer is incorrect. This answer represents the direct labor mix variance, not the direct labor yield variance. Additionally, the direct labor mix
variance would not be unfavorable.

Rationale
 $166 Favorable
This answer is incorrect. This answer represents the direct labor mix variance, not the direct labor yield variance.
Question 71
1.C.1.l
tb.dirmat.dlcv.009_1808
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
Bulk PVC manufactures PVC pipes for plumbing. The company's standard unit uses 1.3 pounds of PVC, and 1 pound of PVC is expected to cost Bulk $1.89
to purchase. In June, Bulk PVC made 50,000 units and used 65,400 pounds of PVC. This cost the company $123,500. What was the difference in price of
the PVC compared to what the company should have spent for the number of pounds of PVC it used?
The company spent $106 more than it should have.
Correct

The company spent $106 less than it should have.

Your Answer

The company spent $650 more than it should have.

The company spent $650 less than it should have.

Rationale
 The company spent $106 more than it should have.
Incorrect. Bulk used 65,400 pounds of PVC to make 50,000 units. Based on the standard price of $1.89 per pound, it should have spent $123,606
(65,400 × $1.89). It did spend $123,500 for 65,400 pounds of PVC. This means Bulk spent $106 less, not more, for the 65,400 pounds than it should
have.

Rationale
 The company spent $106 less than it should have.
Correct. Bulk used 65,400 pounds of PVC to make 50,000 units. Based on the standard price of $1.89 per pound, it should have spent $123,606
(65,400 × $1.89). It did spend $123,500 for 65,400 pounds of PVC. This means Bulk spent $106 less for the 65,400 pounds than it should have.

Rationale
 The company spent $650 more than it should have.
Incorrect. Bulk used 65,400 pounds of PVC to make 50,000 units. Based on the standard of 1.3 pounds of PVC per unit, Bulk should have used 65,000
pounds to produce these units. Based on the standard price of $1.89 per pound, it should have spent $122,850 on PVC. It did spend $123,500 for
65,400 pounds of PVC. This means Bulk spent $650 more than it should have for the PVC it should have used to produce 50,000 units. However, the
question asks about the difference between what Bulk spent for 65,400 pounds and what it should have spent for 65,400 pounds.

Rationale
 The company spent $650 less than it should have.
Incorrect. Bulk used 65,400 pounds of PVC to make 50,000 units. Based on the standard of 1.3 pounds of PVC per unit, Bulk should have used 65,000
pounds to produce these units. Based on the standard price of $1.89 per pound, it should have spent $122,850 on PVC. It did spend $123,500 for
65,400 pounds of PVC. This means Bulk spent $650 more, not less, than it should have for the PVC it should have used to produce 50,000 units. In
addition, the question asks about the difference between what Bulk spent for 65,400 pounds and what it should have spent for 65,400 pounds.
Question 72
1.C.1.j
1B5-LS03
LOS: 1.C.1.j
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 4
What is the standard cost for a unit if the process should consume 8 pounds of direct material at $1.50/pound (actual cost was 7.50 pounds at $2/pound),
should use 0.5 direct labor hours at $10/hour (actual cost was 0.6 hours at $10/hour), and uses a factory overhead rate of $20/direct labor hour in factory
overhead (actual cost was $9.50/unit)?
$17/unit

$12/unit
Your Answer

$22/unit
Correct

$27/unit

Rationale
 $17/unit
This answer is incorrect. This answer did not consider the factory overhead allocated by direct labor hour in the calculation of standard cost for a
unit.

Rationale
 $12/unit
This answer is incorrect. This answer did not consider the direct labor cost or the factory overhead allocated by direct labor hour in the calculation
of standard cost for a unit.

Rationale
 $22/unit
This answer is incorrect. This answer did not consider the direct labor cost in the calculation of standard cost for a unit.

Rationale
 $27/unit
The standard cost is determined using the "should cost" amounts: (8 pounds × $1.50) + (0.5 × $10) + (0.5 × $20) = $27/unit.
Question 73
1.C.1.l
1C1-LS04
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: hard
Bloom Code: 5
The direct material (DM) price variance is $2,650 favorable and the DM usage variance is $3,000 unfavorable. The budgeted amount of DM for each unit of
product is 2 lbs. to be purchased at the standard price of $10 per pound. 2,000 units were budgeted to be manufactured but the actual output was 2,500
units. (Assume material purchased equaled material used.) What was the actual price paid to purchase DM?
$10.00 per pound
Correct

$9.50 per pound

Your Answer

$10.50 per pound

$8.00 per pound

Rationale
 $10.00 per pound
This answer is incorrect. This answer represents the standard price for DM, not the price paid to purchase DM.

Rationale
 $9.50 per pound

The standard amount of material to be used to produce 2,500 units is 5,000 lbs. (2,500 units × 2 lbs./unit).

The actual amount of material used is found by solving for the unknown variable in the DM usage variance formula:

DM usage variance = (actual quantity − standard quantity) × budgeted price

$3,000 = (Y − 5,000 lbs.) × $10/lb.

300 lbs. = Y − 5,000 lbs.

5,300 lbs. = Y

The actual price paid to purchase the direct material is found by solving for the unknown variable in the DM price variance formula:

DM price variance = (actual price − budgeted price) × actual quantity

−$2,650 = ($Y/lb. − $10/lb.) × 5,300 lbs.

−$2,650/5,300 lbs. = ($Y/lb. − $10/lb.)

−$0.50/lb. = ($Y/lb. − $10/lb.)

$9.50/lb = Y.

Rationale
 $10.50 per pound
This answer is incorrect. In the calculation of the price paid to purchase DM, $0.50 was added to $10 instead of being subtracted from $10.

Rationale
 $8.00 per pound
This answer is incorrect. In the calculation of the price paid to purchase DM, 5,300 was divided by $2,650 instead of the other way around.
Question 74
1.C.1.l
dirmat.dlcv.tb.029_0120
LOS: 1.C.1.l
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: medium
Bloom Code: 3
Fox Run Co. produces a product which requires 6 hours of direct labor at $25.60 per hour. During October, Fox Run’s actual payroll was $314,496 and the
company used 12,600 direct labor hours to produce 2,000 units of the product. What is Fox Run’s direct labor quantity variance?
$8,064, unfavorable
Correct

$15,360, unfavorable
Your Answer

$7,296, unfavorable

$8,064, favorable

Rationale
 $8,064, unfavorable
This answer is incorrect. The direct labor price variance is $8,064. However, it is not unfavorable. In addition, the question asks for the direct labor
quantity variance.

Rationale
 $15,360, unfavorable
The direct labor quantity variance measures the impact of the actual labor used being different from the standard labor allowed to be used on labor
costs for a period. It is calculated by multiplying the difference between the standard labor that “should” be used and the actual labor used by the
standard labor price. Fox “should” have used 12,000 hours of labor to produce 2,000 units (2,000 units × 6 hours per unit). Since Fox used 600 extra
hours and the standard price is $25.60 per hour, the direct labor quantity variance is $15,360 ($25.60 × 600) unfavorable.

Rationale
 $7,296, unfavorable
This answer is incorrect. Based on the standard usage of 6 hours of labor per unit and the standard price of $25.60 per hour, Fox “should” have paid
$307,200 for direct labor to produce 2,000 units (2,000 × 6 × $25.60). However, the $7,296 unfavorable variance is the flexible budget direct labor
variance, not the direct labor quantity variance.

Rationale
 $8,064, favorable
This answer is incorrect. The direct labor price variance is $8,064 favorable, not the direct labor quantity variance.
Question 75
1.C.1.k
aq.dirmat.dlcv.003_1807
LOS: 1.C.1.k
Lesson Reference: Direct Material and Direct Labor Cost Variances
Difficulty: easy
Bloom Code: 2
Which of the following is the most probable reason a company would experience an unfavorable labor rate variance and a favorable labor efficiency
variance?
The mix of workers assigned to the particular job was heavily weighted toward the use of new, relatively low-paid unskilled workers.
Correct

The mix of workers assigned to the particular job was heavily weighted toward the use of higher-paid, more experienced individuals.

Because of the production schedule, workers from other production areas were assigned to assist this particular process.
Your Answer

Defective materials caused more labor to be used in order to produce a standard unit.

Rationale
 The mix of workers assigned to the particular job was heavily weighted toward the use of new, relatively low-paid unskilled workers.
This answer is incorrect. Using new, relatively low-paid unskilled workers would result in a favorable labor rate variance and an unfavorable labor
efficiency variance.

Rationale
 The mix of workers assigned to the particular job was heavily weighted toward the use of higher-paid, more experienced individuals.
An unfavorable labor rate variance suggests that the labor cost was higher than anticipated, and a favorable labor efficiency variance implies that
more productive work occurred than had been expected. It would then make sense that the mix of workers assigned to the particular job was
heavily weighted toward the use of higher-paid, more experienced individuals.

Rationale
 Because of the production schedule, workers from other production areas were assigned to assist this particular process.
This answer is incorrect. Workers assigned from another production area will likely have lower production skills in this area, resulting in an
unfavorable labor efficiency variance.

Rationale
 Defective materials caused more labor to be used in order to produce a standard unit.
This answer is incorrect. Defective materials would result in an unfavorable labor efficiency variance.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.1.m
1C1-LS38
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3

Highlight Inc. uses a standard cost system and applies factory overhead to products on the basis of direct labor hours. If the firm recently reported a
favorable direct labor efficiency variance, then the:

* Source: Retired ICMA CMA Exam Questions.

Correct

variable overhead efficiency variance must be favorable.

Your Answer

fixed overhead volume variance must be unfavorable.

direct labor rate variance must be unfavorable.

variable overhead spending variance must be favorable.

Rationale
 variable overhead efficiency variance must be favorable.
In the use of a standard cost system, and applying factory overhead on the basis of direct labor hours, if a firm reports a favorable direct labor
efficiency variance, then the variable overhead efficiency variance must also always be favorable.

Rationale
 fixed overhead volume variance must be unfavorable.
This answer is incorrect. If Highlight Inc. recently reported a favorable direct labor efficiency variance, this does not mean the fixed overhead
volume variance must be unfavorable.

Rationale
 direct labor rate variance must be unfavorable.
This answer is incorrect. If Highlight Inc. recently reported a favorable direct labor efficiency variance, this does not mean the direct labor rate
variance must be unfavorable.

Rationale
 variable overhead spending variance must be favorable.
This answer is incorrect. If Highlight Inc. recently reported a favorable direct labor efficiency variance, this does not mean the variable overhead
spending variance must be favorable.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.1.r
aq.facov.cv.010_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4

Designer Desks (DD) provided the following information:

Budgeted Variable Manufacturing Overhead (VOH) $54,000

Budgeted Fixed Manufacturing Overhead (FOH) $162,000
Budgeted Production 18,000 units
Budgeted Direct Labor Hours (DLH) 27,000 hours
Budgeted DLH per Unit 1.5 DLH
Standard: VOH 1.5 DLH @ $2 per Hour $3 per unit
Standard: FOH 1.5 DLH @ $6 per Hour $9 per unit
Actual VOH $68,250
Actual FOH $148,000
Actual Production 20,000 units
Actual DLH 32,500

Based on the above information, what is DD's fixed overhead volume variance?

$14,000 Unfavorable

$14,000 Favorable
Your Answer

$18,000 Unfavorable
Correct

$18,000 Favorable

Rationale
 $14,000 Unfavorable
This answer is incorrect. This answer represents the fixed overhead spending variance, not the fixed overhead volume variance. Additionally, the
fixed overhead spending variance would not be unfavorable.

Rationale
 $14,000 Favorable
This answer is incorrect. This answer represents the fixed overhead spending variance, not the fixed overhead volume variance.

Rationale
 $18,000 Unfavorable
This answer is incorrect. This answer correctly calculates the fixed overhead volume variance; however, this variance is not unfavorable.

Rationale
 $18,000 Favorable

The fixed overhead volume variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Master budget costs (Budgeted FOH) were provided. Applied costs are calculated by multiplying the DLHs allowed by the FOH rate. DLHs allowed is
calculated by multiplying actual production of 20,000 by standard hours per unit (budgeted DLH per unit) of 1.5 DLH to get 30,000 DLHs allowed.
The 30,000 DLHs allowed is then multiplied by the FOH rate of $6.00 per DLH. Since master budget costs of $162,000 are less than applied costs of
$180,000, the fixed overhead volume variance is favorable (F). More importantly, this variance is favorable because actual production volume
(20,000) is higher than the original budgeted production volume (18,000).

Below is the formula approach.

Fixed overhead volume variance = Applied costs − Master budget costs

Fixed overhead volume variance : (30,000DLHs × $6 per DLH) − $162,000 = $18,000 F

-or-

Fixed overhead volume variance = (Actual production − Budgeted production) × FOH rate

Fixed overhead volume variance : (20,000units − 18,000 units) × $9 per unit = $18,000 F

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, actual production
is higher than budgeted production, the fixed overhead volume variance is favorable (F).
Question 3
1.C.1.m
aq.facov.cv.005_0820
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4

The following information is available for Tyro Company:

Actual factory overhead $15,000

Fixed overhead expenses, actual $ 7,200
Fixed overhead expenses, budgeted $ 7,000
Actual hours 3,500
Standard activity allowed 3,650
Standard hours 3,800
Variable overhead rate per direct labor hour $ 2.50

What is the variable overhead spending variance?

$950 Unfavorable
Correct

$950 Favorable

$375 Unfavorable

$375 Favorable

Rationale
 $950 Unfavorable
This answer is incorrect. This answer correctly calculates the variable overhead spending variance; however, this variance is not unfavorable.

Rationale
 $950 Favorable

The variable overhead spending variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

For calculating the variable overhead spending variance, only the total actual variable overhead costs are used. Total actual variable overhead
costs can be calculated by subtracting $7,200 (actual fixed overhead expenses) from $15,000 (actual factory overhead), which equals $7,800. Based
on a VOH rate of $2.50 per hour, we can predict that Tyro should actually spend $8,750 for variable overhead based on actual DLH. Since the total
actual costs of $7,800 are less than predicted spending of $8,750, the variable overhead spending variance is favorable (F).

Below is the formula approach.

Variable overhead spending variance = (Actual activity used × Standard rate) − Actual costs

Variable overhead spending variance : (3,500 hours × $2.50) − $7,800 = $950 F

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the total
actual costs are less than predicted spending, the variable overhead spending variance is favorable (F).

Rationale
 $375 Unfavorable
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance.
Additionally, the variable overhead efficiency variance would not be unfavorable.

Rationale
 $375 Favorable
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance.
Question 4
1.C.1.m
1C1-CQ22
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4

Harper Company's performance report indicated the following information for the past month:

Actual total overhead $1,600,000

Budgeted fixed overhead 1,500,000
Applied fixed overhead at $3 per labor hour 1,200,000
Applied variable overhead at $.50 per labor hour 200,000
Actual labor hours 430,000

Harper's total overhead spending variance (OSV) for the month was:

$115,000 unfavorable.
Correct

$115,000 favorable.
Your Answer

$100,000 favorable.

$100,000 unfavorable.

Rationale
 $115,000 unfavorable.
This answer is incorrect. This answer correctly calculated Harper's total overhead spending variance (OSV) for the month, but it is not unfavorable.

Rationale
 $115,000 favorable.

The overhead spending variance is calculated as follows:

OSV = (actual overhead) − (budgeted overhead at actual direct labor hours used)

OSV = ($1,600,000) − (budgeted overhead at actual direct labor hours used)

Budgeted overhead at the actual direct labor hours used = (fixed overhead) + (actual direct labor hours)(rate of labor hours used to apply variable
overhead)

Budgeted overhead at the actual direct labor hours used = ($1,500,000) + (430,000 hours)($0.50 per direct labor hour)

Budgeted overhead at the actual direct labor hours used = $1,500,000 + $215,000 = $1,715,000

OSV = $1,600,000 − $1,715,000 = $(115,000) favorable.

Rationale
 $100,000 favorable.
This answer is incorrect. This answer represents the overhead static budget variance, not the overhead spending variance. Additionally, the
overhead static budget variance would not be favorable.

Rationale
 $100,000 unfavorable.
This answer is incorrect. This answer represents the overhead static budget variance, not the overhead spending variance.
Question 5
1.C.1.r
1C1-LS69
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3
If 200,000 machine-hours are budgeted for variable overhead at a standard rate of $5 per machine-hour, but 220,000 machine-hours were actually used
at an actual rate of $6 per machine-hour, what is the variable overhead spending variance?
$100,000 favorable
Your Answer

$220,000 favorable
Correct

$220,000 unfavorable

$100,000 unfavorable

Rationale
 $100,000 favorable
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance. However,
the variable overhead efficiency variance would not be favorable.

Rationale
 $220,000 favorable
This answer is incorrect. This answer correctly calculated the variable overhead spending variance. However, the variable overhead spending
variance is not favorable.

Rationale
 $220,000 unfavorable
The variable overhead spending variance is the difference between the actual rate and the standard rate times the actual quantity. ($6/machine-
hour − $5/machine-hour) × 220,000 machine-hours = $220,000 unfavorable.

Rationale
 $100,000 unfavorable
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance.
Question 6
1.C.1.r
1C1-LS76
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3
The static budget fixed costs are $60,000 for static budget output of 24,000 units. Actual fixed costs are $50,000 for 25,000 actual units. What is the flexible
budget fixed costs?
$50,000
Correct

$60,000
Your Answer

$62,500

$48,000

Rationale
 $50,000
This answer is incorrect. This answer represents actual fixed costs, not flexible budget fixed costs.

Rationale
 $60,000
Fixed costs do not change as the volume of activity changes.

Rationale
 $62,500
This answer is incorrect. This answer was calculated by multiplying the standard fixed cost per unit by actual units. However, this is not the flexible
budget fixed costs.

Rationale
 $48,000
This answer is incorrect. This answer was calculated by multiplying the actual fixed cost per unit by expected units. However, this is not the flexible
budget fixed costs.
Question 7
1.C.1.m
1C1-LS97
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2

When using a flexible budgeting system, the computation for the variable overhead spending variance is the difference between:

* Source: Retired ICMA CMA Exam Questions.

the amount applied to work-in-process and actual variable overhead.

Correct

actual variable overhead and actual inputs times the budgeted rate.
Your Answer

actual variable overhead and the previously budgeted amount.

the previously budgeted amount and actual inputs times the budgeted rate.

Rationale
 the amount applied to work-in-process and actual variable overhead.
This answer is incorrect. When using a flexible budgeting system, the computation for the variable overhead spending variance is not the difference
between the amount applied to work-in-process and actual variable overhead.

Rationale
 actual variable overhead and actual inputs times the budgeted rate.
The computation for the variable overhead spending variance is the difference between actual variable overhead and actual inputs times the
budgeted rate.

Rationale
 actual variable overhead and the previously budgeted amount.
This answer is incorrect. When using a flexible budgeting system, the computation for the variable overhead spending variance is not actual
variable overhead and the previously budgeted amount.

Rationale
 the previously budgeted amount and actual inputs times the budgeted rate.
This answer is incorrect. When using a flexible budgeting system, the computation for the variable overhead spending variance is not the previously
budgeted amount and actual inputs times the budgeted rate.
Question 8
1.C.1.r
1C1-LS71
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3
A company has a fixed overhead spending variance of $5,000 favorable and a fixed overhead production-volume variance of $80,000 unfavorable. Which
of the following is the most likely cause of these variances?
There were variances in worker skill level, scheduling, supervision, or setup efficiency.
Correct

The company made fewer units in the period than expected.

Your Answer

The budget procedure missed or failed to predict changes in fixed costs.

Inadequate control was exercised over departmental spending due to accidents or unexpected repairs.

Rationale
 There were variances in worker skill level, scheduling, supervision, or setup efficiency.
This answer is incorrect. Variances in worker skill level, scheduling, supervision, or setup efficiency were not the likely cause of a favorable fixed
overhead spending variance and an unfavorable fixed overhead production volume variance.

Rationale
 The company made fewer units in the period than expected.
The spending variance is very small and positive, while the production-volume variance is relatively larger and unfavorable. Therefore, the problem
lies with the production-volume variance, which is often caused when the demand for a product changes from what was expected.

Rationale
 The budget procedure missed or failed to predict changes in fixed costs.
This answer is incorrect. The budget procedure missed or failed to predict changes in fixed costs is not the likely cause of a favorable fixed overhead
spending variance and an unfavorable fixed overhead production volume variance.

Rationale
 Inadequate control was exercised over departmental spending due to accidents or unexpected repairs.
This answer is incorrect. Inadequate control exercised over departmental spending due to accidents or unexpected repairs was not the likely cause
of a favorable fixed overhead spending variance and an unfavorable fixed overhead production volume variance.
Question 9
1.C.1.m
cma11.p1.t1.me.0063_0820
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
R&N Manufacturing produces music boxes. This year's budget was based on the production of 3,000 music boxes using a standard of 3 direct labor hours
per music box and $4 variable overhead per direct labor hour. R&N incurred 9,200 hours to produce 2,950 music boxes. If actual variable overhead for the
year is $32,000, what is R&N's variable overhead spending variance?
$4,000 favorable

$4,000 unfavorable
Correct

$4,800 favorable

$4,800 unfavorable

Rationale
 $4,000 favorable
This answer is incorrect. The budgeted variable overhead cost is not used in the calculation of the variable overhead spending variance.

Rationale
 $4,000 unfavorable
This answer is incorrect. The variable overhead spending variance is not unfavorable since the actual variable overhead per direct labor hour is
lower than the budgeted variable overhead per direct labor hour. In addition, the budgeted variable overhead cost is not used to calculate the
variable overhead spending variance.

Rationale
 $4,800 favorable
The variable overhead spending variance is calculated as the difference between actual variable overhead costs ($32,000) and the product of actual
activity driver level (i.e., labor hours) and the standard variable overhead rate (9,200 × $4 = $36,800). The difference is $36,800 – $32,000 = $4,800.
The variance is favorable because actual costs were less than standard costs at the actual activity level.

Rationale
 $4,800 unfavorable
This answer is incorrect. The variable overhead spending variance is not unfavorable since the actual variable overhead per direct labor hour is
lower than the budgeted variable overhead per direct labor hour.
Question 10
1.C.1.r
1C1-LS17
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4
If budgeted fixed overhead costs are $400,000 for 50,000 budgeted direct labor hours (DLH), and the actual direct labor usage was 48,000 DLH, what was
the actual fixed overhead cost if the underapplied overhead was $8,000?
$384,000

$408,000
Correct

$392,000
Your Answer

$376,000

Rationale
 $384,000
This answer is incorrect. This answer did not consider that underapplied overhead was $8,000.

Rationale
 $408,000
This answer is incorrect. This answer added underapplied overhead of $8,000 to budgeted fixed overhead costs, instead of actual overhead applied.

Rationale
 $392,000

Applied overhead was ($400,000 ÷ 50,000) × 48,000 = $384,000

$384,000 + $8,000 underapplied = $392,000

Rationale
 $376,000
This answer is incorrect. This answer subtracted underapplied overhead of $8,000, instead of adding it.
Question 11
1.C.1.r
facov.cv.tb.014_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The ABC Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
ABC expected to produce 10,000 units during the year and to use two direct labor hours to produce each unit. It budgeted $400,000 for variable
manufacturing overhead and $600,000 for fixed manufacturing overhead. ABC actually produced 12,000 units and used 18,000 direct labor hours during
the year. If ABC incurred $415,000 in variable manufacturing overhead costs and $580,000 in fixed manufacturing overhead costs, what is the fixed
manufacturing overhead production volume variance?
$20,000 favorable
Correct

$120,000 favorable
Your Answer

$140,000 favorable

$120,000 unfavorable

Rationale
 $20,000 favorable
This answer is incorrect. The fixed manufacturing overhead spending variance is $20,000 favorable.

Rationale
 $120,000 favorable

The fixed manufacturing overhead production volume variance measures the difference between budgeted fixed manufacturing overhead and
allocated fixed manufacturing overhead. It results from the difference between budgeted and actual production. When actual production is higher
than budgeted production, the production volume variance will be favorable because it indicates the company generated more production with its
fixed manufacturing costs than expected. In this example, ABC’s pre-determined fixed manufacturing overhead allocation rate is $30 per direct
labor hour {$600,000 ÷ (10,000 units × 2 direct labor hours per unit)}. Using this rate, the amount of fixed manufacturing overhead allocated to the
12,000 units produced is $720,000 (12,000 units × 2 direct labor hours per unit × $30 per direct labor hour). This results in a production volume
variance of $120,000 favorable.

Below is the framework approach.

Master budget costs (Budgeted FOH) were provided. Applied costs are calculated by multiplying the DLHs allowed by the FOH rate. DLHs allowed is
calculated by multiplying actual production of 12,000 units by standard hours per unit (budgeted DLH per unit) of 2 DLH to get 24,000 DLHs allowed.
The 24,000 DLHs allowed is then multiplied by the FOH rate of $30.00 per DLH. Since master budget costs of $600,000 are less than applied costs of
$720,000, the fixed overhead volume variance is favorable (F).

Below is the formula approach.

Fixed overhead volume variance = Applied costs − Master budget costs

Fixed overhead volume variance: (24,000DLHs × $30.00 per DLH) − $600,000 = $120,000 F

or

Fixed overhead volume variance = (Actual production − Budgeted production) × FOH rate
Fixed overhead volume variance: (12,000units − 10,000units) × $60 per unit = $120,000 F

Note that the computational solution for the variable overhead efficiency variance is a positive value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since master budget
costs are less than applied costs, the fixed overhead volume variance is favorable (F).

Rationale
 $140,000 favorable
This answer is incorrect. The total fixed manufacturing overhead variance is $140,000 favorable.

Rationale
 $120,000 unfavorable
This answer is incorrect. The difference between allocated fixed manufacturing overhead and budgeted fixed manufacturing overhead is $120,000.
However, actual production is higher than budgeted production.
Question 12
1.C.1.r
facov.cv.tb.017_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The NBV Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
NBV expected to produce 40,000 units during the year and to use three direct labor hours to produce each unit. It budgeted $600,000 for variable
manufacturing overhead and $1,200,000 for fixed manufacturing overhead. NBV actually produced 35,000 units and used 115,000 direct labor hours
during the year. If NBV incurred $650,000 in variable manufacturing overhead costs and $950,000 in fixed manufacturing overhead costs, what is the fixed
manufacturing overhead spending variance?
Correct

$250,000 favorable
Your Answer

$150,000 unfavorable

$100,000 favorable

$75,000 unfavorable

Rationale
 $250,000 favorable

The fixed manufacturing overhead spending variance measures the difference between actual fixed manufacturing overhead and budgeted fixed
manufacturing overhead. In this example, NBV’s actual fixed manufacturing overhead ($950,000) is $250,000 less than its budgeted fixed
manufacturing overhead ($1,200,000). This results in a fixed manufacturing overhead spending variance of $250,000 favorable.

Below is the framework approach.

Total actual costs (Actual FOH) and master budget costs (Budgeted FOH) were provided. Since total actual costs of $950,000 are less than master
budget costs of $1,200,000, the fixed overhead spending variance is favorable (F).

Below is the formula approach.

Fixed overhead spending variance = Master budget − Actual costs spent

Fixed overhead spending variance: $1,200,000 − $950,000 = $250,000 F

Note that the computational solution for the variable overhead efficiency variance is a positive value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since total actual
costs are less than master budget costs, the fixed overhead spending variance is favorable (F).

Rationale
 $150,000 unfavorable
This answer is incorrect. The fixed manufacturing overhead production volume variance is $150,000 unfavorable.

Rationale
 $100,000 favorable
This answer is incorrect. The total fixed manufacturing overhead variance is $100,000 favorable.
Rationale
 $75,000 unfavorable
This answer is incorrect. The variable manufacturing overhead spending variance is $75,000 unfavorable.
Question 13
1.C.1.m
1C1-LS13
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3
If 200,000 machine-hours are budgeted for variable overhead at a standard rate of $5/machine-hour, but 220,000 machine-hours were actually used at an
actual rate of $6/machine-hour, what is the variable overhead efficiency variance?
$100,000 favorable
Correct

$100,000 unfavorable
Your Answer

$320,000 unfavorable

$320,000 favorable

Rationale
 $100,000 favorable
This answer is incorrect. This answer correctly calculated the variable overhead efficiency variance, but it is not favorable.

Rationale
 $100,000 unfavorable
The variable overhead efficiency variance is the product of the actual quantity of the cost driver times the standard variable overhead rate minus
the product of the standard quantity of the cost driver times the standard variable overhead rate. (220,000 machine-hours × $5/machine-hour) −
(200,000 × $5/machine-hour) = $100,000 unfavorable.

Rationale
 $320,000 unfavorable
This answer is incorrect. This answer represents the variable overhead static budget variance, not the variable overhead efficiency variance.

Rationale
 $320,000 favorable
This answer is incorrect. This answer represents the variable overhead static budget variance, not the variable overhead efficiency variance.
Additionally, the variable overhead static budget variance would not be favorable.
Question 14
1.C.1.m
facov.cv.tb.008_0120
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2
Which of the following options best describes the fixed manufacturing overhead spending variance?
Correct

A measure of how actual fixed manufacturing overhead spending compared to the budgeted fixed manufacturing overhead.

A measure of how budgeted fixed manufacturing overhead compared to allocated fixed manufacturing overhead.
Your Answer

A measure of how actual total spending on fixed manufacturing overhead compared to the total amount that “should” have been spent based on the
actual amount of the allocation base used.

A measure of how actual fixed manufacturing overhead spending compared to allocated fixed manufacturing overhead.

Rationale
 A measure of how actual fixed manufacturing overhead spending compared to the budgeted fixed manufacturing overhead.
The fixed manufacturing overhead spending variance measures the difference between actual fixed manufacturing overhead and budgeted fixed
manufacturing overhead.

Rationale
 A measure of how budgeted fixed manufacturing overhead compared to allocated fixed manufacturing overhead.
This answer is incorrect. The fixed manufacturing overhead production volume variance measures the difference between budgeted fixed
manufacturing overhead and allocated fixed manufacturing overhead, not the fixed manufacturing overhead spending variance.

Rationale
 A measure of how actual total spending on fixed manufacturing overhead compared to the total amount that “should” have been spent
based on the actual amount of the allocation base used.
This answer is incorrect. There is no variance that measures how actual total spending on fixed manufacturing overhead compared to the total
amount that “should” have been spent based on the actual amount of the allocation base used.

Rationale
 A measure of how actual fixed manufacturing overhead spending compared to allocated fixed manufacturing overhead.
This answer is incorrect. The total fixed manufacturing overhead variance measures the difference between actual fixed manufacturing overhead
spending and allocated fixed manufacturing overhead, not the fixed manufacturing overhead spending variance.
Question 15
1.C.1.r
facov.cv.tb.020_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The PBJ Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
PBJ expected to produce 50,000 units during the year and to use four direct labor hours to produce each unit. It budgeted $800,000 for variable
manufacturing overhead and $1,400,000 for fixed manufacturing overhead. PBJ actually produced 56,000 units and used 240,000 direct labor hours
during the year. If PBJ incurred $980,000 in variable manufacturing overhead costs and $1,300,000 in fixed manufacturing overhead costs, what is the
variable manufacturing overhead efficiency variance?
$20,000 unfavorable
Correct

$64,000 unfavorable

$84,000 unfavorable

There is never a variable manufacturing overhead efficiency variance.

Rationale
 $20,000 unfavorable
This answer is incorrect. The variable manufacturing overhead spending variance is $20,000 unfavorable.

Rationale
 $64,000 unfavorable

The variable manufacturing overhead efficiency variance measures how efficiently a company used the allocation base, not how efficiently it used
variable manufacturing overhead. It is calculated by multiplying the pre-determined variable manufacturing overhead allocation rate by the
difference between the actual amount of the allocation base used and amount that “should” have been used for the amount produced. In this
example, PBJ’s pre-determined variable manufacturing overhead allocation rate is $4 per direct labor hour {$800,000 ÷ (50,000 units × 4 direct labor
hours per unit)}. PBJ “should” have used 224,000 direct labor hours to produce the 56,000 units. The 16,000 more direct labor hours used is then
multiplied by the $4 per direct labor hour rate. Since more hours were used, the variable manufacturing overhead efficiency variance is $64,000
unfavorable (16,000 direct labor hours × $4 per direct labor hour).

Below is the framework approach.

Based on a VOH rate of $4.00 per hour, we can predict that PBJ would actually spend $960,000 for variable overhead based on actual DLH. Standard
activity allowed is given. Since the actual activity used of 240,000 DLHs is greater than standard activity allowed of 224,000 DLHs, the variable
overhead efficiency variance is unfavorable (U).

Below is the formula approach.

Variable overhead efficiency variance = (Standard activity allowed − Actual activity used) × Standard VOH rate

Variable overhead efficiency variance: (224,000 hours – 240,000hours) × $4.00 = $64,000 U

Note that the computational solution for the variable overhead efficiency variance is a negative value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual
activity used is less than standard activity allowed, the variable overhead efficiency variance is unfavorable (U).
Rationale
 $84,000 unfavorable
This answer is incorrect. The total variable manufacturing overhead variance is $84,000 unfavorable.

Rationale
 There is never a variable manufacturing overhead efficiency variance.
This answer is incorrect. There is never a fixed manufacturing overhead efficiency variance. However, there is a variable manufacturing overhead
efficiency variance.
Question 16
1.C.1.m
tb.facov.cv.003_1808
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4
Vivian is trying to calculate the total overhead variance for July. She knows that the company paid $26,000 in overhead costs and that the production
department produced 8,000 units for a total of 12,500 hours. She also knows that the company allows 1.5 direct labor hours per unit. What else does
Vivian need to know to complete her calculation?
Correct

Predetermined overhead rate.

Budgeted overhead costs.

Your Answer

Normal direct labor hour capacity.

Direct labor variance.

Rationale
 Predetermined overhead rate.
Correct. To calculate the total overhead variance, Vivian would compare the total actual overhead to the standard overhead for the 8,000 units
produced. Vivian knows the total actual overhead. To calculate the standard overhead for the 8,000 units produced, Vivian would multiply the
direct labor hours allowed for 8,000 units by the predetermined amount of overhead per direct labor hour. Vivian would calculate the direct labor
hours allowed for 8,000 units by multiplying the 8,000 actual units produced by the 1.5 direct labor hours per unit produced. Vivian only needs to
know the predetermined overhead per direct labor hour to complete the calculation.

Rationale
 Budgeted overhead costs.
Incorrect. Vivian only needs to know the predetermined overhead per direct labor hour to complete the calculation. While budgeted overhead costs
can be used to calculate the predetermined overhead rate, it is not sufficient by itself to complete the calculation.

Rationale
 Normal direct labor hour capacity.
Incorrect. To calculate the total overhead variance, Vivian would compare the total actual overhead to the standard overhead for the 8,000 units
produced. Normal direct labor hour capacity is not a part of either of these figures. This means it is not needed to complete the calculation.

Rationale
 Direct labor variance.
Incorrect. To calculate the total overhead variance, Vivian would compare the total actual overhead to the standard overhead for the 8,000 units
produced. The direct labor variance is not a part of either of these figures. This means it is not needed to complete the calculation.
Question 17
1.C.1.m
facov.cv.tb.007_0120
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2
Which of the following best describes the variable manufacturing overhead spending variance?
Correct

A measure of how actual total spending on variable manufacturing overhead compared to the total amount that “should” have been spent based on
the actual amount of the allocation base used.
Your Answer

A measure of how actual total spending on variable manufacturing overhead compared to the total amount that “should” have been spent based on
actual production.

A measure of how efficiently variable manufacturing overhead was used.

A measure of how efficiently the allocation base used to allocate variable manufacturing overhead was used.

Rationale
 A measure of how actual total spending on variable manufacturing overhead compared to the total amount that “should” have been
spent based on the actual amount of the allocation base used.
The variable manufacturing overhead spending variance compares the actual variable manufacturing overhead incurred to the amount of variable
manufacturing overhead that “should” have been incurred for the actual quantity of the allocation base used.

Rationale
 A measure of how actual total spending on variable manufacturing overhead compared to the total amount that “should” have been
spent based on actual production.
This answer is incorrect. The amount of variable manufacturing overhead that “should” have been spent is not based on actual production.

Rationale
 A measure of how efficiently variable manufacturing overhead was used.
This answer is incorrect. There is no variance that measures how efficiently variable manufacturing overhead was used.

Rationale
 A measure of how efficiently the allocation base used to allocate variable manufacturing overhead was used.
This answer is incorrect. The variable manufacturing overhead efficiency variance measures how efficiently the allocation base used to allocate
variable manufacturing overhead was used, not the variable manufacturing overhead spending variance.
Question 18
1.C.1.r
aq.facov.cv.009_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4

Designer Desks (DD) provided the following information:

Budgeted Variable Manufacturing Overhead (VOH) $54,000

Budgeted Fixed Manufacturing Overhead (FOH) $162,000
Budgeted Production 18,000 units
Budgeted Direct Labor Hours (DLH) 27,000 hours
Budgeted DLH per Unit 1.5 DLH
Standard: VOH 1.5 DLH @ $2 per Hour $3 per unit
Standard: FOH 1.5 DLH @ $6 per Hour $9 per unit
Actual VOH $68,250
Actual FOH $148,000
Actual Production 20,000 units
Actual DLH 32,500

Based on the above information, what is DD's fixed overhead spending (or budget) variance?

$18,000 Favorable
Your Answer

$18,000 Unfavorable
Correct

$14,000 Favorable

$14,000 Unfavorable

Rationale
 $18,000 Favorable
This answer is incorrect. This answer represents the fixed overhead volume variance, not the fixed overhead spending variance.

Rationale
 $18,000 Unfavorable
This answer is incorrect. This answer represents the fixed overhead volume variance, not the fixed overhead spending variance. Additionally, the
fixed overhead volume variance would not be unfavorable.

Rationale
 $14,000 Favorable

The fixed overhead spending (or budget) variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Total actual costs (Actual FOH) and master budget costs (Budgeted FOH) were provided. Since total actual costs of $148,000 are less than master
budget costs of $162,000, the fixed overhead spending variance is favorable (F).

Below is the formula approach.

Fixed overhead spending variance = Master budget − Actual costs spent

Fixed overhead spending variance : $162,000 − $148,000 = $14,000 F

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since total actual
costs are less than master budget costs, the fixed overhead spending variance is favorable (F).

Rationale
 $14,000 Unfavorable
This answer is incorrect. This answer correctly calculates the fixed overhead spending variance; however, this variance is not unfavorable.
Question 19
1.C.1.r
1C1-CQ23
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 5

The JoyT Company manufactures Maxi Dolls for sale in toy stores. In planning for this year, JoyT estimated variable factory overhead of $600,000 and
fixed factory overhead of $400,000. JoyT uses a standard costing system, and factory overhead is allocated to units produced on the basis of standard
direct labor hours. The denominator level of activity budgeted for this year was 10,000 direct labor hours, and JoyT used 10,300 actual direct labor hours.

Based on the output accomplished during this year, 9,900 standard direct labor hours should have been used. Actual variable factory overhead was
$596,000, and actual fixed factory overhead was $410,000 for the year. Based on this information, the variable overhead spending variance (VOSV) for
JoyT for this year was:

Correct

$22,000 favorable.

$24,000 favorable.
Your Answer

$22,000 unfavorable.

$24,000 unfavorable.

Rationale
 $22,000 favorable.

The variable overhead spending variance is calculated as follows:

VOSV = (actual variable overhead) − (budgeted variable overhead at the actual level of direct labor hours used)

VOSV = ($596,000) − (budgeted variable overhead at the actual level of direct labor hours used)

The budgeted variable overhead at the actual level of direct labor hours used is calculated as follows:

Budgeted variable overhead at the actual level of direct labor hours used = (variable overhead rate, or SRV)(actual direct labor hours used)

Budgeted variable overhead at the actual level of direct labor hours used = (SRV)(10,300 direct labor hours)

SRV = (estimated variable overhead) ÷ (budgeted direct labor hours)

SRV = ($600,000)(10,000 budgeted direct labor hours) = $60 per direct labor hour

Budgeted variable overhead at the actual level of direct labor hours = $60(10,300 hours)

Budgeted variable overhead at the actual level of direct labor hours = $618,000

VOSV = $596,000 − $618,000 = −$22,000, or, $22,000 favorable.

Rationale
 $24,000 favorable.
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance. However,
the variable overhead efficiency variance is not favorable.

Rationale
 $22,000 unfavorable.
This answer is incorrect. This answer correctly calculated the variable overhead spending variance. However, the variable overhead spending
variance is not unfavorable.

Rationale
 $24,000 unfavorable.
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance.
Question 20
1.C.1.r
1C1-CQ10
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4
Cordell Company uses a standard cost system. On January 1 of the current year, Cordell budgeted fixed manufacturing overhead cost of $600,000 and
production at 200,000 units. During the year, the firm produced 190,000 units and incurred fixed manufacturing overhead of $595,000. The production
volume variance for the year was:
$5,000 unfavorable.

$10,000 unfavorable.
Correct

$30,000 unfavorable.

$3,333 unfavorable.

Rationale
 $5,000 unfavorable.
This answer is incorrect. This answer represents the fixed overhead static budget variance, not the fixed overhead volume variance.

Rationale
 $10,000 unfavorable.
This answer is incorrect. This answer represents the number of production units different between budgeted and actual. However, this amount
does not represent the fixed overhead volume variance.

Rationale
 $30,000 unfavorable.

The fixed overhead volume variance (FOVV) is calculated as:

FOVV = (fixed overhead rate)(normal base level of production − actual production level)

Fixed overhead rate = SRF

FOVV = (SRF)(200,000 units − 190,000 units) FOVV = 10,000 SRF

The fixed overhead rate (SRF) is equal to the budgeted fixed overhead of $600,000, divided by the normal (budgeted) base of 200,000 units, which
comes to $3.00 per unit.

Therefore, the FOVV = (10,000)($3) = $30,000 unfavorable.

Rationale
 $3,333 unfavorable.
This answer is incorrect. This answer divided the units different between budgeted and actual by three instead of multiplying by three.
Question 21
1.C.1.m
tb.facov.cv.004_1808
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4
Norman is calculating the company's total overhead variance for April. He knows the company paid $14,280 in overhead costs and that the production
department produced 3,600 units for a total of 4,800 hours. He also knows that the company has a predetermined overhead rate of $3.00 per labor hour.
What else does Norman need to know to complete his calculation?
Overhead fixed costs.

Budgeted overhead costs.

Correct

Standard hours allowed.

Overhead variable costs.

Rationale
 Overhead fixed costs.
Incorrect. To calculate the total overhead variance, Norman would compare the total actual overhead to the standard overhead for the 3,600 units
produced. Since Norman already knows the total actual overhead, he does not need to know the fixed overhead costs.

Rationale
 Budgeted overhead costs.
Incorrect. To calculate the total overhead variance, Norman would compare the total actual overhead to the standard overhead for the 3,600 units
produced. While budgeted overhead costs can be used to calculate the predetermined overhead rate, Norman already knows this figure.

Rationale
 Standard hours allowed.
Correct. To calculate the total overhead variance, Norman would compare the total actual overhead to the standard overhead for the 3,600 units
produced. Norman knows the total actual overhead. To calculate the standard overhead for the 3,600 units produced, Norman would multiply the
direct labor hours allowed for 3,600 units by the predetermined amount of overhead per direct labor hour. Since Norman knows the predetermined
rate, he only needs to know the standard direct labor hours allowed per unit produced to complete the calculation. Therefore, this is a correct
answer.

Rationale
 Overhead variable costs.
Incorrect. To calculate the total overhead variance, Norman would compare the total actual overhead to the standard overhead for the 3,600 units
produced. Since Norman already knows the total actual overhead, he does not need to know the variable overhead costs.
Question 22
1.C.1.m
facov.cv.tb.010_0120
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2
Which of the following options best describes the fixed manufacturing overhead efficiency variance?
A measure of how actual fixed manufacturing overhead spending compared to the budgeted fixed manufacturing overhead.

A measure of how budgeted fixed manufacturing overhead compared to allocated fixed manufacturing overhead.
Correct

There is never a fixed manufacturing overhead efficiency variance.

A measure of how actual fixed manufacturing overhead spending compared to allocated fixed manufacturing overhead.

Rationale
 A measure of how actual fixed manufacturing overhead spending compared to the budgeted fixed manufacturing overhead.
This answer is incorrect. The fixed manufacturing overhead spending variance measures the difference between actual fixed manufacturing
overhead and budgeted fixed manufacturing overhead, not the fixed manufacturing overhead efficiency variance.

Rationale
 A measure of how budgeted fixed manufacturing overhead compared to allocated fixed manufacturing overhead.
This answer is incorrect. The fixed manufacturing overhead production volume variance measures the difference between budgeted fixed
manufacturing overhead and allocated fixed manufacturing overhead, not the fixed manufacturing overhead efficiency variance.

Rationale
 There is never a fixed manufacturing overhead efficiency variance.
There is never a fixed manufacturing overhead efficiency variance as it is not possible to be more or less efficient with a fixed cost.

Rationale
 A measure of how actual fixed manufacturing overhead spending compared to allocated fixed manufacturing overhead.
This answer is incorrect. The total fixed manufacturing overhead variance measures the difference between actual fixed manufacturing overhead
spending and allocated fixed manufacturing overhead, not the fixed manufacturing overhead efficiency variance.
Question 23
1.C.1.r
aq.facov.cv.003_1807
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2
Which of the following is used in the computation of the fixed overhead volume variance?
Correct

Total Actual Costs: No; Master Budget Costs: Yes; Applied Costs: Yes

Total Actual Costs: Yes; Master Budget Costs: Yes; Applied Costs: Yes

Total Actual Costs: Yes; Master Budget Costs: No; Applied Costs: Yes
Your Answer

Total Actual Costs: Yes; Master Budget Costs: Yes; Applied Costs: No

Rationale
 Total Actual Costs: No; Master Budget Costs: Yes; Applied Costs: Yes
The fixed overhead volume variance is the difference between master budget costs and applied costs. Total actual costs are used in the
computation of the fixed overhead spending variance, not the fixed overhead volume variance.

Rationale
 Total Actual Costs: Yes; Master Budget Costs: Yes; Applied Costs: Yes
This answer is incorrect. Total actual costs are used in the computation of the fixed overhead spending variance, not the fixed overhead volume
variance.

Rationale
 Total Actual Costs: Yes; Master Budget Costs: No; Applied Costs: Yes
This answer is incorrect. Total actual costs are used in the computation of the fixed overhead spending variance, not the fixed overhead volume
variance. Master budget costs are used in the computation of the fixed overhead volume variance.

Rationale
 Total Actual Costs: Yes; Master Budget Costs: Yes; Applied Costs: No
This answer is incorrect. Total actual costs are used in the computation of the fixed overhead spending variance, not the fixed overhead volume
variance. Applied costs are used in the computation of the fixed overhead volume variance.
Question 24
1.C.1.m
1D3-AT30
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3
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:
Correct

unfavorable.
Your Answer

favorable.

the same amount as the labor efficiency variance.

indeterminable since it is not related to the labor efficiency variance.

Rationale
 unfavorable.

The variable overhead efficiency variance is calculated as:

Variable overhead efficiency variance = (the variable overhead rate)(the actual base for the variable overhead application − the standard base for
the variable overhead application)

It measures the efficiency of the base. If the base used is direct labor hours, the variable overhead efficiency variance is the labor efficiency variance
evaluated with the variable overhead rate. It would, therefore, be in the same direction as the labor efficiency variance.

Rationale
 favorable.
This answer is incorrect. If for a given period the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will not be
favorable.

Rationale
 the same amount as the labor efficiency variance.
This answer is incorrect. If for a given period the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance will not be
the same amount as the labor efficiency variance.

Rationale
 indeterminable since it is not related to the labor efficiency variance.
This answer is incorrect. If for a given period the direct labor efficiency variance is unfavorable, the variable overhead efficiency variance can be
determined because it is related to the labor efficiency variance.
Question 25
1.C.1.r
facov.cv.tb.013_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The ABC Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
ABC expected to produce 10,000 units during the year and to use two direct labor hours to produce each unit. It budgeted $400,000 for variable
manufacturing overhead and $600,000 for fixed manufacturing overhead. ABC actually produced 12,000 units and used 18,000 direct labor hours during
the year. If ABC incurred $415,000 in variable manufacturing overhead costs and $580,000 in fixed manufacturing overhead costs, what is the fixed
manufacturing overhead spending variance?
Correct

$20,000 favorable

$120,000 favorable
Your Answer

$140,000 favorable

$55,000 unfavorable

Rationale
 $20,000 favorable

The fixed manufacturing overhead spending variance measures the difference between actual fixed manufacturing overhead and budgeted fixed
manufacturing overhead. In this example, ABC’s actual fixed manufacturing overhead ($580,000) is $20,000 less than its budgeted fixed
manufacturing overhead ($600,000). This results in a fixed manufacturing overhead spending variance of $20,000 favorable.

Below is the framework approach.

Total actual costs (Actual FOH) and master budget costs (Budgeted FOH) were provided. Since total actual costs of $580,000 are less than master
budget costs of $600,000, the fixed overhead spending variance is favorable (F).

Below is the formula approach.

Fixed overhead spending variance = Master budget − Actual costs spent

Fixed overhead spending variance: $600,000 − $580,000 = $20,000F

Note that the computational solution for the variable overhead efficiency variance is a positive value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since total actual
costs are less than master budget costs, the fixed overhead spending variance is favorable (F).

Rationale
 $120,000 favorable
This answer is incorrect. The fixed manufacturing overhead production volume variance is $120,000 favorable.

Rationale
 $140,000 favorable
This answer is incorrect. The total fixed manufacturing overhead variance is $140,000 favorable.
Rationale
 $55,000 unfavorable
This answer is incorrect. The variable manufacturing overhead spending variance is $55,000 unfavorable.
Question 26
1.C.1.m
aq.facov.cv.001_0820
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2
Which of the following standard costing variances would be least controllable by a production supervisor?
Overhead efficiency

Labor efficiency
Correct

Overhead volume
Your Answer

Material usage

Rationale
 Overhead efficiency
This answer is incorrect. Overhead efficiency is based on the difference between the actual quantity and standard quantity of the overhead
allocation activity basis. Typically these activity bases are machine hours, labor hours, or production units. The production supervisor has control
over these amounts.

Rationale
 Labor efficiency
This answer is incorrect. Labor efficiency is based on the difference between the actual labor hours used and standard labor hours used. The
production supervisor has control over this amount.

Rationale
 Overhead volume
The amount being produced within a period (volume) is largely determined by the sales forecast, which is generally more influenced by the sales
department. Thus, the production supervisor would have little control over the overhead volume variance.

Rationale
 Material usage
This answer is incorrect. Material usage is based on the difference between the actual quantity of inputs used and the standard quantity of inputs
allowed. The production supervisor has control over this amount.
Question 27
1.C.1.m
tb.facov.cv.002_1808
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4
Doan Textiles has an old weaving machine that continually breaks down, but the company does not have the cash saved to purchase a new one. What
effect do you expect the old machine to have on Doan's total overhead variance?
The overhead variance will become increasingly favorable.
Correct

The overhead variance will become increasingly unfavorable.

Your Answer

The overhead variance will be unfavorable but constant.

The overhead variance will be zero.

Rationale
 The overhead variance will become increasingly favorable.
Incorrect. As the machine continues to be used, it is likely to break down more often. This will cause the overhead variance to become increasingly
unfavorable, not favorable. For the variance to become more favorable, less machine time and other overhead will have to be used. This does not
seem likely.

Rationale
 The overhead variance will become increasingly unfavorable.
Correct. Overhead needs to be allocated to products using an allocation base. One common allocation base is machine hours. If Doan uses a
machine that continually breaks down, it will use more machine time than it should. If this happens, it will incur more overhead than it should. This
results in an unfavorable overhead variance. As the machine continues to be used, it is likely to break down more often. This will cause the
overhead variance to become increasingly unfavorable.

Rationale
 The overhead variance will be unfavorable but constant.
Incorrect. As the machine continues to be used, it is likely to break down more often. This will cause the overhead variance to become increasingly
unfavorable, not to stay the same. For the variance to stay the same, a similar amount of machine time and other overhead will have to be used.
This does not seem likely.

Rationale
 The overhead variance will be zero.
Incorrect. As the machine continues to be used, it is likely to break down more often. This will cause the overhead variance to become increasingly
unfavorable, due to additional repair costs and the time associated with not using the machine. This will not lead to the overhead variance
becoming zero.
Question 28
1.C.1.m
tb.facov.cv.001_1808
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4
Clarkdale Industries recently purchased a new energy-efficient furnace to melt glass that will be shaped into light bulbs. Before the purchase of the
furnace, the total overhead variance was increasingly unfavorable each month. What effect do you expect this to have on Clarkdale's total overhead
variance?
Correct

The overhead variance will become more favorable.

The overhead variance will continue to become increasingly unfavorable.

Your Answer

The overhead variance will remain unfavorable at the present amount but will not be more unfavorable each month.

The overhead variance will be zero.

Rationale
 The overhead variance will become more favorable.
Correct. One component of overhead is energy usage (utilities). As energy usage decreases, the amount of overhead also decreases. As the current
overhead variance is increasingly unfavorable, reducing overhead (in the form of increased energy efficiency) will reduce the unfavorable variance.

Rationale
 The overhead variance will continue to become increasingly unfavorable.
Incorrect. One component of overhead is energy usage. As energy usage decreases, the amount of overhead also decreases. As the current
overhead variance is increasingly unfavorable, reducing overhead (in the form of increased energy efficiency) will reduce the unfavorable variance,
not increase it.

Rationale
 The overhead variance will remain unfavorable at the present amount but will not be more unfavorable each month.
Incorrect. One component of overhead is energy usage. As energy usage decreases, the amount of overhead also decreases. As the current
overhead variance is increasingly unfavorable, reducing overhead (in the form of increased energy efficiency) will reduce the unfavorable variance,
not keep it at the same level.

Rationale
 The overhead variance will be zero.
Incorrect. One component of overhead is energy usage. As energy usage decreases, the amount of overhead also decreases. As the current
overhead variance is increasingly unfavorable, reducing overhead (in the form of increased energy efficiency) will reduce the unfavorable variance,
although it may not decrease all the way to zero.
Question 29
1.C.1.r
1C1-LS96
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3

A company has a fixed overhead volume variance that is $10,000 unfavorable. The most likely cause for this variance is that:

* Source: Retired ICMA CMA Exam Questions.

the production supervisory salaries were less than planned.

Correct

less was produced than planned.

the production supervisory salaries were greater than planned.

more was produced than planned.

Rationale
 the production supervisory salaries were less than planned.
This answer is incorrect. The most likely cause of a fixed overhead volume variance that is unfavorable is not that the production supervisory
salaries were less than planned.

Rationale
 less was produced than planned.
When there is a fixed overhead volume variance that is unfavorable, it is assumed that the volume was lower than what was budgeted. Therefore,
less was produced than planned.

Rationale
 the production supervisory salaries were greater than planned.
This answer is incorrect. The most likely cause of a fixed overhead volume variance that is unfavorable is not that the production supervisory
salaries were greater than planned.

Rationale
 more was produced than planned.
This answer is incorrect. The most likely cause of a fixed overhead volume variance that is unfavorable is not that more was produced than
planned.
Question 30
1.C.1.r
aq.facov.cv.007_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 5

Designer Desks (DD) provided the following information:

Budgeted Variable Manufacturing Overhead (VOH) $54,000

Budgeted Fixed Manufacturing Overhead (FOH) $162,000
Budgeted Production 18,000 units
Budgeted Direct Labor Hours (DLH) 27,000 hours
Budgeted DLH per Unit 1.5 DLH
Standard: VOH 1.5 DLH @ $2 per Hour $3 per unit
Standard: FOH 1.5 DLH @ $6 per Hour $9 per unit
Actual VOH $68,250
Actual FOH $148,000
Actual Production 20,000 units
Actual DLH 32,500

Based on the above information, what is DD's variable overhead spending variance?

Correct

$3,250 Unfavorable
Your Answer

$3,250 Favorable

$5,000 Unfavorable

$5,000 Favorable

Rationale
 $3,250 Unfavorable

The variable overhead spending variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Total actual costs are provided. Based on a VOH rate of $2.00 per hour, we can predict that DD should actually spend $65,000 for variable overhead
based on actual DLH. Since the total actual costs of $68,250 are more than predicted spending of $65,000, the variable overhead spending variance
is unfavorable (U).

Below is the formula approach.

Variable overhead spending variance = (Actual activity used × Standard rate) − Actual costs

Variable overhead spending variance : (32,500 hours × $2.00) − $68,250 = $3,250 U

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the total
actual costs are more than predicted spending, the variable overhead spending variance is unfavorable (U).

Rationale
 $3,250 Favorable
This answer is incorrect. This answer correctly calculated the variable overhead spending variance; however, this variance is not favorable.
Rationale
 $5,000 Unfavorable
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance.

Rationale
 $5,000 Favorable
This answer is incorrect. This answer represents the variable overhead efficiency variance, not the variable overhead spending variance.
Additionally, the variable overhead efficiency variance would not be favorable.
Question 31
1.C.1.m
tb.facov.cv.006_1808
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
Automotive Parts Overstock (APO) has normal budgeted overhead costs of $348,400 and a normal capacity of 52,000 direct labor hours for the first
quarter, which are evenly distributed between months. APO allows 1.2 direct labor hours per unit, and the company produced 15,000 units in the second
month of the quarter. This took APO 16,500 labor hours. APO had variable overhead costs of $52,200 and fixed overhead of $41,400 costs in the month.
What was the overhead variance for the month?
Correct

$27,000 favorable.

$27,000 unfavorable.
Your Answer

$16,950 favorable.

$16,950 unfavorable.

Rationale
 $27,000 favorable.
Correct. The total overhead variance for a period compares the actual total overhead for a period to the total overhead that should have been
incurred for the period based on standard allocation base usage and predetermined allocation rate. The 15,000 units should use 18,000 direct labor
hours (15,000 × 1.2 direct labor hours per unit). The predetermined overhead allocation rate is $6.70 per direct labor hour ($348,400 ÷ 52,000 direct
labor hours). Based on this rate, the standard overhead for 18,000 direct labor hours is $120,600 (18,000 × $6.70 per direct labor hour). Total actual
overhead is $93,600 ($52,200 + $41,400). Since actual total overhead is $27,000 lower than the standard amount ($120,600 – $93,600), the variance is
$27,000 favorable.

Rationale
 $27,000 unfavorable.
Incorrect. The total overhead variance for a period compares the actual total overhead for a period to the total overhead that should have been
incurred for the period based on standard allocation base usage and predetermined allocation rate. The 15,000 units should use 18,000 direct labor
hours (15,000 × 1.2 direct labor hours per unit). The predetermined overhead allocation rate is $6.70 per direct labor hour ($348,400 ÷ 52,000 direct
labor hours). Based on this rate, the standard overhead for 18,000 direct labor hours is $120,600 (18,000 × $6.70 per direct labor hour). Total actual
overhead is $93,600 ($52,200 + $41,400). Since actual total overhead is $27,000 lower than the standard amount ($120,600 – $93,600), the variance is
$27,000 favorable, not unfavorable.

Rationale
 $16,950 favorable.
Incorrect. The 15,000 units should use 18,000 direct labor hours (15,000 × 1.2 direct labor hours per unit). The predetermined overhead allocation
rate is $6.70 per direct labor hour ($348,400 ÷ 52,000 direct labor hours). The total expected overhead for the 16,500 actual direct labor hours is
$110,550 (16,500 × $6.70 per direct labor hour). This would result in a $16,950 favorable variance ($110,550 – $93,600). However, the total overhead
variance uses the standard amount of the allocation base for actual output, not the actual amount of the allocation base. The spending variance
uses the actual amount of the allocation base.

Rationale
 $16,950 unfavorable.
Incorrect. The 15,000 units should use 18,000 direct labor hours (15,000 × 1.2 direct labor hours per unit). The predetermined overhead allocation
rate is $6.70 per direct labor hour ($348,400 ÷ 52,000 direct labor hours). The total expected overhead for the 16,500 actual direct labor hours is
$110,550 (16,500 × $6.70 per direct labor hour). This would result in a $16,950 favorable variance ($110,550 – $93,600), not unfavorable variance.
However, the total overhead variance uses the standard amount of the allocation base for actual output, not the actual amount of the allocation
base. The spending variance uses the actual amount of the allocation base.
Question 32
1.C.1.m
aq.facov.cv.004_0820
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3

The following information relates to one particular department of the Herman Company for the fourth quarter:

Actual variable overhead $68,500

Variable overhead application rate $0.50 per hour
Total overhead application rate $1.50 per hour
Spending variance $8,000 unfavorable
Volume variance $5,000 favorable

What were the actual hours worked in this department during the quarter?

137,000
Correct

121,000
Your Answer

127,000

119,000

Rationale
 137,000
This answer is incorrect. This answer did not consider the unfavorable spending variance when calculating the actual hours worked in the given
department during the quarter.

Rationale
 121,000
The actual hours worked in the given department during the quarter is calculated as follows:
Actual variable overhead $68,500
Less: spending variance 8,000 Unfavorable
Predicted variable costs $ 60,500
Variable overhead rate ÷ $0.50
Actual hours worked 121,000 Hours

Rationale
 127,000
This answer is incorrect. This answer used the volume variance instead of the spending variance when calculating the actual hours worked in the
given department during the quarter.

Rationale
 119,000
This answer is incorrect. This answer divided actual overhead by the total overhead application rate instead of using the budget formula.
Additionally, this answer did not consider the spending variance.
Question 33
1.C.1.m
1C1-LS20
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3
Which of the following would lead to a favorable variable manufacturing overhead efficiency variance?
Correct

Less maintenance was required than expected

Too much of the cost driver was used

Your Answer

Employees used too much electricity during production

Excess supplies were used

Rationale
 Less maintenance was required than expected
All other answers will lead to unfavorable variances.

Rationale
 Too much of the cost driver was used
This answer is incorrect. "Too much of the cost driver was used" would lead to an unfavorable variable manufacturing overhead efficiency variance.

Rationale
 Employees used too much electricity during production
This answer is incorrect. "Employees used too much electricity during production" would lead to an unfavorable variable manufacturing overhead
efficiency variance.

Rationale
 Excess supplies were used
This answer is incorrect. "Excess supplies were used" would lead to an unfavorable variable manufacturing overhead efficiency variance.
Question 34
1.C.1.r
facov.cv.tb.016_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The NBV Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
NBV expected to produce 40,000 units during the year and to use three direct labor hours to produce each unit. It budgeted $600,000 for variable
manufacturing overhead and $1,200,000 for fixed manufacturing overhead. NBV actually produced 35,000 units and used 115,000 direct labor hours
during the year. If NBV incurred $650,000 in variable manufacturing overhead costs and $950,000 in fixed manufacturing overhead costs, what is the
variable manufacturing overhead efficiency variance?
$75,000 unfavorable
Correct

$50,000 unfavorable

$125,000 unfavorable
Your Answer

There is never a variable manufacturing overhead efficiency variance.

Rationale
 $75,000 unfavorable
This answer is incorrect. The variable manufacturing overhead spending variance is $75,000 unfavorable.

Rationale
 $50,000 unfavorable

The variable manufacturing overhead efficiency variance measures how efficiently a company used the allocation base, not how efficiently it used
variable manufacturing overhead. It is calculated by multiplying the pre-determined variable manufacturing overhead allocation rate by the
difference between the actual amount of the allocation base used and amount that “should” have been used for the amount produced. In this
example, NBV’s pre-determined variable manufacturing overhead allocation rate is $5 per direct labor hour {$600,000 ÷ (40,000 units × 3 direct labor
hours per unit)}. NBV “should” have used 105,000 direct labor hours to produce the 35,000 units. The 10,000 more direct labor hours used is then
multiplied by the $5 per direct labor hour rate. Since more hours were used, the variable manufacturing overhead efficiency variance is $50,000
unfavorable (10,000 direct labor hours × $5 per direct labor hour).

Below is the framework approach.

Based on a VOH rate of $5.00 per hour, we can predict that NBV would actually spend $575,000 for variable overhead based on actual DLH.
Standard activity allowed is given. Since the actual activity used of 115,000 DLHs is greater than standard activity allowed of 105,000 DLHs, the
variable overhead efficiency variance is unfavorable (U).

Below is the formula approach.

Variable overhead efficiency variance = (Standard activity allowed − Actual activity used) × Standard VOH rate

Variable overhead efficiency variance: (105,000 hours – 115,000hours) × $5.00 = $50,000 U

Note that the computational solution for the variable overhead efficiency variance is a negative value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual
activity used is less than standard activity allowed, the variable overhead efficiency variance is unfavorable (U).
Rationale
 $125,000 unfavorable
This answer is incorrect. The total variable manufacturing overhead variance is $125,000 unfavorable.

Rationale
 There is never a variable manufacturing overhead efficiency variance.
This answer is incorrect. There is never a fixed manufacturing overhead efficiency variance. However, there is a variable manufacturing overhead
efficiency variance.
Question 35
1.C.1.m
aq.facov.cv.002_1807
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2
Assuming overhead is applied on the basis of direct labor hours, which of the following is used in the computation of the variable overhead spending
variance?
Standard variable overhead rate based on actual hours: Yes; Standard variable overhead rate based on standard hours: Yes

Standard variable overhead rate based on actual hours: No; Standard variable overhead rate based on standard hours: Yes

Standard variable overhead rate based on actual hours: No; Standard variable overhead rate based on standard hours: No
Correct

Standard variable overhead rate based on actual hours: Yes; Standard variable overhead rate based on standard hours: No

Rationale
 Standard variable overhead rate based on actual hours: Yes; Standard variable overhead rate based on standard hours: Yes
This answer is incorrect. Standard variable overhead rate based on standard hours is not used in the computation of the variable overhead
spending variance.

Rationale
 Standard variable overhead rate based on actual hours: No; Standard variable overhead rate based on standard hours: Yes
This answer is incorrect. Standard variable overhead rate based on actual hours is used in the computation of the variable overhead spending
variance. Additionally, standard variable overhead rate based on standard hours is not used in the computation of the variable overhead spending
variance.

Rationale
 Standard variable overhead rate based on actual hours: No; Standard variable overhead rate based on standard hours: No
This answer is incorrect. Standard variable overhead rate based on actual hours is used in the computation of the variable overhead spending
variance.

Rationale
 Standard variable overhead rate based on actual hours: Yes; Standard variable overhead rate based on standard hours: No
The variable overhead spending variance is the difference between total actual overhead costs and the standard variable overhead rate based on
actual activity used.
Question 36
1.C.1.m
aq.facov.cv.006_0820
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4

The following information is available for Tyro Company:

Actual factory overhead $15,000

Fixed overhead expenses, actual $ 7,200
Fixed overhead expenses, budgeted $ 7,000
Actual hours 3,500
Standard activity allowed 3,650
Standard hours 3,800
Variable overhead rate per direct labor hour $ 2.50

What is the variable overhead efficiency variance?

$950 Unfavorable

$950 Favorable
Your Answer

$375 Unfavorable
Correct

$375 Favorable

Rationale
 $950 Unfavorable
This answer is incorrect. This answer represents the variable overhead spending variance, not the variable overhead efficiency variance.
Additionally, the variable overhead spending variance would not be unfavorable.

Rationale
 $950 Favorable
This answer is incorrect. This answer represents the variable overhead spending variance, not the variable overhead efficiency variance.

Rationale
 $375 Unfavorable
This answer is incorrect. This answer correctly calculated the variable overhead efficiency variance; however, this variance would not be
unfavorable.

Rationale
 $375 Favorable

The variable overhead efficiency variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Based on a VOH rate of $2.50 per hour, we can predict that Tyro would actually spend $8,750 for variable overhead based on actual DLH. Standard
activity allowed is given. Since the actual activity used of 3,500 DLHs is less than standard activity allowed of 3,650 DLHs, the variable overhead
efficiency variance is favorable (F).

Below is the formula approach.

 Variable overhead efficiency variance = (Standard activity allowed − Actual activity used) × Standard rate

Variable overhead efficiency variance : (3,650 hours − 3,500 hours) × $2.50 = $375 F

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual
activity used is less than standard activity allowed, the variable overhead efficiency variance is favorable (F).
Question 37
1.C.1.r
1C1-LS18d
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3
If the budgeted fixed overhead (OH) costs are $177,000 applied at the rate of $3 per direct labor hour (DLH), and the actual DLH usage was 56,000 DLH,
what was the actual fixed OH cost if the overapplied OH was $12,000?
$180,000

$177,000

$168,000
Correct

$156,000

Rationale
 $180,000
This answer is incorrect. This answer added overapplied OH to applied OH instead of subtracting it.

Rationale
 $177,000
This answer is incorrect. This amount represents budgeted OH, not actual fixed OH.

Rationale
 $168,000
This answer is incorrect. This answer did not consider that overapplied OH was $12,000.

Rationale
 $156,000
OH application rate is $3/DLH, applied OH = $3/DLH × 56,000 DLH = $168,000. Actual OH is $168,000 − $12,000 = $156,000.
Question 38
1.C.1.r
facov.cv.tb.021_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The PBJ Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
PBJ expected to produce 50,000 units during the year and to use four direct labor hours to produce each unit. It budgeted $800,000 for variable
manufacturing overhead and $1,400,000 for fixed manufacturing overhead. PBJ actually produced 56,000 units and used 240,000 direct labor hours
during the year. If PBJ incurred $980,000 in variable manufacturing overhead costs and $1,300,000 in fixed manufacturing overhead costs, what is the
fixed manufacturing overhead spending variance?
Correct

$100,000 favorable

$168,000 favorable
Your Answer

$268,000 favorable

$20,000 unfavorable

Rationale
 $100,000 favorable

The fixed manufacturing overhead spending variance measures the difference between actual fixed manufacturing overhead and budgeted fixed
manufacturing overhead. In this example, PBJ’s actual fixed manufacturing overhead ($1,300,000) is $100,000 less than its budgeted fixed
manufacturing overhead ($1,400,000). This results in a fixed manufacturing overhead spending variance of $100,000 favorable.

Below is the framework approach.

Total actual costs (Actual FOH) and master budget costs (Budgeted FOH) were provided. Since total actual costs of $1,300,000 are less than master
budget costs of $1,400,000, the fixed overhead spending variance is favorable (F).

Below is the formula approach.

Fixed overhead spending variance = Master budget − Actual costs spent

Fixed overhead spending variance: $1,400,000 − $1,300,000 = $100,000 F

Note that the computational solution for the variable overhead efficiency variance is a positive value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since total actual
costs are less than master budget costs, the fixed overhead spending variance is favorable (F).

Rationale
 $168,000 favorable
This answer is incorrect. The fixed manufacturing overhead production volume variance is $168,000 favorable.

Rationale
 $268,000 favorable
This answer is incorrect. The total fixed manufacturing overhead variance is $268,000 favorable.
Rationale
 $20,000 unfavorable
This answer is incorrect. The variable manufacturing overhead spending variance is $20,000 unfavorable.
Question 39
1.C.1.r
facov.cv.tb.019_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The PBJ Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
PBJ expected to produce 50,000 units during the year and to use four direct labor hours to produce each unit. It budgeted $800,000 for variable
manufacturing overhead and $1,400,000 for fixed manufacturing overhead. PBJ actually produced 56,000 units and used 240,000 direct labor hours
during the year. If PBJ incurred $980,000 in variable manufacturing overhead costs and $1,300,000 in fixed manufacturing overhead costs, what is the
variable manufacturing overhead spending variance?
Correct

$20,000 unfavorable

$64,000 unfavorable
Your Answer

$84,000 unfavorable

$96,000 favorable

Rationale
 $20,000 unfavorable

The variable manufacturing overhead spending variance compares the actual variable manufacturing incurred to the amount of variable
manufacturing overhead that “should” have been incurred for the actual quantity of the allocation base used. In this example, PBJ’s pre-
determined variable manufacturing overhead allocation rate is $4 per direct labor hour {$800,000 ÷ (50,000 units × 4 direct labor hours per unit)}.
Based on this rate, PBJ “should” have incurred $960,000 in variable manufacturing overhead for the 240,000 direct labor hours used. Since actual
variable manufacturing overhead is $20,000 higher ($980,000 versus $960,000), the variable manufacturing overhead spending variance is $20,000
unfavorable.

Below is the framework approach.

For calculating the variable overhead spending variance, we are only interested in total actual variable overhead costs. Total actual variable
overhead is given ($980,000). Based on a VOH rate of $4.00 per hour, we can predict that PBJ would actually spend $960,000 for variable overhead
based on actual DLH. Since the total actual costs of $980,000 are greater than predicted spending of $960,000, the variable overhead spending
variance is unfavorable (U).

Below is the formula approach.

Variable overhead spending variance = (Actual activity used × Standard rate) − Actual costs

Variable overhead spending variance: (240,000 hours × $4.00) − $980,000 = $20,000 U

Note that the computational solution for the variable overhead spending variance is a negative value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the total actual
costs are greater than predicted spending, the variable overhead spending variance is unfavorable (U).

Rationale
 $64,000 unfavorable
This answer is incorrect. The variable manufacturing overhead efficiency variance is $64,000 unfavorable.
Rationale
 $84,000 unfavorable
This answer is incorrect. The total variable manufacturing overhead variance is $84,000 unfavorable.

Rationale
 $96,000 favorable
This answer is incorrect. Budgeted variable manufacturing overhead is $96,000 lower than allocated variable manufacturing overhead ($800,000
versus $896,000). However, this difference is not the variable manufacturing overhead spending variance.
Question 40
1.C.1.r
facov.cv.tb.018_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The NBV Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
NBV expected to produce 40,000 units during the year and to use three direct labor hours to produce each unit. It budgeted $600,000 for variable
manufacturing overhead and $1,200,000 for fixed manufacturing overhead. NBV actually produced 35,000 units and used 115,000 direct labor hours
during the year. If NBV incurred $650,000 in variable manufacturing overhead costs and $950,000 in fixed manufacturing overhead costs, what is the fixed
manufacturing overhead production volume variance?
$250,000 favorable
Correct

$150,000 unfavorable
Your Answer

$100,000 favorable

$150,000 favorable

Rationale
 $250,000 favorable
This answer is incorrect. The fixed manufacturing overhead spending variance is $250,000 favorable.

Rationale
 $150,000 unfavorable

The fixed manufacturing overhead production volume variance measures the difference between budgeted fixed manufacturing overhead and
allocated fixed manufacturing overhead. It results from the difference between budgeted and actual production. When actual production is lower
than budgeted production, the production volume variance will be unfavorable because it indicates the company generated less production with
its fixed manufacturing costs than expected. In this example, NBV’s pre-determined fixed manufacturing overhead allocation rate is $10 per direct
labor hour {$1,200,000 ÷ (40,000 units × 3 direct labor hours per unit)}. Using this rate, the amount of fixed manufacturing overhead allocated to the
35,000 units produced is $1,050,000 (35,000 units × 3 direct labor hours per unit × $10 per direct labor hour). This results in a production volume
variance of $150,000 unfavorable.

Below is the framework approach.

Master budget costs (Budgeted FOH) were provided. Applied costs are calculated by multiplying the DLHs allowed by the FOH rate. DLHs allowed is
calculated by multiplying actual production of 35,000 units by standard hours per unit (budgeted DLH per unit) of 3 DLH to get 105,000 DLHs
allowed. The 105,000 DLHs allowed is then multiplied by the FOH rate of $10.00 per DLH. Since master budget costs of $1,200,000 are greater than
applied costs of $1,050,000, the fixed overhead volume variance is unfavorable (U).

Below is the formula approach.

Fixed overhead volume variance = Applied costs − Master budget costs

Fixed overhead volume variance: (105,000DLHs × $10.00 per DLH) − $1,200,000 = $150,000 U

or

Fixed overhead volume variance = (Actual production − Budgeted production) × FOH rate
Fixed overhead volume variance: (35,000units − 40,000units) × $30 per unit = $150,000 U

Note that the computational solution for the variable overhead efficiency variance is a negative value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since master budget
costs are less than applied costs, the fixed overhead volume variance is unfavorable (U).

Rationale
 $100,000 favorable
This answer is incorrect. The total fixed manufacturing overhead variance is $100,000 favorable.

Rationale
 $150,000 favorable
This answer is incorrect. The difference between allocated fixed manufacturing overhead and budgeted fixed manufacturing overhead is $150,000.
However, actual production is lower than budgeted production.
Question 41
1.C.1.r
1C1-AT30
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 3

Franklin 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:

temporary employment of workers with lower skill levels than originally anticipated.

a wage hike granted to a production supervisor.

Correct

a newly imposed initiative to reduce finished goods inventory levels.

Your Answer

acceptance of an unexpected sales order.

Rationale
 temporary employment of workers with lower skill levels than originally anticipated.
This answer is incorrect. Temporary employment of workers with lower skill levels than originally anticipated was not the likely cause of
Baltimore's production volume variance.

Rationale
 a wage hike granted to a production supervisor.
This answer is incorrect. A wage hike granted to a production supervisor was not the likely cause of Baltimore's production volume variance.

Rationale
 a newly imposed initiative to reduce finished goods inventory levels.

Volume variances are caused by a difference in the budgeted fixed overhead and the amount allocated on the basis of actual output. A newly
imposed initiative to reduce finished goods inventory levels is consistent with the change in production compared to budget.

A wage hike would affect the spending variance, not the volume variance.

Since the volume variance in this case is unfavorable (amount allocated less than budget), acceptance of an unexpected sales order would not be
correct because an unexpected sales order would increase the amount allocated.

Rationale
 acceptance of an unexpected sales order.
This answer is incorrect. Acceptance of an unexpected sales order was not the likely cause of Baltimore's production volume variance.
Question 42
1.C.1.r
facov.cv.tb.011_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The ABC Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
ABC expected to produce 10,000 units during the year and to use two direct labor hours to produce each unit. It budgeted $400,000 for variable
manufacturing overhead and $600,000 for fixed manufacturing overhead. ABC actually produced 12,000 units and used 18,000 direct labor hours during
the year. If ABC incurred $415,000 in variable manufacturing overhead costs and $580,000 in fixed manufacturing overhead costs, what is the variable
manufacturing overhead spending variance?
Correct

$55,000 unfavorable

$120,000 favorable

$65,000 favorable
Your Answer

$15,000 unfavorable

Rationale
 $55,000 unfavorable

The variable manufacturing overhead spending variance compares the actual variable manufacturing incurred to the amount of variable
manufacturing overhead that “should” have been incurred for the actual quantity of the allocation base used. In this example, ABC’s
predetermined variable manufacturing overhead allocation rate is $20 per direct labor hour {$400,000 ÷ (10,000 units × 2 direct labor hours per
unit)}. Based on this rate, ABC “should” have incurred $360,000 in variable manufacturing overhead for the 18,000 direct labor hours used. Since
actual variable manufacturing overhead is $55,000 higher ($415,000 versus $360,000), the variable manufacturing overhead spending variance is
$55,000 unfavorable.

Below is the framework approach.

For calculating the variable overhead spending variance, we are only interested in total actual variable overhead costs. Total actual variable
overhead is given ($415,000). Based on a VOH rate of $20.00 per hour, we can predict that ABC would actually spend $360,000 for variable overhead
based on actual DLH. Since the total actual costs of $415,000 are greater than predicted spending of $360,000, the variable overhead spending
variance is unfavorable (U).

Below is the formula approach.

Variable overhead spending variance = (Actual activity used × Standard rate) − Actual costs

Variable overhead spending variance: (18,000 hours × $20.00) − $415,000 = $55,000 U

Note that the computational solution for the variable overhead spending variance is a negative value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the total actual
costs are greater than predicted spending, the variable overhead spending variance is unfavorable (U).

Rationale
 $120,000 favorable
This answer is incorrect. The variable manufacturing overhead efficiency variance is $120,000 favorable.
Rationale
 $65,000 favorable
This answer is incorrect. The total variable manufacturing overhead variance is $65,000 favorable.

Rationale
 $15,000 unfavorable
This answer is incorrect. Actual variable manufacturing overhead is $15,000 higher than budgeted variable manufacturing overhead. However, this
difference is not the variable manufacturing overhead spending variance.
Question 43
1.C.1.r
aq.facov.cv.008_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 5

Designer Desks (DD) provided the following information:

Budgeted Variable Manufacturing Overhead (VOH) $54,000

Budgeted Fixed Manufacturing Overhead (FOH) $162,000
Budgeted Production 18,000 units
Budgeted Direct Labor Hours (DLH) 27,000 hours
Budgeted DLH per Unit 1.5 DLH
Standard: VOH 1.5 DLH @ $2 per Hour $3 per unit
Standard: FOH 1.5 DLH @ $6 per Hour $9 per unit
Actual VOH $68,250
Actual FOH $148,000
Actual Production 20,000 units
Actual DLH 32,500

Based on the above information, what is DD's variable overhead efficiency variance?

$3,250 Favorable

$3,250 Unfavorable
Correct

$5,000 Unfavorable

$5,000 Favorable

Rationale
 $3,250 Favorable
This answer is incorrect. This answer represents the variable overhead spending variance, not the variable overhead efficiency variance.
Additionally, the variable overhead spending variance would not be favorable.

Rationale
 $3,250 Unfavorable
This answer is incorrect. This answer represents the variable overhead spending variance, not the variable overhead efficiency variance.

Rationale
 $5,000 Unfavorable

The variable overhead efficiency variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Based on a VOH rate of $2.00 per hour, we can predict that DD should actually spend $65,000 for variable overhead based on actual DLH. Standard
activity allowed is calculated by multiplying actual production of 20,000 by standard hours per unit (budgeted DLH per unit) of 1.5 DLH to get 30,000
DLHs allowed. Since the actual activity used of 32,500 DLHs is more than standard activity allowed of 30,000 DLHs, the variable overhead efficiency
variance is unfavorable (U).

Below is the formula approach.

 Variable overhead efficiency variance = (Standard activity allowed − Actual activity used) × Standard rate

Standard activity allowed : 20,000 units × 1.5 DLHs = 30,000 DLHs allowed

Variable overhead efficiency variance : (30,000 hours − 32,500 hours) × $2.00 = $5,000 U

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual
activity used is more than standard activity allowed, the variable overhead efficiency variance is unfavorable (U).

Rationale
 $5,000 Favorable
This answer is incorrect. This answer correctly calculated the variable overhead efficiency variance; however, this variance is not favorable.
Question 44
1.C.1.r
1C1-AT41
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4

The JoyT Company manufactures Maxi Dolls for sale in toy stores. In planning for this year, JoyT estimated variable factory overhead of $600,000 and
fixed factory overhead of $400,000. JoyT uses a standard costing system, and factory overhead is allocated to units produced on the basis of standard
direct labor hours. The denominator level of activity budgeted for this year was 10,000 direct labor hours, and JoyT used 10,300 actual direct labor hours.

Based on the output accomplished during the year, 9,900 standard direct labor hours should have been used. Actual variable factory overhead was
$596,000, and actual fixed factory overhead was $410,000 for the year.

Based on this information, the volume variance for JoyT for this year is:

$10,000 unfavorable.
Correct

$4,000 unfavorable.

$10,000 favorable.
Your Answer

$4,000 favorable.

Rationale
 $10,000 unfavorable.
This answer is incorrect. This answer represents the fixed overhead static budget variance, not the volume variance.

Rationale
 $4,000 unfavorable.

To calculate the volume variance, take the fixed overhead rate and multiply it by the difference between the denominator (or normal-level) hours
and the standard number of hours.

Fixed overhead rate (normal level hours − standard level hours).

Fixed overhead rate = $400,000 budgeted fixed overhead ÷ 10,000 budgeted direct labor hours = $40/direct labor hour

Volume variance = $40 rate (10,000 normal-level direct labor hours − 9,900 standard-level direct labor hours) = $4,000 unfavorable.

The variance is unfavorable since the normal-level hours came in higher than the standard-level hours.

Rationale
 $10,000 favorable.
This answer is incorrect. This answer represents the fixed overhead static budget variance, not the volume variance. The fixed overhead static
budget variance would not be favorable.

Rationale
 $4,000 favorable.
This answer is incorrect. This answer correctly calculated the volume variance. However, it is not favorable.
Question 45
1.C.1.r
facov.cv.tb.015_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The NBV Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
NBV expected to produce 40,000 units during the year and to use three direct labor hours to produce each unit. It budgeted $600,000 for variable
manufacturing overhead and $1,200,000 for fixed manufacturing overhead. NBV actually produced 35,000 units and used 115,000 direct labor hours
during the year. If NBV incurred $650,000 in variable manufacturing overhead costs and $950,000 in fixed manufacturing overhead costs, what is the
variable manufacturing overhead spending variance?
Correct

$75,000 unfavorable

$50,000 unfavorable
Your Answer

$125,000 unfavorable

$75,000 unfavorable

Rationale
 $75,000 unfavorable

The variable manufacturing overhead spending variance compares the actual variable manufacturing incurred to the amount of variable
manufacturing overhead that “should” have been incurred for the actual quantity of the allocation base used. In this example, NBV’s pre-
determined variable manufacturing overhead allocation rate is $5 per direct labor hour {$600,000 ÷ (40,000 units × 3 direct labor hours per unit)}.
Based on this rate, NBV “should” have incurred $575,000 in variable manufacturing overhead for the 115,000 direct labor hours used. Since actual
variable manufacturing overhead is $75,000 higher ($650,000 versus $575,000), the variable manufacturing overhead spending variance is $75,000
unfavorable.

Below is the framework approach.

For calculating the variable overhead spending variance, we are only interested in total actual variable overhead costs. Total actual variable
overhead is given ($650,000). Based on a VOH rate of $5.00 per hour, we can predict that NBV would actually spend $575,000 for variable overhead
based on actual DLH. Since the total actual costs of $650,000 are greater than predicted spending of $575,000, the variable overhead spending
variance is unfavorable (U).

Below is the formula approach.

Variable overhead spending variance = (Actual activity used × Standard rate) − Actual costs

Variable overhead spending variance: (115,000 hours × $5.00) − $650,000 = $75,000 U

Note that the computational solution for the variable overhead spending variance is a negative value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the total actual
costs are greater than predicted spending, the variable overhead spending variance is unfavorable (U).

Rationale
 $50,000 unfavorable
This answer is incorrect. The variable manufacturing overhead efficiency variance is $50,000 unfavorable.
Rationale
 $125,000 unfavorable
This answer is incorrect. The total variable manufacturing overhead variance is $125,000 unfavorable.

Rationale
 $75,000 unfavorable
This answer is incorrect. Budgeted variable manufacturing overhead is $75,000 higher than allocated variable manufacturing overhead ($600,000
versus $525,000). However, this difference is not the variable manufacturing overhead spending variance.
Question 46
1.C.1.r
1C1-LS21
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: easy
Bloom Code: 2
The difference between applied fixed overhead of $45,000 and budgeted fixed overhead of $40,000 is known as:
Correct

$5,000 favorable production volume variance.

$5,000 overapplied overhead.

$5,000 unfavorable production volume variance.

Your Answer

$5,000 underapplied overhead.

Rationale
 $5,000 favorable production volume variance.
Production volume variance is defined as producing more output than expected (budgeted). It is computed as the difference between budgeted
fixed overhead and applied fixed overhead where budgeted fixed overhead = budgeted quantity × standard fixed overhead rate, and applied fixed
overhead = actual quantity × standard fixed overhead rate. Production volume variance is favorable in this example because the actual quantity
produced is more than the budgeted quantity produced.

Rationale
 $5,000 overapplied overhead.
This answer is incorrect. The difference between applied fixed overhead of $45,000 and budgeted fixed overhead of $40,000 is not known as $5,000
overapplied overhead.

Rationale
 $5,000 unfavorable production volume variance.
This answer is incorrect. The difference between applied fixed overhead of $45,000 and budgeted fixed overhead of $40,000 is not known as $5,000
unfavorable production volume variance.

Rationale
 $5,000 underapplied overhead.
This answer is incorrect. The difference between applied fixed overhead of $45,000 and budgeted fixed overhead of $40,000 is not known as $5,000
underapplied overhead.
Question 47
1.C.1.m
1C1-LS87
LOS: 1.C.1.m
Lesson Reference: Factory Overhead Cost Variances
Difficulty: medium
Bloom Code: 4

A company applies variable overhead based upon direct labor hours and has a variable overhead efficiency variance that is $25,000 favorable. A possible
cause of this variance is that:

* Source: Retired ICMA CMA Exam Questions.

fewer units of finished goods were produced.

electricity rates were lower than expected.

Correct

higher-skilled labor was used.

fewer supplies were used than anticipated.

Rationale
 fewer units of finished goods were produced.
This answer is incorrect. Fewer units of finished goods were produced is not a possible cause of a favorable variable overhead efficiency variance.

Rationale
 electricity rates were lower than expected.
This answer is incorrect. Electricity rates were lower than expected is not a possible cause of a favorable variable overhead efficiency variance.

Rationale
 higher-skilled labor was used.
In this case, variable overhead is based upon direct labor hours. Given that the variable overhead efficiency variance was $25,000 favorable, we can
assume that the labor force was higher skilled and, through the learning curve, became more efficient in the production process.

Rationale
 fewer supplies were used than anticipated.
This answer is incorrect. Fewer supplies were used than anticipated is not a possible cause of a favorable variable overhead efficiency variance.
Question 48
1.C.1.r
facov.cv.tb.012_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The ABC Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
ABC expected to produce 10,000 units during the year and to use two direct labor hours to produce each unit. It budgeted $400,000 for variable
manufacturing overhead and $600,000 for fixed manufacturing overhead. ABC actually produced 12,000 units and used 18,000 direct labor hours during
the year. If ABC incurred $415,000 in variable manufacturing overhead costs and $580,000 in fixed manufacturing overhead costs, what is the variable
manufacturing overhead efficiency variance?
$55,000 unfavorable
Correct

$120,000 favorable
Your Answer

$65,000 favorable

$15,000 unfavorable

Rationale
 $55,000 unfavorable
This answer is incorrect. The variable manufacturing overhead spending variance is $55,000 unfavorable.

Rationale
 $120,000 favorable

The variable manufacturing overhead efficiency variance measures how efficiently a company used the allocation base, not how efficiently it used
variable manufacturing overhead. It is calculated by multiplying the predetermined variable manufacturing overhead allocation rate by the
difference between the actual amount of the allocation base used and amount that “should” have been used for the amount produced. In this
example, ABC’s predetermined variable manufacturing overhead allocation rate is $20 per direct labor hour {$400,000 ÷ (10,000 units × 2 direct
labor hours per unit)}. ABC “should” have used 24,000 direct labor hours to produce the 12,000 units. The 6,000 fewer direct labor hours used is then
multiplied by the $20 per direct labor hour rate. Since fewer hours were used, the variable manufacturing overhead efficiency variance is $120,000
favorable (6,000 direct labor hours × $20 per direct labor hour).

Below is the framework approach.

Based on a VOH rate of $20.00 per hour, we can predict that ABC would actually spend $360,000 for variable overhead based on actual DLH.
Standard activity allowed is given. Since the actual activity used of 18,000 DLHs is less than standard activity allowed of 24,000 DLHs, the variable
overhead efficiency variance is favorable (F).

Below is the formula approach.

Variable overhead efficiency variance = (Standard activity allowed − Actual activity used) × Standard VOH rate

Variable overhead efficiency variance: (24,000 hours – 18,000hours) × $20.00 = $120,000 F

Note that the computational solution for the variable overhead efficiency variance is a positive value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual
activity used is less than standard activity allowed, the variable overhead efficiency variance is favorable (F).
Rationale
 $65,000 favorable
This answer is incorrect. The total variable manufacturing overhead variance is $65,000 favorable.

Rationale
 $15,000 unfavorable
This answer is incorrect. Actual variable manufacturing overhead is $15,000 higher than budgeted variable manufacturing overhead. However, this
difference is not the variable manufacturing overhead efficiency variance.
Question 49
1.C.1.r
facov.cv.tb.022_0820
LOS: 1.C.1.r
Lesson Reference: Factory Overhead Cost Variances
Difficulty: hard
Bloom Code: 4
The PBJ Company allocates both variable manufacturing overhead and fixed manufacturing overhead using direct labor hours as the allocation base.
PBJ expected to produce 50,000 units during the year and to use four direct labor hours to produce each unit. It budgeted $800,000 for variable
manufacturing overhead and $1,400,000 for fixed manufacturing overhead. PBJ actually produced 56,000 units and used 240,000 direct labor hours
during the year. If PBJ incurred $980,000 in variable manufacturing overhead costs and $1,300,000 in fixed manufacturing overhead costs, what is the
fixed manufacturing overhead production volume variance?
$100,000 favorable
Correct

$168,000 favorable
Your Answer

$268,000 favorable

$168,000 unfavorable

Rationale
 $100,000 favorable
This answer is incorrect. The fixed manufacturing overhead spending variance is $100,000 favorable.

Rationale
 $168,000 favorable

The fixed manufacturing overhead production volume variance measures the difference between budgeted fixed manufacturing overhead and
allocated fixed manufacturing overhead. It results from the difference between budgeted and actual production. When actual production is higher
than budgeted production, the production volume variance will be favorable because it indicates the company generated more production with its
fixed manufacturing costs than expected. In this example, PBJ’s pre-determined fixed manufacturing overhead allocation rate is $7 per direct labor
hour {$1,400,000 ÷ (50,000 units × 4 direct labor hours per unit)}. Using this rate, the amount of fixed manufacturing overhead allocated to the
56,000 units produced is $1,568,000 (56,000 units × 4 direct labor hours per unit × $7 per direct labor hour). This results in a production volume
variance of $168,000 favorable.

Below is the framework approach.

Master budget costs (Budgeted FOH) were provided. Applied costs are calculated by multiplying the DLHs allowed by the FOH rate. DLHs allowed is
calculated by multiplying actual production of 56,000 units by standard hours per unit (budgeted DLH per unit) of 4 DLH to get 224,000 DLHs
allowed. The 224,000 DLHs allowed is then multiplied by the FOH rate of $7.00 per DLH. Since master budget costs of $1,400,000 are less than
applied costs of $1,568,000, the fixed overhead volume variance is favorable (F).

Below is the formula approach.

Fixed overhead volume variance = Applied costs − Master budget costs

Fixed overhead volume variance: (224,000DLHs × $7.00 per DLH) − $1,400,000 = $168,000 F

or

Fixed overhead volume variance = (Actual production − Budgeted production) × FOH rate
Fixed overhead volume variance: (56,000units − 50,000units) × $28 per unit = $168,000 F

Note that the computational solution for the variable overhead efficiency variance is a positive value, but the result is reported as an absolute
value. Variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since master budget
costs are less than applied costs, the fixed overhead volume variance is favorable (F).

Rationale
 $268,000 favorable
This answer is incorrect. The total fixed manufacturing overhead variance is $268,000 favorable.

Rationale
 $168,000 unfavorable
This answer is incorrect. The difference between allocated fixed manufacturing overhead and budgeted fixed manufacturing overhead is $168,000.
However, actual production is higher than budgeted production.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.1.s
manw.va.tb.013_0120
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 3
Bixby Motor Oil has been experiencing an increasing unfavorable materials quantity variance since March. The company discovered that the cause was
an old machine that was wasting more materials than normal. If the standard quantity for 10,000 units is 15,000 pounds and the standard price is $1.52
per pound, which of the following sets of data may have warned the company about the problem?
Your Answer

Actual quantity of 12,000 pounds

Actual price of $1.55 per pound

Correct

Actual quantity of 17,000 pounds

Actual price of $1.50 per pound

Rationale
 Actual quantity of 12,000 pounds
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
An actual quantity of 12,000 pounds would not have warned Bixby about the problem since this does not indicate more materials being used than
should have been used.

Rationale
 Actual price of $1.55 per pound
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
An actual price of $1.55 per pound would not have warned Bixby about the problem since this does not indicate more materials being used than
should have been used.

Rationale
 Actual quantity of 17,000 pounds
An unfavorable materials quantity variance means more materials were used in production than “should” have been used. An actual quantity of
17,000 pounds would have warned Bixby about the problem since any amount over the 15,000 that should have been used to produce 10,000 units
would result in an unfavorable materials quantity variance.

Rationale
 Actual price of $1.50 per pound
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
An actual price of $1.50 per pound would not have warned Bixby about the problem since this does not indicate more materials being used than
should have been used.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.1.s
manw.va.tb.009_0120
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 2
Which of the following is usually responsible for a labor price variance attributable to misallocation of workers?
Quality control

Purchasing
Correct

Production

Engineering

Rationale
 Quality control
This answer is incorrect. An unfavorable labor price variance attributable to misallocation of workers is not usually the responsibility of quality
control as it is not responsible for deploying and allocating production workers.

Rationale
 Purchasing
This answer is incorrect. An unfavorable labor price variance attributable to misallocation of workers is not usually the responsibility of the
purchasing department as it is not responsible for deploying and allocating production workers.

Rationale
 Production
Variances can be used to identify areas for managers to focus on. As part of this analysis, managers need to determine which variances are within
the control of the department and which are not. An unfavorable labor price variance attributable to misallocation of workers is usually within the
control of the production department since it is most responsible for deploying and allocating production workers.

Rationale
 Engineering
This answer is incorrect. An unfavorable labor price variance attributable to misallocation of workers is not usually the responsibility of the
engineering department as it is not responsible for deploying and allocating production workers.
Question 3
1.C.1.q
aq.manw.va.007_1807
LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

Accounting Training, Inc. (ATI) provides continuing education seminars. These seminars are sold as a continuing education event to accounting firms,
which then schedule to bring in their own employees. Seminars are held at hotels in a location that is convenient to the client organization. ATI has a
large number of certified seminar instructors that it contracts to travel to the event and provide the training. The standard price for a training seminar
event is $50,000. Below are ATI's standard variable costs for a seminar event.

Accounting Training, Inc.

Standard Price and Cost Sheet Input Quantity Cost per Input Cost per Event
Printed packets - per attendee 75 attendees $50 per attendee $ 3,750
Instructors - per instructor 3 instructors $4,000 per instructor 12,000
Travel reimbursement - per instructor 3 instructors $1,100 per instructor 3,300
Hotel facility rent - per event 1 event $20,000 per event 20,000
Total Product Cost $39,050

In addition to the standard variable costs listed above, ATI has budgeted $100,000 as an annual fixed cost for advertising.

For the year just completed ATI had originally planned for 80 seminar events with 75 participants per event. ATI actually held 77 seminar events for the
year with an average of 78 participants at each event and collected $3,734,500 in revenue. ATI's actual costs and activity volumes are listed below.

Printed materials: $351,000 for 6,500 packets

Instructors: $936,000 for 240 instructor contract payments
Travel: $288,000 for 240 travel reimbursements
Hotels: $1,617,000 for 77 hotel bookings
Advertising: $88,000 total

What is the hotel spending variance and the advertising spending variance?

Hotel Spending Variance: $77,000 Favorable; Advertising Spending Variance: $12,000 Unfavorable.
Your Answer

Hotel Spending Variance: $77,000 Favorable; Advertising Spending Variance: $12,000 Favorable.

Hotel Spending Variance: $77,000 Unfavorable; Advertising Spending Variance: $12,000 Unfavorable.
Correct

Hotel Spending Variance: $77,000 Unfavorable; Advertising Spending Variance: $12,000 Favorable.

Rationale
 Hotel Spending Variance: $77,000 Favorable; Advertising Spending Variance: $12,000 Unfavorable.
This answer is incorrect. This answer correctly calculates the hotel spending variance; however, the variance is not favorable. Additionally, this
answer correctly calculates the advertising spending variance; however, the variance is not unfavorable.

Rationale
 Hotel Spending Variance: $77,000 Favorable; Advertising Spending Variance: $12,000 Favorable.
This answer is incorrect. This answer correctly calculates the hotel spending variance; however, the variance is not favorable. The advertising
spending variance is correct.

Rationale
 Hotel Spending Variance: $77,000 Unfavorable; Advertising Spending Variance: $12,000 Unfavorable.
This answer is incorrect. This answer correctly calculates the advertising spending variance; however, the variance is not unfavorable. The hotel
spending variance is correct.

Rationale
 Hotel Spending Variance: $77,000 Unfavorable; Advertising Spending Variance: $12,000 Favorable.

Hotel spending variance:

ATI's average booking cost on hotels $21,000 per booking ($1,617,000 ÷ 77 events) and is unfavorable. Since this is the only source of hotel cost
variance, this price variance represents the entire spending variance.

Hotel spending variance = (Actual activity used × Standard rate) − Actual cost
Hotel spending variance = (77 bookings × $20,000) − $1,617,000 = $77,000 U

Advertising spending variance:

Because advertising is a fixed cost, the spending variance computation is very straightforward.

Advertising spending variance = Budgeted cost − Actual cost

Advertising spending variance = $100,000 − $88,000 = $12,000 F

Question 4
1.C.1.q
aq.manw.va.005_0820
LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

Accounting Training, Inc. (ATI) provides continuing education seminars. These seminars are sold as a continuing education event to accounting firms,
which then schedule to bring in their own employees. Seminars are held at hotels in a location that is convenient to the client organization. ATI has a
large number of certified seminar instructors that it contracts to travel to the event and provide the training. The standard price for a training seminar
event is $50,000. Below are ATI's standard variable costs for a seminar event.

Accounting Training, Inc.

Standard Price and Cost Sheet Input Quantity Cost per Input Cost per Event
Printed packets - per attendee 75 attendees $50 per attendee $ 3,750
Instructors - per instructor 3 instructors $4,000 per instructor 12,000
Travel reimbursement - per instructor 3 instructors $1,100 per instructor 3,300
Hotel facility rent - per event 1 event $20,000 per event 20,000
Total Product Cost $39,050

In addition to the standard variable costs listed above, ATI has budgeted $100,000 as an annual fixed cost for advertising.

For the year just completed ATI had originally planned for 80 seminar events with 75 participants per event. ATI actually held 77 seminar events for the
year with an average of 78 participants at each event and collected $3,734,500 in revenue. ATI's actual costs and activity volumes are listed below.

Printed materials: $351,000 for 6,500 packets

Instructors: $936,000 for 240 instructor contract payments
Travel: $288,000 for 240 travel reimbursements
Hotels: $1,617,000 for 77 hotel bookings
Advertising: $88,000 total

What is the instructor rate variance and efficiency variance?

Correct

Instructor Rate Variance: $24,000 Favorable; Instructor Efficiency Variance: $36,000 Unfavorable.
Your Answer

Instructor Rate Variance: $24,000 Unfavorable; Instructor Efficiency Variance: $36,000 Unfavorable.

Instructor Rate Variance: $24,000 Favorable; Instructor Efficiency Variance: $36,000 Favorable.

Instructor Rate Variance: $24,000 Unfavorable; Instructor Efficiency Variance: $36,000 Favorable.

Rationale
 Instructor Rate Variance: $24,000 Favorable; Instructor Efficiency Variance: $36,000 Unfavorable.

Instructor rate variance and efficiency variance:

ATI's average actual rate paid on instructor contracts was $3,900 per contract ($936,000 ÷ 240 instructor contracts) and is favorable. The standard
instructor contracts allowed for the 77 actual events is 231 contracts (3 contracts per event × 77 actual events), which means the efficiency variance
is unfavorable (ATI sometimes had more than three instructors at seminar events).

Instructor rate variance = Actual quantity × (Standard rate − Actual rate)

Instructor rate variance = 240 contracts × ($4,000 − $3,900) = $24,000 F

Instructor efficiency variance = (Standard quantity allowed − Actual quantity used) × Standard price

Instructor efficiency variance = (231 contracts − 240 contracts) × $4,000 = $36,000 U

Rationale
 Instructor Rate Variance: $24,000 Unfavorable; Instructor Efficiency Variance: $36,000 Unfavorable.
This answer is incorrect. This answer correctly calculated the instructor rate variance; however, the variance is not unfavorable. The instructor
efficiency variance is correct.

Rationale
 Instructor Rate Variance: $24,000 Favorable; Instructor Efficiency Variance: $36,000 Favorable.
This answer is incorrect. This answer correctly calculated the instructor efficiency variance; however, the variance is not favorable. The instructor
rate variance is correct.
Rationale
 Instructor Rate Variance: $24,000 Unfavorable; Instructor Efficiency Variance: $36,000 Favorable.
This answer is incorrect. This answer correctly calculated the instructor rate variance; however, the variance is not unfavorable. Additionally, this
answer correctly calculated the instructor efficiency variance; however, the variance is not favorable.
Question 5
1.C.1.q
aq.manw.va.002_0820
LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: hard
Bloom Code: 5

Chair Company (CC) manufactures inexpensive classroom chairs, and has provided the following standard cost sheet costs for delivering chairs to buying
customers:

Variable selling overhead − $5. 00 standard cost per chair to deliver

CC also disclosed the following actual information:

Actual total delivery costs: $5,302.50.

1,100 plastic chairs were produced and sold during the year.
Actual chairs delivered: 1,050 (50 chairs were picked up by customers).

What is the sales and administrative (S&A) overhead efficiency variance based on the above information?

Correct

$250.00 Favorable

$250.00 Unfavorable
Your Answer

$52.50 Unfavorable

$52.50 Favorable

Rationale
 $250.00 Favorable

The S&A overhead efficiency variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Since the actual quantity delivered is less than the standard deliveries allowed, the S&A overhead efficiency variance is favorable (F).

Below is the formula approach.

S&A overhead efficiency variance = (Standard delivery events allowed − Actual chairsdelivered) × Standard rate

S&A overhead efficiency variance: (1,100 chairs − 1,050 chairs) × $5.00 = $250.00 F

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. As mentioned, since the actual
quantity delivered is less than the standard deliveries allowed, the S&A overhead efficiency variance is favorable (F).

Rationale
 $250.00 Unfavorable
This answer is incorrect. This answer correctly calculates the S&A overhead efficiency variance; however, this variance is not unfavorable.

Rationale
 $52.50 Unfavorable
This answer is incorrect. This answer represents the S&A overhead price variance, not the S&A overhead efficiency variance.
Rationale
 $52.50 Favorable
This answer is incorrect. This answer represents the S&A overhead price variance, not the S&A overhead efficiency variance. Additionally, the S&A
overhead price variance would not be favorable.
Question 6
1.C.1.s
tb.manw.va.003_1808
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 4
Under which of the following circumstances is Sammy's Shirts likely to consider a budget variance significant and take action to correct the variance?
When actual costs exceed budgeted costs by .5%.
Your Answer

When actual costs are lower than budgeted costs by 2%.

When actual costs are lower than budgeted costs by 1%.

Correct

When actual costs exceed budgeted costs by 8%.

Rationale
 When actual costs exceed budgeted costs by .5%.
Incorrect. While materiality can be defined in many ways, a .5% variance (whether unfavorable or favorable) does not qualify as material and
significant. Sammy would most likely not investigate this variance and take corrective action related to it as it is insignificant, and the benefits
would likely not exceed the costs.

Rationale
 When actual costs are lower than budgeted costs by 2%.
Incorrect. While materiality can be defined in many ways, a 2% variance (whether unfavorable or favorable) does not qualify as material and
significant. Sammy would most likely not investigate this variance and take corrective action related to it as it is insignificant, and the benefits
would likely not exceed the costs.

Rationale
 When actual costs are lower than budgeted costs by 1%.
Incorrect. While materiality can be defined in many ways, a 1% variance (whether unfavorable or favorable) does not qualify as material and
significant. Sammy would most likely not investigate this variance and take corrective action related to it as it is insignificant, and the benefits
would likely not exceed the costs.

Rationale
 When actual costs exceed budgeted costs by 8%.
Correct. Variances can be used to identify areas for managers to focus on. Since managers’ time is limited, they cannot focus on each and every
variance. One factor to consider when deciding whether to investigate a variance is the materiality (size) of the variance. Managers are more likely
to investigate larger variances (in dollar amount or relative to budgeted amounts) as correcting these items results in larger benefits. While
materiality can be defined in many ways, an 8% variance (whether unfavorable or favorable) qualifies as material and significant. Sammy would
most likely investigate this variance and take corrective action based on that investigation.
Question 7
1.C.1.s
1D1-AT20d
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 2
In a standard cost system, the investigation of an unfavorable material usage variance should begin with the:
plant controller only.

purchasing manager only.

Correct

production manager and/or the purchasing manager.

production manager only.

Rationale
 plant controller only.
This answer is incorrect. In a standard cost system, the investigation of an unfavorable material usage variance should not begin with the plant
controller only.

Rationale
 purchasing manager only.
This answer is incorrect. In a standard cost system, the investigation of an unfavorable material usage variance should not begin with the
purchasing manager only.

Rationale
 production manager and/or the purchasing manager.
Assuming the material usage standard is realistic, the material usage variance would be caused by either production problems or inferior materials
having been purchased and used in production. The former is a production issue, while the latter is a purchasing issue.

Rationale
 production manager only.
This answer is incorrect. In a standard cost system, the investigation of an unfavorable material usage variance should not begin with the
production manager only.
Question 8
1.C.1.s
manw.va.tb.010_0120
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 3
Larson Textiles made 8,000 bolts of cloth in June. The company used 35,000 pounds of direct materials that cost them $2.85 per pound. The standard
quantity of materials is 4.5 pounds per unit and the standard price is $2.72 per pound. If the company wants to determine the reason for the materials
price variance, what should it do first?
Talk to the production department

Talk to the sales department

Your Answer

Talk to the finance department

Correct

Talk to the purchasing department

Rationale
 Talk to the production department
This answer is incorrect. An unfavorable materials price variance means a company paid a higher price for materials than expected. Since the
production department is generally not involved in negotiating purchase agreements, it would not be a good first step to talk to the production
department to determine the reason for an unfavorable materials price variance.

Rationale
 Talk to the sales department
This answer is incorrect. An unfavorable materials price variance means a company paid a higher price for materials than expected. Since the sales
department is generally not involved in negotiating purchase agreements, it would not be a good first step to talk to the sales department to
determine the reason for an unfavorable materials price variance.

Rationale
 Talk to the finance department
This answer is incorrect. An unfavorable materials price variance means a company paid a higher price for materials than expected. Since the
finance department is generally not involved in negotiating purchase agreements, it would not be a good first step to talk to the finance
department to determine the reason for an unfavorable materials price variance.

Rationale
 Talk to the purchasing department
Variances can be used to identify areas for managers to focus on. As part of this analysis, managers need to determine which variances are within
the control of the department and which are not. An unfavorable materials price variance means a company paid a higher price for materials than
expected. This is the case for Larson. Since the purchasing department is responsible for negotiating purchase agreements, it would be a good first
step to talk to the purchasing department to determine the reason for an unfavorable materials price variance.
Question 9
1.C.1.q
manw.va.tb.006_0120
LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4
The Tiger Company uses labor, materials, and overhead variances and the Lion Company uses labor and overhead variances, but not material variances.
Which statement about Tiger and Lion is correct?
Tiger is likely a service company and Lion is likely a manufacturing company.
Correct

Tiger is likely a manufacturing company and Lion is likely a service company.

Both companies are likely to be manufacturing companies.

Your Answer

Both companies are likely to be service companies.

Rationale
 Tiger is likely a service company and Lion is likely a manufacturing company.
This answer is incorrect. Organizations can benefit from using variance analysis in areas they spend significant resources on, but not from using
variance analysis in other areas. Since manufacturing companies use labor, materials, and overhead in their operations, they are likely to benefit
from using variances in all three of these cost areas. Service companies, on the other hand, are not likely to get much benefit from using materials
variances because they use little to no materials in their operations. Based on this, Tiger is most likely not a service company and Lion is most likely
not a manufacturing company.

Rationale
 Tiger is likely a manufacturing company and Lion is likely a service company.
Organizations can benefit from using variance analysis in areas they spend significant resources on, but not from using variance analysis in other
areas. Since manufacturing companies use labor, materials, and overhead in their operations, they are likely to benefit from using variances in all
three of these cost areas. Service companies, on the other hand, are not likely to get much benefit from using materials variances because they use
little to no materials in their operations. Based on this, Tiger is likely a manufacturing company and Lion is likely a service company.

Rationale
 Both companies are likely to be manufacturing companies.
This answer is incorrect. Organizations can benefit from using variance analysis in areas they spend significant resources on, but not from using
variance analysis in other areas. In this problem, one company uses materials variances and the other doesn’t, which suggests that it is not likely
that they are both manufacturing companies.

Rationale
 Both companies are likely to be service companies.
This answer is incorrect. Organizations can benefit from using variance analysis in areas they spend significant resources on, but not from using
variance analysis in other areas. In this problem, one company uses materials variances and the other doesn’t, which suggests that it is not likely
that they are both service companies.
Question 10
1.C.1.s
1C1-LS89
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

The following information is from the accounting records of St. Charles Enterprises.

Static Budget Actual

Sales volume (units) 82,000 75,000
Selling price/unit $ 15.00 $ 15.00
Variable cost/unit $ 9.00 $ 9.25
Fixed cost $ 280,000.00 $ 285,000.00
A staff assistant performed a comparison of budget and actual data, and calculated an unfavorable operating income variance of $65,750. The assistant
concluded that performance did not meet expectations because there was an unfavorable variance in operating income. Which one of the following is
the best evaluation of this preliminary conclusion?

* Source: Retired ICMA CMA Exam Questions.

The conclusion is incorrect, but the variance calculation is informative.

Correct

The conclusion is correct, but the variance calculation could be more informative.

The conclusion is incorrect and the variance calculation is correct.

Both the conclusion and the variance calculation are incorrect.

Rationale
 The conclusion is incorrect, but the variance calculation is informative.
This answer is incorrect. The conclusion is actually correct and the the variance calculation could be more informative.

Rationale
 The conclusion is correct, but the variance calculation could be more informative.
In this problem, there is an unfavorable variance in the sales volume versus the actual, therefore, it would cause an unfavorable variance in
operating income. Given that a static budget was used, the staff assistance should have provided additional information to state why the variances
have occurred, and suggest that a flexible budget be used.

Rationale
 The conclusion is incorrect and the variance calculation is correct.
This answer is incorrect. The conclusion is correct and the variance calculation is correct. However, other variance calculations could be more
informative.

Rationale
 Both the conclusion and the variance calculation are incorrect.
This answer is incorrect. Either the conclusion, the variance calculation or both are correct.
Question 11
1.C.1.s
1C1-LS42
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

During the month of May, Tyler Company experienced a significant unfavorable material efficiency variance in the production of its single product at one
of Tyler's plants. All of the following reasons can explain why the unfavorable variance arose except:

* Source: Retired ICMA CMA Exam Questions.

replacement production equipment had just been installed.

inferior materials were purchased.

Your Answer

workers used were less skilled than expected.

Correct

actual production was lower than planned production.

Rationale
 replacement production equipment had just been installed.
This answer is incorrect. If Tyler Company experienced a significant unfavorable material efficiency variance, this could be because replacement
production equipment had just been installed.

Rationale
 inferior materials were purchased.
This answer is incorrect. If Tyler Company experienced a significant unfavorable material efficiency variance, this could be because inferior
materials were purchased.

Rationale
 workers used were less skilled than expected.
This answer is incorrect. If Tyler Company experienced a significant unfavorable material efficiency variance, this could be because workers used
were less skilled than expected.

Rationale
 actual production was lower than planned production.
In the event that there is a significant unfavorable material efficiency variance in the production of a single product, it could mean that inferior
materials were purchased, workers were less skilled than expected, or the replacement production equipment had just been installed, creating
some downtime leading to the unfavorable variance.
Question 12
1.C.1.s
manw.va.tb.011_0120
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 3
Chester Tools realized that they had an unfavorable variance in their screwdriver production for the month of May. Their first plan of action was to talk to
the purchasing department. What type of variance did they likely have?
Correct

Materials price variance

Materials quantity variance

Your Answer

Labor price variance

Labor quantity variance

Rationale
 Materials price variance
Variances can be used to identify areas for managers to focus on. As part of this analysis, managers need to determine which variances are within
the control of the department and which are not. An unfavorable materials price variance means a company paid a higher price for materials than
expected. This is the case for Chester. Since the purchasing department is responsible for negotiating purchase agreements, it would be a good first
step to talk to the purchasing department to determine the reason for an unfavorable materials price variance.

Rationale
 Materials quantity variance
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
Since the purchasing department is not likely involved in how materials are used, Chester likely does not have a materials quantity variance.

Rationale
 Labor price variance
This answer is incorrect. An unfavorable labor price variance means a higher wage rate than expected was paid. Since the purchasing department is
not likely involved in how much production workers are paid, Chester likely does not have a labor price variance.

Rationale
 Labor quantity variance
This answer is incorrect. An unfavorable labor quantity variance means more hours were used in production than “should” have been used. Since
the purchasing department is not likely involved in how production workers are trained and deployed, Chester likely does not have a labor quantity
variance.
Question 13
1.C.1.s
aq.manw.va.009_0820
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 2
Fake Flowers (FF) paid more property tax on their manufacturing facility this year than they were expecting. This would most likely cause an:
unfavorable fixed overhead volume variance.
Correct

unfavorable fixed overhead spending variance.

Your Answer

unfavorable variable overhead efficiency variance.

unfavorable variable overhead spending variance.

Rationale
 unfavorable fixed overhead volume variance.
This answer is incorrect. The fixed overhead volume variance is the difference between master budget costs and applied costs and does not
consider actual fixed overhead expenses. FF will have a volume variance if actual manufacturing output is more or less than budgeted.

Rationale
 unfavorable fixed overhead spending variance.
Manufacturing facility property tax is most often considered a fixed cost. The fixed overhead spending variance is the difference between total
actual fixed costs and master budget costs. The property tax would cause total actual costs to exceed master budget costs, leading to an
unfavorable fixed overhead spending variance.

Rationale
 unfavorable variable overhead efficiency variance.
This answer is incorrect. Manufacturing facility property tax is a fixed cost, not a variable cost. In addition, the variable overhead efficiency variance
is based on the efficient use of the activity basis used to apply variable overhead costs.

Rationale
 unfavorable variable overhead spending variance.
This answer is incorrect. Manufacturing facility property tax is a fixed cost, not a variable cost.
Question 14
1.C.1.q
aq.manw.va.003_1807
LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

Accounting Training, Inc. (ATI) provides continuing education seminars. These seminars are sold as a continuing education event to accounting firms,
which then schedule to bring in their own employees. Seminars are held at hotels in a location that is convenient to the client organization. ATI has a
large number of certified seminar instructors that it contracts to travel to the event and provide the training. The standard price for a training seminar
event is $50,000. Below are ATI's standard variable costs for a seminar event.

Accounting Training, Inc.

Standard Price and Cost Sheet Input Quantity Cost per Input Cost per Event
Printed packets - per attendee 75 attendees $50 per attendee $ 3,750
Instructors - per instructor 3 instructors $4,000 per instructor 12,000
Travel reimbursement - per instructor 3 instructors $1,100 per instructor 3,300
Hotel facility rent - per event 1 event $20,000 per event 20,000
Total Product Cost $39,050

In addition to the standard variable costs listed above, ATI has budgeted $100,000 as an annual fixed cost for advertising.

For the year just completed ATI had originally planned for 80 seminar events with 75 participants per event. ATI actually held 77 seminar events for the
year with an average of 78 participants at each event and collected $3,734,500 in revenue. ATI's actual costs and activity volumes are listed below.

Printed materials: $351,000 for 6,500 packets

Instructors: $936,000 for 240 instructor contract payments
Travel: $288,000 for 240 travel reimbursements
Hotels: $1,617,000 for 77 hotel bookings
Advertising: $88,000 total

What is the revenue price variance and volume variance?

Revenue Price Variance: $115,500 Favorable; Revenue Volume Variance: $150,000 Unfavorable.
Your Answer

Revenue Price Variance: $115,500 Unfavorable; Revenue Volume Variance: $150,000 Favorable.
Correct

Revenue Price Variance: $115,500 Unfavorable; Revenue Volume Variance: $150,000 Unfavorable.

Revenue Price Variance: $115,500 Favorable; Revenue Volume Variance: $150,000 Favorable.

Rationale
 Revenue Price Variance: $115,500 Favorable; Revenue Volume Variance: $150,000 Unfavorable.
This answer is incorrect. This answer correctly calculates the revenue price variance; however, the variance is not favorable. The revenue volume
variance is correct.

Rationale
 Revenue Price Variance: $115,500 Unfavorable; Revenue Volume Variance: $150,000 Favorable.
This answer is incorrect. This answer correctly calculates the revenue volume variance; however, the variance is not favorable. The revenue price
variance is correct.

Rationale
 Revenue Price Variance: $115,500 Unfavorable; Revenue Volume Variance: $150,000 Unfavorable.

Revenue price variance and volume variance (measured by price):

Note that ATI's average price per seminar event was actually $48,500 per event ($3,734,500 ÷ 77 events) and is unfavorable.

Revenue price variance = Actual volume × (Standard price − Actual price)

Revenue price variance = 77 events × ($50,000 − 48,500) = $115,500 U

Revenue volume variance = (Expected volume − Actual volume) × Standard price

Revenue volume variance = (80 seminars − 77 seminars) × $50,000 = $150,000 U

Rationale
 Revenue Price Variance: $115,500 Favorable; Revenue Volume Variance: $150,000 Favorable.
This answer is incorrect. This answer correctly calculates the revenue price variance and the revenue volume variance; however, the variances are
not favorable.
Question 15
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Lesson Reference: Management Work with Variance Analysis
Difficulty: hard
Bloom Code: 5

Chair Company (CC) manufactures inexpensive classroom chairs, and has provided the following standard costs for delivering chairs to buying
customers:

Variable selling overhead − $5. 00 standard cost per chair to deliver

CC disclosed the following actual information:

Actual total delivery costs: $5,302.50.

1,100 plastic chairs were produced and sold during the year.
Actual chairs delivered: 1,050 (50 chairs did not have to be delivered because they were picked up by customers).

What is the sales and administrative (S&A) overhead price variance based on the above information?

$52.50 Favorable
Correct

$52.50 Unfavorable

$250.00 Favorable

$250.000 Unfavorable

Rationale
 $52.50 Favorable
This answer is incorrect. This answer correctly calculated the S&A overhead price variance; however, this variance is not favorable.

Rationale
 $52.50 Unfavorable

The S&A overhead price variance formula can be calculated using either the framework approach or the formula approach.

Below is the framework approach.

Note that we can compute the actual delivery price paid on the 1,050 chairs as $5.05 per chair ($5,302.50 ÷ 1,050 chairs). Since the actual price is
more than the standard price, the S&A overhead price variance is unfavorable (U).

Below is the formula approach.

S&A overhead price variance = Actual quantity delivered × (Standard price − Actual price)

S&A overhead price variance: 1,050 units × ($5.00 − $5.05) = $52.50 U

Note that variances are not reported as negative or positive values, but as unfavorable (U) or favorable (F) values. Since the actual price is more
than the standard price, the S&A overhead price variance is unfavorable (U).

Rationale
 $250.00 Favorable
This answer is incorrect. This answer represents the S&A overhead efficiency variance, not the S&A overhead price variance.
Rationale
 $250.000 Unfavorable
This answer is incorrect. This answer represents the S&A overhead efficiency variance, not the S&A overhead price variance. Additionally, the S&A
overhead efficiency variance would not be unfavorable.
Question 16
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Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4
An unfavorable labor quantity variance means that:
The actual rate was higher than the standard rate.

The total labor variance must also be unfavorable.

Correct

Actual hours exceeded standard hours.

Actual hours were less than standard hours.

Rationale
 The actual rate was higher than the standard rate.
Incorrect. An unfavorable labor price variance, not quantity variance, occurs when the actual rate is higher than the standard rate.

Rationale
 The total labor variance must also be unfavorable.
Incorrect. A favorable labor price variance is smaller than an unfavorable labor quantity variance or if the labor quantity and labor price variances
are both unfavorable, the total labor variance will be unfavorable. Any of these scenarios is possible.

Rationale
 Actual hours exceeded standard hours.
Correct. Variances are classified depending on how they impact actual net income relative to net income in the static budget. Any variance that
would increase actual net income relative to net income in the static budget is a favorable variance and any variance that would decrease actual
net income relative to net income in the static budget is an unfavorable variance. An unfavorable labor quantity variance occurs when actual hours
worked are greater than the standard hours “allowed” to be worked for actual volume.

Rationale
 Actual hours were less than standard hours.
Incorrect. An unfavorable labor quantity variance occurs when actual hours worked are greater than, not less than, the standard hours “allowed” to
be worked for actual volume. Fewer hours would increase net income, not decrease it.
Question 17
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LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 2
Fake Flowers (FF) experienced a favorable direct materials price variance while also experiencing an unfavorable direct materials usage variance. Which
of the following best explains the likely cause of these variances?
FF produced fewer flowers this period than expected.

FF purchased and used premium grade plastic to produce its flowers.

Correct

FF purchased and used low-quality plastic to produce its flowers.

FF produced more flowers this period than expected.

Rationale
 FF produced fewer flowers this period than expected.
This answer is incorrect. The number of flowers produced this period does not affect the direct materials price variance or the direct materials
usage variance.

Rationale
 FF purchased and used premium grade plastic to produce its flowers.
This answer is incorrect. If FF purchased and used premium grade plastic to produce its flowers, it would likely experience an unfavorable direct
materials price variance and a favorable direct materials usage variance, not the other way around.

Rationale
 FF purchased and used low-quality plastic to produce its flowers.
Assuming FF purchased and used low-quality plastic to produce its flowers, the direct materials price variance would be favorable because the low-
quality plastic is less expensive. While less expensive, the low-quality plastic could cause more problems in the production process, resulting in
more plastic being used, causing the unfavorable direct materials usage variance.

Rationale
 FF produced more flowers this period than expected.
This answer is incorrect. The number of flowers produced this period does not affect the direct materials price variance or the direct materials
usage variance.
Question 18
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LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 3
Murgia Assembly used 30,000 pounds of metal to make the shells of 200 cars. The metal cost $150,000. The standard quantity of materials is 125 pounds
per unit and the standard price is $5.00 per pound. Recently, the company installed a new assembly line to increase production, which required it to hire
new employees. Based on this, what is the most likely reason for Murgia’s increased materials usage?
Correct

Inexperienced employees

Inefficiency of new machinery

Your Answer

Higher production levels

Inferior quality of raw materials

Rationale
 Inexperienced employees
An unfavorable materials quantity variance means more materials were used in production than “should” have been used. That was the case with
Murgia. One reason for increased material usage could be that newly hired workers were not experienced enough and wasted materials. Since
Murgia needed to hire new employees, this is a likely reason for the extra material usage.

Rationale
 Inefficiency of new machinery
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
That was the case with Murgia. One reason for increased material usage could be inefficient machinery if the machinery damages units during
production or wastes materials during production. However, a newly installed assembly line is not likely to be inefficient. Workers may need to get
experience with the equipment, but that is different from the equipment itself being inefficient.

Rationale
 Higher production levels
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
That was the case with Murgia. Higher production levels are not likely to result in more materials being used than should have been used since the
amount of materials that should have been used is adjusted for actual production levels.

Rationale
 Inferior quality of raw materials
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
That was the case with Murgia. One reason for increased material usage could be inferior raw materials if the materials are more difficult to work
with. However, Murgia paid $5.00 per pound for materials, which is the same as the standard price per pound. This indicates the materials are not
lower quality than expected.
Question 19
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LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: hard
Bloom Code: 5

A pizza restaurant recently experienced a decline in profit margin although sales have remained steady. An analysis of direct cost inputs revealed the
following:

A favorable materials price variance

An unfavorable materials quantity variance
A favorable labor rate variance
An unfavorable labor efficiency variance

Which one of the following is the most likely cause of the decline in the profit margin?

*Source: Retired ICMA CMA Exam Questions.

The cheese supplier has raised prices.

Correct

New employees are still learning the recipes.

Your Answer

The employees are being paid more than the budgeted standard rates.

The employees are working fewer hours than budgeted standard hours.

Rationale
 The cheese supplier has raised prices.
This answer is incorrect. A favorable materials price variance would indicate that the restaurant is paying lower-than-expected prices for cheese.

Rationale
 New employees are still learning the recipes.
The combination of favorable labor rate variance with an unfavorable labor efficiency variance would indicate new employees at lower wages than
the budgeted standard rates are taking longer than budgeted allotted time. It could also explain the unfavorable materials quantity variance:
inexperienced employees may use more ingredients than expected while learning the recipes.

Rationale
 The employees are being paid more than the budgeted standard rates.
This answer is incorrect. The favorable labor rate variance would indicate that employees are being paid less than the budgeted standard rates, not
more than the budgeted standard rates.

Rationale
 The employees are working fewer hours than budgeted standard hours.
This answer is incorrect. The unfavorable labor efficiency variance would indicate that employees are working more hours than budgeted.
Question 20
1.C.1.s
1C1-LS88
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

A company has a raw material price variance that is unfavorable. An analysis of this variance indicates that the company's only available supplier of one
of its raw materials unexpectedly raised the price of the material. The action management should take regarding this situation should be to:

* Source: Retired ICMA CMA Exam Questions.

negatively evaluate the performance of the production manager.

ask the production manager to lower the material usage standard to compensate for higher material costs.
Correct

change the raw material price standard.

negatively evaluate the performance of the purchasing manager.

Rationale
 negatively evaluate the performance of the production manager.
This answer is incorrect. If a company's only available supplier of raw materials raises the price, management should not negatively evaluate the
performance of the production manager.

Rationale
 ask the production manager to lower the material usage standard to compensate for higher material costs.
This answer is incorrect. If a company's only available supplier of raw materials raises the price, management should not ask the production
manager to lower the material usage standard to compensate for higher material costs.

Rationale
 change the raw material price standard.
Any time it is found that a cost standard is changed either in a positive or negative manner, the cost standard should be adjusted accordingly to
allow for variances to be more in-line with current market conditions. In this case, the company's only supplier increased the price of the material,
forcing an unfavorable price variance. Therefore, management should change the raw material price standard.

Rationale
 negatively evaluate the performance of the purchasing manager.
This answer is incorrect. If a company's only available supplier of raw materials raises the price, management should not negatively evaluate the
performance of the purchasing manager.
Question 21
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Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

Accounting Training, Inc. (ATI) provides continuing education seminars. These seminars are sold as a continuing education event to accounting firms,
which then schedule to bring in their own employees. Seminars are held at hotels in a location that is convenient to the client organization. ATI has a
large number of certified seminar instructors that it contracts to travel to the event and provide the training. The standard price for a training seminar
event is $50,000. Below are ATI's standard variable costs for a seminar event.

Accounting Training, Inc.

Standard Price and Cost Sheet Input Quantity Cost per Input Cost per Event
Printed packets - per attendee 75 attendees $50 per attendee $ 3,750
Instructors - per instructor 3 instructors $4,000 per instructor 12,000
Travel reimbursement - per instructor 3 instructors $1,100 per instructor 3,300
Hotel facility rent - per event 1 event $20,000 per event 20,000
Total Product Cost $39,050

In addition to the standard variable costs listed above, ATI has budgeted $100,000 as an annual fixed cost for advertising.

For the year just completed ATI had originally planned for 80 seminar events with 75 participants per event. ATI actually held 77 seminar events for the
year with an average of 78 participants at each event and collected $3,734,500 in revenue. ATI's actual costs and activity volumes are listed below.

Printed materials: $351,000 for 6,500 packets

Instructors: $936,000 for 240 instructor contract payments
Travel: $288,000 for 240 travel reimbursements
Hotels: $1,617,000 for 77 hotel bookings
Advertising: $88,000 total

What is the printed materials price variance and usage variance?

Materials Price Variance: $26,000 Favorable; Materials Usage Variance: $36,250 Favorable

Materials Price Variance: $26,000 Unfavorable; Materials Usage Variance: $36,250 Favorable
Your Answer

Materials Price Variance: $26,000 Favorable; Materials Usage Variance: $36,250 Unfavorable
Correct

Materials Price Variance: $26,000 Unfavorable; Materials Usage Variance: $36,250 Unfavorable

Rationale
 Materials Price Variance: $26,000 Favorable; Materials Usage Variance: $36,250 Favorable
This answer is incorrect. This answer correctly calculated the materials price variance; however, the variance is not favorable. Additionally, this
answer correctly calculated the materials usage variance; however, the variance is not favorable.

Rationale
 Materials Price Variance: $26,000 Unfavorable; Materials Usage Variance: $36,250 Favorable
This answer is incorrect. This answer correctly calculated the materials usage variance; however, the variance is not favorable. The materials price
variance is correct.

Rationale
 Materials Price Variance: $26,000 Favorable; Materials Usage Variance: $36,250 Unfavorable
This answer is incorrect. This answer correctly calculated the materials price variance; however, the variance is not favorable. The materials usage
variance is correct.

Rationale
 Materials Price Variance: $26,000 Unfavorable; Materials Usage Variance: $36,250 Unfavorable

Printed materials price variance and usage variance:

Note that ATI's average price per packet was actually $54.00 per packet ($351,000 ÷ 6,500 packets) and is unfavorable. The standard packets
allowed for the 77 actual events is 5,775 packets (75 standard packets per event × 77 actual events), which means the usage variance is unfavorable.
(Remember that the flexible budget is based on the actual product output the organization sells into the market. ATI sells seminar events for groups
with a standard expectation of 75 attendees. It doesn't sell individual registrations for attendees. Hence, the printed materials standard used by ATI
is 75 packets per event, not 1 packet per attendee.)

Materials price variance = Actual quantity × (Standard price − Actual price)

Materials price variance = 6,500 packets × ($50.00 − $54.00) = $26,000 U

Materials usage variance = (Standard quantity allowed − Actual quantity used) × Standard price

Materials usage variance = (5,775 packets − 6,500 packets) × $50 = $36,250 U

Question 22
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LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4
The following explanations appeared on last week's variance report for JT Engineering's purchasing department. Which of these explanations could
reflect negatively on the purchasing department?
Quantity discount.
Correct

Rush order.

Regular supplier on strike.

Your Answer

Repeat customer credit.

Rationale
 Quantity discount.
Incorrect. Receiving a quantity discount could result in a favorable direct materials price variance as the actual price paid will be lower than the
standard price. This is within the control of the purchasing department, but it reflects positively, not negatively, on the purchasing department as
the discount saves the company money.

Rationale
 Rush order.
Correct. Variances can be used to identify areas for managers to focus on. As part of this analysis, managers need to determine which variances are
within the control of the department and which are not. Needing a rush order could result in an unfavorable direct materials price variance as the
actual price paid will be higher than the standard price. This is within the control of the purchasing department and could reflect negatively on it as
it is its responsibility to ensure necessary items are available to be used. Having to pay additional costs for rush orders could be avoided with
proper planning.

Rationale
 Regular supplier on strike.
Incorrect. A regular supplier being on strike could result in an unfavorable direct materials price variance as the actual price paid could be higher
than the standard price because of a reduction in supply. However, this is not within the control of the purchasing department.

Rationale
 Repeat customer credit.
Incorrect. A repeat customer credit could result in an unfavorable selling price variance as the actual selling price received will be lower than the
standard selling price. However, this is not within the control of the purchasing department.
Question 23
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Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 2
Which of the following departments is generally responsible for an unfavorable material price variance?
Quality control
Correct

Purchasing

Engineering
Your Answer

Production

Rationale
 Quality control
This answer is incorrect. An unfavorable materials price variance means a company paid a higher price for materials than expected. Quality control
is generally not involved in negotiating purchase agreements.

Rationale
 Purchasing
Variances can be used to identify areas for managers to focus on. As part of this analysis, managers need to determine which variances are within
the control of the department and which are not. An unfavorable materials price variance means a company paid a higher price for materials than
expected. This is generally within the control of the purchasing department since it is responsible for negotiating purchase agreements.

Rationale
 Engineering
This answer is incorrect. An unfavorable materials price variance means a company paid a higher price for materials than expected. Engineering is
generally not involved in negotiating purchase agreements.

Rationale
 Production
This answer is incorrect. An unfavorable materials price variance means a company paid a higher price for materials than expected. Production is
generally not involved in negotiating purchase agreements.
Question 24
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LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4
During the first quarter, Tillman's Toys had an unfavorable budget variance of 6%. In the second quarter, Tillman's variance dropped to .5%. How does
the materiality of the first quarter variance differ from that of the second quarter variance?
Both variances are significant. As a result, management will take corrective action after both the first and the second quarters.

The first quarter variance is not significant, while the second quarter variance is significant. As a result, management did not take corrective action
after the first quarter but will take corrective action after the second quarter.
Your Answer

Neither variance is significant. As a result, management will not take corrective action after either the first or the second quarter.
Correct

The first quarter variance is significant while the second quarter variance is not. As a result, management took corrective action after the first quarter
but will not take corrective action after the second quarter.

Rationale
 Both variances are significant. As a result, management will take corrective action after both the first and the second quarters.
Incorrect. While materiality can be defined in many ways, a 6% variance qualifies as material and significant. Tillman would most likely investigate
this variance and take corrective action based on that investigation. On the other hand, a .5% variance does not qualify as material. Tillman would
most likely not investigate this one or take corrective action related to it as the benefits would likely not exceed the costs and management could
spend its time better elsewhere.

Rationale
 The first quarter variance is not significant, while the second quarter variance is significant. As a result, management did not take
corrective action after the first quarter but will take corrective action after the second quarter.
Incorrect. While materiality can be defined in many ways, a 6% variance qualifies as material and significant, not insignificant. Tillman would most
likely investigate this variance and take corrective action based on that investigation. On the other hand, a .5% variance does not qualify as
material. Tillman would most likely not investigate this one or take corrective action related to it as it is insignificant, and the benefits would likely
not exceed the costs.

Rationale
 Neither variance is significant. As a result, management will not take corrective action after either the first or the second quarter.
Incorrect. While materiality can be defined in many ways, a 6% variance qualifies as material and significant while a .5% variance does not. Tillman
would most likely investigate the first quarter variance but not the second quarter one.

Rationale
 The first quarter variance is significant while the second quarter variance is not. As a result, management took corrective action after
the first quarter but will not take corrective action after the second quarter.
Correct. Variances can be used to identify areas for managers to focus on. Since managers’ time is limited, they cannot focus on each and every
variance. One factor to consider when deciding whether to investigate a variance is the materiality (size) of the variance. Managers are more likely
to investigate larger variances (in dollar amount or relative to budgeted amounts) as correcting these items results in larger benefits. While
materiality can be defined in many ways, a 6% variance qualifies as material and significant. Tillman would most likely investigate this variance and
take corrective action based on that investigation. On the other hand, a .5% variance does not qualify as material. Tillman would most likely not
investigate this one or take corrective action related to it as it is insignificant.
Question 25
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LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 3
Davidson Furniture used 4,000 pounds of nails to make 12,000 tables. The nails cost $5,600. The standard quantity of materials is 0.25 pounds per unit
and the standard price is $1.45 per pound. The company knows that the production department has not had any new employees in the last six months.
What is the most likely reason for the increased materials usage?
The production department lost a package of nails.
Your Answer

The sales department sold a package of nails.

The purchasing department bought better quality nails.

Correct

The purchasing department bought inferior nails.

Rationale
 The production department lost a package of nails.
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
That was the case with Davidson. While the production department losing a package of nails could cause an unfavorable materials quantity
variance, Davidson used 1,000 extra pounds of nails to make 12,000 tables. Losing one package of nails likely does not result in using 1,000 extra
pounds.

Rationale
 The sales department sold a package of nails.
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
That was the case with Davidson. The sales department selling a package of nails does not impact the amount used in the production process.

Rationale
 The purchasing department bought better quality nails.
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
That was the case with Davidson. However, the purchased nails are not likely to be better quality since Davidson paid less than expected for nails
($1.40 versus $1.45). In addition, higher quality materials are often easier to work with.

Rationale
 The purchasing department bought inferior nails.
An unfavorable materials quantity variance means more materials were used in production than “should” have been used. That was the case with
Davidson. One reason for the increased material usage could be that inferior quality materials are sometimes more difficult to work with, resulting
in greater material waste. Since Davidson paid less than expected for nails ($1.40 versus $1.45), it is possible that the nails were of inferior quality.
Question 26
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LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

Accounting Training, Inc. (ATI) provides continuing education seminars. These seminars are sold as a continuing education event to accounting firms,
which then schedule to bring in their own employees. Seminars are held at hotels in a location that is convenient to the client organization. ATI has a
large number of certified seminar instructors that it contracts to travel to the event and provide the training. The standard price for a training seminar
event is $50,000. Below are ATI's standard variable costs for a seminar event.

Accounting Training, Inc.

Standard Price and Cost Sheet Input Quantity Cost per Input Cost per Event
Printed packets - per attendee 75 attendees $50 per attendee $ 3,750
Instructors - per instructor 3 instructors $4,000 per instructor 12,000
Travel reimbursement - per instructor 3 instructors $1,100 per instructor 3,300
Hotel facility rent - per event 1 event $20,000 per event 20,000
Total Product Cost $39,050

In addition to the standard variable costs listed above, ATI has budgeted $100,000 as an annual fixed cost for advertising.

For the year just completed ATI had originally planned for 80 seminar events with 75 participants per event. ATI actually held 77 seminar events for the
year with an average of 78 participants at each event and collected $3,734,500 in revenue. ATI's actual costs and activity volumes are listed below.

Printed materials: $351,000 for 6,500 packets

Instructors: $936,000 for 240 instructor contract payments
Travel: $288,000 for 240 travel reimbursements
Hotels: $1,617,000 for 77 hotel bookings
Advertising: $88,000 total

What is the travel rate variance and efficiency variance?

Travel Rate Variance: $24,000 Favorable; Travel Efficiency Variance: $9,900 Favorable.
Your Answer

Travel Rate Variance: $24,000 Favorable; Travel Efficiency Variance: $9,900 Unfavorable.
Correct

Travel Rate Variance: $24,000 Unfavorable; Travel Efficiency Variance: $9,900 Unfavorable.

Travel Rate Variance: $24,000 Unfavorable; Travel Efficiency Variance: $9,900 Favorable.

Rationale
 Travel Rate Variance: $24,000 Favorable; Travel Efficiency Variance: $9,900 Favorable.
This answer is incorrect. This answer correctly calculated the travel rate variance; however, the variance is not favorable. Additionally, this answer
correctly calculated the travel efficiency variance; however, the variance is not favorable.

Rationale
 Travel Rate Variance: $24,000 Favorable; Travel Efficiency Variance: $9,900 Unfavorable.
This answer is incorrect. This answer correctly calculated the travel rate variance; however, the variance is not favorable. The travel efficiency
variance is correct.

Rationale
 Travel Rate Variance: $24,000 Unfavorable; Travel Efficiency Variance: $9,900 Unfavorable.

Travel rate variance and efficiency variance:

ATI's average amount reimbursed on actual instructor travel costs was $1,200 per reimbursement ($288,000 ÷ 240 reimbursements) and is
unfavorable. The standard travel reimbursements allowed for the 77 actual events is 231 reimbursements (3 reimbursements per event × 77 actual
events), which means the efficiency variance is unfavorable (ATI sometimes had more than three instructors at seminar events).

Travel rate variance = Actual quantity × (Standard rate − Actual rate)

Travel rate variance = 240 contracts × ($1,100 − $1,200) = $24,000 U

Travel efficiency variance = (Standard quantity allowed − Actual quantity used) × Standard price

Travel efficiency variance = (231 reimbursements − 240 reimbursements) × $1,100 = $9,900 U

Rationale
 Travel Rate Variance: $24,000 Unfavorable; Travel Efficiency Variance: $9,900 Favorable.
This answer is incorrect. This answer correctly calculated the travel efficiency variance; however, the variance is not favorable. The travel rate
variance is correct.
Question 27
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LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 4

For a given time period, a company had a favorable material quantity variance, a favorable direct labor efficiency variance, and a favorable fixed
overhead volume variance. The following factors could have caused all three variances, except:

* Source: Retired ICMA CMA Exam Questions.

the purchase of higher-quality materials.

Correct

the use of lower-skilled workers.

Your Answer

the purchase of more efficient machinery.

an increase in production supervision.

Rationale
 the purchase of higher-quality materials.
This answer is incorrect. The purchase of higher-quality materials could have caused all three variances.

Rationale
 the use of lower-skilled workers.
If all variances in an analysis are favorable, the items that would not cause these favorable variances would be any situation that would cause the
variances to be unfavorable. Out of the choices, the one that would cause an unfavorable variance would be the use of lower-skilled workers.

Rationale
 the purchase of more efficient machinery.
This answer is incorrect. The purchase of more efficient machinery could have caused all three variances.

Rationale
 an increase in production supervision.
This answer is incorrect. An increase in production supervision could have caused all three variances.
Question 28
1.C.1.q
manw.va.tb.007_0120
LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 1
A service company is likely to benefit from using which types of variances?
Labor variances but not material and overhead variances
Correct

Labor and overhead variances but not material variances

Your Answer

Overhead variances but not material and labor variances

Material and labor variances but not overhead variances

Rationale
 Labor variances but not material and overhead variances
This answer is incorrect. Although service companies are likely to benefit from using labor variances, they can also benefit from using other types of
variances.

Rationale
 Labor and overhead variances but not material variances
Organizations can benefit from using variances in areas they spend significant resources on, but not from using variance analysis in other areas.
Service companies use significant amounts of labor and overhead, but they typically use little to no materials in their operations. This means that
service companies are likely to benefit from using labor and overhead variances, but not likely to get much benefit from using materials variances.

Rationale
 Overhead variances but not material and labor variances
This answer is incorrect. Although service companies are likely to benefit from using overhead variances, they can also benefit from using other
types of variances.

Rationale
 Material and labor variances but not overhead variances
This answer is incorrect. Using a mix of material and labor variances but not overhead variances is not likely to provide service companies with the
greatest possible benefit of variance analysis.
Question 29
1.C.1.q
manw.va.tb.005_0120
LOS: 1.C.1.q
Lesson Reference: Management Work with Variance Analysis
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning using variance analysis in service companies is correct?
Service companies are not likely to use variance analysis since they are fundamentally different from manufacturing companies.
Correct

Service companies are not likely to use material variances but they can benefit from using labor and overhead variances.
Your Answer

Service companies are not likely to use overhead variances but they can benefit from using material and labor variances.

Service companies are not likely to use overhead or material variances but they can benefit from using labor variances.

Rationale
 Service companies are not likely to use variance analysis since they are fundamentally different from manufacturing companies.
This answer is incorrect. Comparing actual to budgeted performance through variance analysis can benefit any type of organization since this type
of analysis helps identify areas to improve.

Rationale
 Service companies are not likely to use material variances but they can benefit from using labor and overhead variances.
Since service companies use little to no materials in their operations, they are not likely to get much benefit from using materials variances. On the
other hand, they do use significant amounts of labor and overhead which means they can benefit from using labor and overhead variances.

Rationale
 Service companies are not likely to use overhead variances but they can benefit from using material and labor variances.
This answer is incorrect. Organizations can benefit from using variance analysis in areas they spend significant resources on, but not from using
variance analysis in other areas. Using material and labor variances, but not using overhead variances would not provide the most benefit to
service organizations.

Rationale
 Service companies are not likely to use overhead or material variances but they can benefit from using labor variances.
This answer is incorrect. Organizations can benefit from using variance analysis in areas they spend significant resources on, but not from using
variance analysis in other areas. Using labor variances, but not overhead or material variances, would not provide the most benefit to service
organizations.
Question 30
1.C.1.s
manw.va.tb.012_0120
LOS: 1.C.1.s
Lesson Reference: Management Work with Variance Analysis
Difficulty: medium
Bloom Code: 3
Rockport Beauty Products made 12,000 bottles of shampoo in May. The company used 19,000 pounds of direct materials that cost $1.94 per pound. The
standard quantity of materials is 1.5 pounds per unit and the standard price is $1.95 per pound. If the company wants to determine the reason for the
materials quantity variance, what should it do first?
Talk to the purchasing department to determine if the variance is due to raw materials costs
Your Answer

Talk to the purchasing department to determine if the variance is due to shipping costs
Correct

Talk to the production department to determine if the variance is due to inexperienced workers

Talk to the sales department to determine if the variance is due to increased sales

Rationale
 Talk to the purchasing department to determine if the variance is due to raw materials costs
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
Paying less for materials may result in lower quality materials. Lower quality materials may result in more materials being used than should be used
because lower quality materials are harder to work with. However, the purchasing department is not likely to have the expertise to understand if
this is the case.

Rationale
 Talk to the purchasing department to determine if the variance is due to shipping costs
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
Since shipping costs are not likely to impact how materials are used, talking to the purchasing department to determine if an unfavorable materials
quantity variance is the result of shipping costs is not likely to be effective.

Rationale
 Talk to the production department to determine if the variance is due to inexperienced workers
Variances can be used to identify areas for managers to focus on. As part of this analysis, managers need to determine which variances are within
the control of the department and which are not. An unfavorable materials quantity variance means more materials were used in production than
“should” have been used. This is the case for Rockport. One possible reason for using more materials than “should” have been used is that workers
do not have the necessary experience. Since the production department is responsible for training and deploying production workers, it would be a
good first step to talk to the production department to determine if the unfavorable materials quantity variance is due to inexperienced workers.

Rationale
 Talk to the sales department to determine if the variance is due to increased sales
This answer is incorrect. An unfavorable materials quantity variance means more materials were used in production than “should” have been used.
An increase in sales is not likely to result in more materials being used than “should” have been used. If there is any impact of higher sales on
material usage, it would be that less materials are used due to the need to rush production. As a result, talking to the sales department to
determine if an unfavorable materials quantity variance is the result of higher sales is not likely to be effective.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.2.c
aq.perev.bs.004_0820
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

The following information from the prior year was provided by Comfortable Sofas & Couches, Inc. (CSCI):

The company produced 1,900 units and sold 1,800 units, as expected.
There was 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 $120
Direct materials $25
Direct labor $20
Other variable manufacturing costs $15
Fixed manufacturing costs $12
Variable selling costs $8
Fixed selling costs $6
Fixed administrative costs $5

What is the contribution margin earned by CSCI for the prior year?

Your Answer

$72,000

$108,000
Correct

$93,600

$86,400

Rationale
 $72,000
This answer is incorrect. This answer included fixed manufacturing costs in the calculation of contribution margin per unit.

Rationale
 $108,000
This answer is incorrect. This answer did not include variable selling costs in the calculation of contribution margin per unit.

Rationale
 $93,600
The contribution margin equals total sales minus all variable costs expensed. Provided that there was no work-in-process and no beginning
finished goods, the contribution margin is $93,600 = 1,800 × ($120 − $25 − $20 − $15 − $8).

Rationale
 $86,400
This answer is incorrect. This answer did not include variable selling costs in the calculation of contribution margin per unit. Additionally, this
answer included fixed manufacturing costs in the calculation of contribution margin per unit.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.2.a
aq.perev.bs.002_0820
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
Any organizational unit in which the manager of that unit has responsibility for both costs and revenues best describes what type of responsibility
center?
Correct

Profit center

Cost center
Your Answer

Investment center

Revenue center

Rationale
 Profit center
A profit center manager has responsibility for both costs and revenues. Profit centers are usually found at higher levels in an organization than are
cost centers.

Rationale
 Cost center
This answer is incorrect. A cost center is any organizational unit in which the manager of that unit has control only over the costs incurred by the
unit.

Rationale
 Investment center
This answer is incorrect. The key responsibility that belongs solely to an investment center is the stewardship to manage assets, revenue, and costs
for the business unit.

Rationale
 Revenue center
This answer is incorrect. If a business unit is set up to focus exclusively on generating sales and revenue, without any responsibility for costs, that
unit would be designated as a revenue center.
Question 3
1.C.2.c
1C2-CQ21
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

Consider the following for Gridiron Sporting Goods Manufacturing Company for the prior year:

The company produced 1,500 units and sold 1,300 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 $50
Direct materials $15
Direct labor $10
Other variable manufacturing costs $5
Fixed manufacturing costs $3
Variable selling costs $6
Fixed selling costs $2
Fixed administrative costs $1

The contribution margin earned by Gridiron Sporting Goods Manufacturing Company for the prior year was:

Your Answer

$32,500.

$26,000.
Correct

$18,200.

$10,400.

Rationale
 $32,500.
This answer is incorrect. This answer did not consider other variable manufacturing costs or variable selling costs in the calculation of contribution
margin.

Rationale
 $26,000.
This answer is incorrect. This answer did not consider variable selling costs in the calculation of contribution margin.

Rationale
 $18,200.

The contribution margin equals total sales minus all variable costs expensed. Provided that there was no work-in-process and no beginning
finished goods, the contribution margin is $18,200 (1,300 units × ($50 − $15 − $10 − $5 − $ 6).

Fixed costs are not included in the computation of contribution margin.

Rationale
 $10,400.
This answer is incorrect. This answer included fixed costs in the computation of contribution margin.
Question 4
1.C.2.d
perev.bs.tb.020_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
For the current fiscal year, Tuscany Corporation’s Florence division generated net revenues of $3,200,000. The division had variable expenses of
$800,000, direct fixed expenses of $400,000, and indirect corporate fixed expenses of $200,000. What is the division’s controllable margin?
$2,200,000
Correct

$2,000,000
Your Answer

$2,600,000

$1,800,000

Rationale
 $2,200,000
This answer is incorrect. If only the variable expenses and indirect fixed expenses are deducted the controllable margin would be $2,200,000
($3,200,000 − $800,000 − $200,000). However, costs that are controllable by the division should be deducted and those not controllable by the
division should not be deducted. Therefore, this is not the correct way to calculate the controllable margin.

Rationale
 $2,000,000
A division’s controllable margin is defined as the contribution margin less the controllable fixed costs. Only the direct fixed costs should be
deducted in this calculation because the division has control over these costs, but it does not have control over indirect corporate fixed costs.
Because Tuscany’s contribution margin equals $2,400,000 ($3,200,000 − $800,000), Tuscany’s controllable margin is $2,000,000 ($2,400,000 −
$400,000).

Rationale
 $2,600,000
This answer is incorrect. If a company’s controllable margin were calculated by deducting the fixed expenses from the net revenues, the
controllable margin would be $2,600,000 ($3,200,000 − $400,000 − $200,000). This is not the correct way to calculate the controllable margin.

Rationale
 $1,800,000
This answer is incorrect. If a company’s controllable margin were calculated by deducting all the expenses from the net revenues, the controllable
margin would be $1,800,000 ($3,200,000 − $800,000 − $400,000 − $200,000). This is not the correct way to calculate the controllable margin.
Question 5
1.C.2.g
perev.bs.tb.040_0120
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
Each of the following statements concerning the incremental cost allocation method are correct, except:
The incremental cost allocation method is more susceptible to manipulation than the stand-alone cost allocation method.

The incremental cost allocation method is harder to implement than the stand-alone cost allocation method.
Correct

The incremental cost allocation method allocates common costs to users based on their relative use of the resource.
Your Answer

The incremental cost allocation method requires the organization to designate one user as the primary user.

Rationale
 The incremental cost allocation method is more susceptible to manipulation than the stand-alone cost allocation method.
This answer is incorrect. The amount of common costs allocated to each user will differ under the incremental allocation method depending on
which user is designated as the primary user. This is not the case under the stand-alone allocation method which means allocation results are more
susceptible to manipulation under the incremental allocation method.

Rationale
 The incremental cost allocation method is harder to implement than the stand-alone cost allocation method.
This answer is incorrect. Under the incremental allocation method, users need to be designated as either primary or incremental users and costs
that are added by a particular user are allocated only to that user. On the other hand, the only information that is needed to implement the stand-
alone allocation method is the amount of the resource used by each user. The incremental allocation method is harder to implement than the
stand-alone allocation method.

Rationale
 The incremental cost allocation method allocates common costs to users based on their relative use of the resource.
Common costs can be allocated using stand-alone allocation or incremental allocation. Costs are allocated to users based on their relative use of
the resource under the stand-alone allocation method, not the incremental allocation method.

Rationale
 The incremental cost allocation method requires the organization to designate one user as the primary user.
This answer is incorrect. The incremental allocation method allocates costs to users based on whether they are primary or incremental users which
means that one user is designated as the primary user and the others are incremental users.
Question 6
1.C.2.c
cma11.p1.t1.me.0046_0820
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

A company is setting up a new division to sell its products in Africa. An accountant has determined that the new African division will have to sell 250,000
units in order to cover the division's fixed costs of $365,000. The company is estimating total sales of $475,000 for the new African division. What is the
contribution margin per unit for the new African division?

*Source: Retired ICMA CMA Exam Questions.

$0.44
Your Answer

$0.68
Correct

$1.46.

$1.90

Rationale
 $0.44

This answer is incorrect.

Selling price per unit must be included when determining contribution margin per unit.

Rationale
 $0.68

This answer is incorrect.

Contribution margin per unit is calculated as “Total contribution margin ÷ Units sold,” not as “Units sold ÷ Total contribution margin.”

Rationale
 $1.46.
At the break-even point, fixed costs equal total contribution margin. With 250,000 units sold and a total contribution margin of $365,000, the
contribution margin per unit is $1.46.

Rationale
 $1.90

This answer is incorrect.

Variable cost per unit must be included when determining contribution margin per unit.
Question 7
1.C.2.d
perev.bs.tb.027_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Bareboating International has operations in Greece, the British Virgin Islands, Tahiti, and the San Juan Islands. Each location is operated as an
independent division. During the most recent six months, the Tahiti division reported a contribution margin of $1,210,000 and indirect fixed corporate
costs of $160,000 were allocated to the division based on controllable revenues. If the Tahiti division’s controllable margin is $630,000, what are the
segment’s controllable fixed costs?
$1,840,000
Your Answer

$740,000

$420,000
Correct

$580,000

Rationale
 $1,840,000
This answer is incorrect. If the controllable fixed costs equaled the sum of the contribution margin and the controllable margin, then the
controllable fixed costs would be $1,840,000 ($1,210,000 + $630,000). This is not the correct formula.

Rationale
 $740,000
This answer is incorrect. If the controllable fixed costs were calculated by adding the indirect corporate fixed costs to the difference between the
contribution margin and the controllable margin, then the controllable fixed costs would be $740,000 ($1,210,000 − $630,000 + $160,000). This is not
the correct formula because only costs that are controllable by the division should be a part of the controllable margin calculation.

Rationale
 $420,000
This answer is incorrect. If the controllable fixed costs were calculated by subtracting the indirect corporate fixed costs from the difference between
the contribution margin and the controllable margin, then the controllable fixed costs would be $420,000 ($1,210,000 − $630,000 − $160,000). This is
not the correct calculation because only costs that are controllable by the division should be a part of the controllable margin calculation.

Rationale
 $580,000
A division’s controllable margin is defined as the contribution margin less controllable fixed costs. Because both the controllable margin and
contribution margin are given in the facts, the Tahiti division’s controllable fixed costs can be solved for by rearranging the formula to set the
controllable fixed costs equal to the contribution margin minus the controllable margin. In this example, Tahiti’s controllable fixed costs are
$580,000 ($1,210,000 − $630,000).
Question 8
1.C.2.b
perev.bs.tb.012_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Bridgewater Consulting has several business units, each consisting of a team of consultants managed by a senior partner. Karen, a senior partner, makes
hiring decisions and is responsible for sales of consulting services to clients. She is compensated based on the profit generated by her unit, as well as the
profit earned by the entire firm. Based on this information, Karen’s business unit is likely regarded as a(n) ________ center.
investment
Your Answer

cost

consulting
Correct

profit

Rationale
 investment
This answer is incorrect. In an investment center, managers are responsible for short-run decisions that impact profitability in the center as well as
long-run strategic decisions. Since Karen is not responsible for long-run strategic decisions that impact the entire company, her business unit is not
an investment center.

Rationale
 cost
This answer is incorrect. In a cost center, managers are only responsible for costs that are incurred in the center. Since Karen is responsible for more
than just the costs incurred in her business unit, her business unit is not a cost center.

Rationale
 consulting
This answer is incorrect. A consulting center is not a part of a responsibility system.

Rationale
 profit
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In a profit center, managers
are responsible for decisions that impact profitability in the center, but they are not responsible for long-run strategic decisions. Since Karen is
responsible for decisions impacting the profitability of her business unit but not for long-run decisions impacting the entire company, her business
unit should be regarded as a profit center.
Question 9
1.C.2.d
perev.bs.tb.025_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
In the most recent reporting period, Athens Corporation’s Legion division generated net revenues of $2,000,000. During the same reporting period, the
division had variable expenses of $700,000, direct fixed expenses of $500,000, and indirect corporate fixed expenses of $250,000. What is the division’s
controllable margin?
$550,000
Correct

$800,000

$1,050,000

$1,300,000

Rationale
 $550,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the sum of all expenses from the division’s revenue, the
controllable margin would be $550,000 ($2,000,000 − $700,000 − $500,000 − $250,000). This is not the correct formula because only costs that are
controllable by the division should be deducted when calculating the controllable margin.

Rationale
 $800,000
A division’s controllable margin is defined as the contribution margin less controllable fixed costs. The controllable fixed costs should be deducted
when calculating controllable margin as these costs are controllable by the division. Indirect corporate fixed costs should not be deducted when
calculating controllable margin since these costs are not controllable by the division. In this example, the Legion division’s contribution margin is
$1,300,000 ($2,000,000 − $700,000) and the controllable fixed costs equal $500,000; therefore, Legion division’s controllable margin is $800,000
($1,300,000 − $500,000).

Rationale
 $1,050,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the total variable costs and the indirect fixed costs from
the division’s revenue, the controllable margin would be $1,050,000 ($2,000,000 − $700,000 − $250,000). This is not the correct formula because only
costs that are controllable by the division should be deducted when calculating the controllable margin.

Rationale
 $1,300,000
This answer is incorrect. The Legion division’s contribution margin is $1,300,000 ($2,000,000 − $700,000); however, a division’s contribution margin
is not the same as its controllable margin. To calculate the controllable margin, all costs that are controllable by the division need to be considered,
not just the variable costs.
Question 10
1.C.2.e
1C2-LS06d
LOS: 1.C.2.e
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
A firm that uses reporting segments shows a bottom line for each segment that includes traceable fixed costs but not common fixed costs. Which of the
following is this bottom line called?
Controllable costs.
Your Answer

Operating income.

Net income.
Correct

Segment margin.

Rationale
 Controllable costs.
This answer is incorrect. The bottom line that includes traceable fixed costs but not common fixed costs is not called controllable costs.

Rationale
 Operating income.
This answer is incorrect. The bottom line that includes traceable fixed costs but not common fixed costs is not called operating income.

Rationale
 Net income.
This answer is incorrect. The bottom line that includes traceable fixed costs but not common fixed costs is not called net income.

Rationale
 Segment margin.
The segment margin of a segment is it's contribution margin less all traceable fixed costs for the segment.
Question 11
1.C.2.b
1C2-LS39
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

The production manager of the Super T-shirt Company is responsible for the activity of her department and the costs associated with production. Super
T adheres to a responsibility centered budget process, and the manager's performance is measured by how well she performs to budget. Recently, the
dark horse team won the local college basketball tournament. As a result, the sales department, which operates as a profit center, received an order for
10,000 t-shirts, but only if they could be delivered in three days. The production manager said she could meet the schedule, but only by incurring
overtime pay that would cause her to be over budget for hourly wages paid. What would be the best course of action for the sales department and the
production manager to undertake in this case?

* Source: Retired ICMA CMA Exam Questions.

Correct

Charge the overtime to the sales department's budget.

Accept the order and overrun the production manager's budget.

Refuse the overtime and produce only what the production department is capable of while staying within the budget.

Accept the order and ignore the effect on the production department budget when conducting the performance review.

Rationale
 Charge the overtime to the sales department's budget.
Given that the order was extraordinary in nature, and the production department would incur additional costs over and above its normal
operations, it would be the best course of action for the sales department to be charged for the additional overtime incurred because of this order.

Rationale
 Accept the order and overrun the production manager's budget.
This answer is incorrect. Accept the order and overrun the production manager's budget would not be the best course of action for the sales
department and the production manager to undertake.

Rationale
 Refuse the overtime and produce only what the production department is capable of while staying within the budget.
This answer is incorrect. Refuse the overtime and produce only what the production department is capable of while staying within the budget
would not be the best course of action for the sales department and the production manager to undertake.

Rationale
 Accept the order and ignore the effect on the production department budget when conducting the performance review.
This answer is incorrect. Accept the order and ignore the effect on the production department budget when conducting the performance review
would not be the best course of action for the sales department and the production manager to undertake.
Question 12
1.C.2.b
perev.bs.tb.006_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
A fast-food chain has over 3,000 stores nationwide, with each store making its own decisions about hiring, expansion, and sales. Each location can be
regarded as a(n) _______ center.
cost
Correct

investment

profit

revenue

Rationale
 cost
This answer is incorrect. In a cost center, managers are only responsible for costs incurred in the center. Each fast-food store is responsible for more
than just costs incurred in the store.

Rationale
 investment
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In an investment center,
managers are responsible for the profitability in the center as well as the investment decisions to generate that profit. In this case, each fast-food
store is responsible for deciding how to use its assets to generate profit.

Rationale
 profit
This answer is incorrect. In a profit center, managers are only responsible for profitability in the center. Since each fast-food store is responsible for
its own expansion decisions, each store is responsible for more than profitability.

Rationale
 revenue
This answer is incorrect. In a revenue center, managers are only responsible for revenue generated in the center. Each fast-food store is responsible
for more than just the revenue generated in the store.
Question 13
1.C.2.a
1C2-LS37
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
Patriotic Flag Manufacturing Company uses an accounting system that charges costs to the manager who has the responsibility to make decisions
incurring the costs. For example, if the sales manager accepts a rush order from the government, requiring additional production costs of flags, these
additional costs are charged to the sales manager because the authority for the order lies in the hands of the sales manager. The type of accounting
system used in this case is:
functional accounting.
Correct

profit center accounting.

bonus focused accounting.

feedback accounting.

Rationale
 functional accounting.
This answer is incorrect. An accounting system that charges costs to the manager who has the responsibility to make decisions incurring the costs is
not called a functional accounting system.

Rationale
 profit center accounting.
Profit center accounting is accounting used for profit centers. In this case, the sales manager had the control over costs associated with the sale,
thus they are a profit center and are charged with the additional costs associated with the rush order.

Rationale
 bonus focused accounting.
This answer is incorrect. An accounting system that charges costs to the manager who has the responsibility to make decisions incurring the costs is
not called a bonus focused accounting system.

Rationale
 feedback accounting.
This answer is incorrect. An accounting system that charges costs to the manager who has the responsibility to make decisions incurring the costs is
not called a feedback accounting system.
Question 14
1.C.2.d
1C2-LS29
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
All of the following are true of a contribution approach to an income statement except:
the contribution approach helps decide whether to make or buy a good.

the contribution approach helps analyze product lines.

Correct

managers can view their cost by function.

the contribution approach could be used to evaluate profit center manager's performance regarding fixed and variable controllable costs.

Rationale
 the contribution approach helps decide whether to make or buy a good.
This answer is incorrect. “The contribution approach helps decide whether to make or buy a good“ is a true statement regarding a contribution
approach to an income statement.

Rationale
 the contribution approach helps analyze product lines.
This answer is incorrect. “The contribution approach helps analyze product lines” is a true statement regarding a contribution approach to an
income statement.

Rationale
 managers can view their cost by function.
Under the contribution approach, managers can view costs by their behavior instead of by function such as sales, administration, or production.

Rationale
 the contribution approach could be used to evaluate profit center manager's performance regarding fixed and variable controllable
costs.
This answer is incorrect. "The contribution approach could be used to evaluate profit center manager's performance regarding fixed and variable
controllable costs" is a true statement regarding a contribution approach to an income statement.
Question 15
1.C.2.b
perev.bs.tb.015_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Virginia owns an interior design company and hires freelance decorators to help with large jobs. In this way, she is able to keep costs low by only
employing staff when they are needed. However, over time Virginia has added full-time staff members as the company grows. How would you classify
Virginia’s company?
As a profit center

As both a cost center and a profit center, but not an investment center
Correct

As an investment center

As a cost center but not a profit center

Rationale
 As a profit center
This answer is incorrect. In this case, Virginia is responsible for using assets to generate profit. This means she is responsible for profit and
investment. Because she is responsible for investment as well, this cannot be a profit center.

Rationale
 As both a cost center and a profit center, but not an investment center
This answer is incorrect. In this case, Virginia is responsible for using assets to generate profit. This means she is responsible for profit and
investment. Because she is responsible for investment as well, this cannot be a profit center or a cost center.

Rationale
 As an investment center
In an investment center, managers are responsible for profitability in the center as well as the investment used to generate that profit. In this case,
Virginia is responsible for using assets to generate profit. This makes this an investment center.

Rationale
 As a cost center but not a profit center
This answer is incorrect. In this case, Virginia is responsible for using assets to generate profit. This means she is responsible for profit and
investment. Because she is responsible for investment as well, this cannot be a cost center or a profit center.
Question 16
1.C.2.f
1C2-LS41
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Which one of the following allocation approaches will ensure that the production departments do not underestimate their planned usage of service at
the start of the budget period as well as make the service departments cost efficient?

* Source: Retired ICMA CMA Exam Questions.

The use of rates and quantities based on long-term historical averages for both variable and fixed costs.
Your Answer

The use of a budgeted lump-sum amount based on estimates provided by the production departments for both variable and fixed costs.
Correct

Budgeted rates and standard hours allowed for output attained for variable costs and budgeted rates and capacity available for fixed costs.

The use of actual rates and actual hours for both fixed and variable costs.

Rationale
 The use of rates and quantities based on long-term historical averages for both variable and fixed costs.
This answer is incorrect. The use of rates and quantities based on long-term historical averages for both variable and fixed costs will not ensure that
the production departments do not underestimate their planned usage of service at the start of the budget period as well as make the service
departments cost efficient.

Rationale
 The use of a budgeted lump-sum amount based on estimates provided by the production departments for both variable and fixed costs.
This answer is incorrect. The use of a budgeted lump-sum amount based on estimates provided by the production departments for both variable
and fixed costs will not ensure that the production departments do not underestimate their planned usage of service at the start of the budget
period as well as make the service departments cost efficient.

Rationale
 Budgeted rates and standard hours allowed for output attained for variable costs and budgeted rates and capacity available for fixed
costs.
To ensure a production department does not underestimate their planned usage of service at the start of the budget period, as well as make the
service department's costs cost efficient is to develop budgeted rates and standard hours allowed for output attained for variable costs and
budgeted rates and capacity available for fixed costs.

Rationale
 The use of actual rates and actual hours for both fixed and variable costs.
This answer is incorrect. The use of actual rates and actual hours for both fixed and variable costs will not ensure that the production departments
do not underestimate their planned usage of service at the start of the budget period as well as make the service departments cost efficient.
Question 17
1.C.2.a
1C2-LS14d
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Sara Bellows, manager of the telecommunication sales team, has the following department budget.

Billings - Long Distance $350,000

Billings - Phone Card $ 75,000
Billings - Toll Free $265,000

Her responsibility center is best described as a:

* Source: Retired ICMA CMA Exam Questions.

profit center.
Correct

revenue center.
Your Answer

cost center.

investment center.

Rationale
 profit center.
This answer is incorrect. Sara Bellows, manager of the telecommunication sales team, does not have a responsibility center best described as a
profit center.

Rationale
 revenue center.
A revenue center is and identifiable department, division, or unit of a firm that generates revenue through sale of goods and/or services. In this
example, the telecommunication sales team is a revenue center based on the definition.

Rationale
 cost center.
This answer is incorrect. Sara Bellows, manager of the telecommunication sales team, does not have a responsibility center best described as a cost
center.

Rationale
 investment center.
This answer is incorrect. Sara Bellows, manager of the telecommunication sales team, does not have a responsibility center best described as an
investment center.
Question 18
1.C.2.b
perev.bs.tb.010_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
The accounting department in a large manufacturing company would be classified as a(n):
Profit center.
Correct

Cost center.
Your Answer

Investment center.

Controllable center.

Rationale
 Profit center.
This answer is incorrect. In a profit center, managers are responsible for both revenues and costs. Since an accounting department in a large
manufacturing company does not directly generate revenue, it should not be classified as a profit center.

Rationale
 Cost center.
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In a cost center, managers are
only responsible for the costs that are incurred in the center. They are not responsible for generating revenue; rather, they provide support and
services to centers that do generate revenue without incurring excessive costs. An accounting department in a large manufacturing company meets
this definition of a cost center.

Rationale
 Investment center.
This answer is incorrect. In an investment center, managers are responsible for short-run decisions that impact profitability in the center as well as
long-run strategic decisions. Since an accounting department in a large manufacturing company does not directly generate revenue and is not
responsible for long-run strategic decisions, it should not be classified as an investment center.

Rationale
 Controllable center.
This answer is incorrect. A controllable center is not a part of a responsibility system.
Question 19
1.C.2.c
perev.bs.tb.016_0120
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Based on the following information from VPK Corporation, calculate its contribution margin per unit.
Selling price per unit $90
Direct materials per unit $12
Direct labor per unit $9
Variable manufacturing overhead per unit $7
Fixed manufacturing overhead per unit $11
Sales commissions per unit $6
Fixed selling costs per unit $5

$51 per unit

Your Answer

$40 per unit

$62 per unit

Correct

$56 per unit

Rationale
 $51 per unit
This answer is incorrect. VPK’s gross profit per unit is $51 ($90 − $12 − $9 − $7 − $11). Only the variable costs are included in the contribution margin
calculation.

Rationale
 $40 per unit
This answer is incorrect. VPK’s operating income per unit is $40 ($90 − $12 − $9 − $7 − $11 − $6 − $5). Only the variable costs are included in the
contribution margin calculation.

Rationale
 $62 per unit
This answer is incorrect. If a unit’s contribution margin were calculated by subtracting the sum of the variable manufacturing costs from the unit
revenue, the contribution margin would equal $62 per unit ($90 − ($12 + $9 + $7)). All the variable costs must be included in the contribution margin
calculation, not just the variable manufacturing costs.

Rationale
 $56 per unit
A unit’s contribution margin represents the amount of revenue left over after all the unit variable costs have been paid. VPK’s variable costs consist
of direct materials, direct labor, variable manufacturing overhead, and sales commissions; consequently, the variable costs total $34 per unit ($12 +
$9 + $7 + $6). Based on VPK Corporation’s revenue and variable costs, VPK’s contribution margin per unit equals $56 ($90 − $34).
Question 20
1.C.2.d
perev.bs.tb.026_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Info King Data Services, a provider of cloud-based hosting services, reports a contribution margin of $13,750 for its health industry segment. Indirect
fixed corporate costs of $1,200 are allocated to the segment based on controllable revenues. If the health industry segment’s controllable margin is
$11,950, what are the segment’s controllable fixed costs?
$25,700

$600
Correct

$1,800
Your Answer

$3,000

Rationale
 $25,700
This answer is incorrect. If the controllable fixed costs equaled the sum of the contribution margin and the controllable margin, then the
controllable fixed costs would be $25,700 ($13,750 + $11,950). This is not the correct formula.

Rationale
 $600
This answer is incorrect. If the controllable fixed costs were calculated by subtracting the indirect corporate fixed costs from the difference between
the contribution margin and the controllable margin, then the controllable fixed costs would be $600 ($13,750 − $11,950 − $1,200). This is not the
correct formula because costs that are not controllable by the division should not be a part of the controllable margin calculation.

Rationale
 $1,800
A division’s controllable margin is defined as the contribution margin less controllable fixed costs. The controllable fixed costs should be deducted
when calculating controllable margin as these costs are controllable by the division. Indirect corporate fixed costs should not be deducted when
calculating controllable margin since these costs are not controllable by the division. Because both the controllable margin and contribution
margin are given in the facts, the segment’s controllable fixed costs can be solved for by rearranging the formula to set the controllable fixed costs
equal to the contribution margin minus the controllable margin. In this example, Info King has controllable fixed costs of $1,800 ($13,750 − $11,950).

Rationale
 $3,000
If the controllable fixed costs were calculated by adding the indirect corporate fixed costs to the difference between the contribution margin and
the controllable margin, then the controllable fixed costs would be $3,000 ($13,750 − $11,950 + $1,200). This is not the correct calculation because
costs that are not controllable by the division should not be a part of the controllable margin calculation.
Question 21
1.C.2.e
perev.bs.tb.031_0120
LOS: 1.C.2.e
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
Each of the following represent a reporting segment that an organization would report separate information on except:
Correct

Results for the organization’s first quarter.

Results for all operations in the United States.

Results for the electrical products division.

Your Answer

Results for all sales to healthcare companies.

Rationale
 Results for the organization’s first quarter.
Organizations can divide their operations into reporting segments in order to evaluate the profitability of product lines, geographic regions, or
other segments of the business. Dividing an organization’s results by quarter is not an example of a reporting segment.

Rationale
 Results for all operations in the United States.
This answer is incorrect. Reporting results for all operations in the United States is an example of a reporting segment.

Rationale
 Results for the electrical products division.
This answer is incorrect. Reporting results for the electrical products division is an example of a reporting segment.

Rationale
 Results for all sales to healthcare companies.
This answer is incorrect. Reporting results for all sales to healthcare companies is an example of a reporting segment.
Question 22
1.C.2.f
cma11.p1.t1.me.0061_0820
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

All of the following are issues that should be considered in evaluating performance when common costs are allocated to business segments except that

*Source: Retired ICMA CMA Exam Questions.

Correct

cost allocations are not included in the calculation of long-term cost per unit.
Your Answer

common costs are not controllable by segment managers.

the allocation can be affected by the cost drivers used by other segments.

there may be no cause-and-effect relationship between an allocated cost and the segment's operations.

Rationale
 cost allocations are not included in the calculation of long-term cost per unit.
Cost allocations are included in the calculation of long-term cost per unit and should be considered when evaluating the performance of individual
business segments.

Rationale
 common costs are not controllable by segment managers.
This answer is incorrect. Common costs are not controllable by segment managers, so this is an issue that should be considered in evaluating
segment performance.

Rationale
 the allocation can be affected by the cost drivers used by other segments.
This answer is incorrect. When evaluating the performance of business segments, consideration should be taken that the allocation of common
costs to business segments can be affected by the cost drivers used by other segments.

Rationale
 there may be no cause-and-effect relationship between an allocated cost and the segment's operations.
This answer is incorrect. Consideration of the cause-and-effect relationship between an allocated cost and the segment's operations (or the
absence of a relationship) should be taken when evaluating the performance of a business segment.
Question 23
1.C.2.g
1C2-LS16
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Most firms allocate corporate and other support costs to divisions and departments for all of the following reasons except to:

*Source: Retired ICMA CMA Exam Questions.

remind profit-center managers that earnings must be adequate to cover some share of the indirect costs.
Correct

stimulate profit-center managers to put pressure on central managers to control service costs.
Your Answer

create competition between divisions and departments, and their managers.

fix accountability and evaluate profit center.

Rationale
 remind profit-center managers that earnings must be adequate to cover some share of the indirect costs.
This answer is incorrect. Most firms allocate corporate and other support costs to divisions and departments to remind profit-center managers that
earnings must be adequate to cover some share of the indirect costs.

Rationale
 stimulate profit-center managers to put pressure on central managers to control service costs.
Corporate and support costs should be allocated to divisions and departments to remind profitcenter managers that earnings must be adequate to
cover some share of the indirect costs, create competition between divisions and departments, and their managers, and to fix accountability and
evaluate profit centers.

Rationale
 create competition between divisions and departments, and their managers.
This answer is incorrect. Most firms allocate corporate and other support costs to divisions and departments to create competition between
divisions and departments, and their managers.

Rationale
 fix accountability and evaluate profit center.
This answer is incorrect. Most firms allocate corporate and other support costs to divisions and departments to fix accountability and evaluate
profit center.
Question 24
1.C.2.d
perev.bs.tb.022_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Clark and Hemsley, Inc., has two divisions—toys and books. It is preparing an estimate of the controllable margin for the toy division. The following
information for the division is available:

Revenue $1,250,000
Variable costs
Labor and material $500,000
Selling and administrative $250,000
Fixed costs
Manufacturing $150,000
Direct fixed $75,000
Corporate indirect cost allocation $125,000

Based on this information, what is the toy division’s controllable margin?

Your Answer

$150,000

$225,000

$500,000
Correct

$275,000

Rationale
 $150,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the sum of all expenses from the division’s revenue, the
toy division’s controllable margin would be $150,000 ($1,250,000 − $500,000 − $250,000 − $150,000 − $75,000 − $125,000). This is not the correct
formula because only costs that are controllable by the division should be considered when calculating a division’s controllable margin.

Rationale
 $225,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the total variable costs and the indirect fixed costs from
the division’s revenue, the controllable margin would be $225,000 ($1,250,000 − $500,000 − $250,000 − $125,000). This is not the correct formula
because only costs that are controllable by the division should be deducted when calculating the controllable margin.

Rationale
 $500,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting only the variable costs from the division’s revenue, the
controllable margin would be $500,000 ($1,250,000 − $500,000 − $250,000). This number represents the contribution margin, not the controllable
margin.

Rationale
 $275,000
A division’s controllable margin is defined as the contribution margin less total controllable fixed costs. The controllable fixed costs should be
deducted when calculating controllable margin as these costs are controllable by the division. Indirect corporate fixed costs should not be
deducted when calculating controllable margin since these costs are not controllable by the division. In this example, the toy division’s
contribution margin is $500,000 ($1,250,000 − $500,000 − $250,000) and the controllable fixed costs equal $225,000 ($150,000 + $75,000); therefore,
the controllable margin equals $275,000 ($500,000 − $225,000).
Question 25
1.C.2.g
perev.bs.tb.042_0120
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
Which common cost allocation method is being used if a company identifies the amount of a common resource used by each user, and then allocates the
cost based on each user’s relative use of the resource?
Correct

Stand-alone cost allocation only

Incremental cost allocation only

Your Answer

Either stand-alone or incremental cost allocation

Neither stand-alone nor incremental cost allocation

Rationale
 Stand-alone cost allocation only
Common costs can be allocated using either the stand-alone allocation method or the incremental allocation method. Under the stand-alone
allocation method, costs are allocated based on each user’s relative use of the resource. Under the incremental cost allocation method, the
organization designates one user as the primary user of the resource and costs are allocated based on whether users are primary users or
incremental users of the resource. The amount of a common resource used by each user has to be identified only for the stand-alone method.

Rationale
 Incremental cost allocation only
This answer is incorrect. It is not necessary to identify the amount of a common resource used by each user to implement the incremental cost
allocation method.

Rationale
 Either stand-alone or incremental cost allocation
This answer is incorrect. Identifying the amount of a common resource used by each user is only necessary under one of the allocation methods.

Rationale
 Neither stand-alone nor incremental cost allocation
This answer is incorrect. Identifying the amount of a common resource used by each user is necessary under one of the allocation methods.
Question 26
1.C.2.b
aq.perev.bs.003_1807
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Classy Purses, Inc. (CPI) is an international manufacturer of stylish shoulder bags. CPI is split up into three regions: Europe Region, Asia Eastern Region,
U.S. Region. The Europe region is split into three operating units: England Operations, France Operations, Germany Operations. The France operating
unit is split up into the Sales Division and Manufacturing Division. The France sales division is set up to focus exclusively on generating sales and revenue,
without responsibility for cost.

Which of the following most accurately identifies the responsibility center for the Sales Division, Manufacturing Division, and France Operations of CPI?

Sales Division: cost center; Manufacturing Division: revenue center; France Operations: profit center.
Correct

Sales Division: revenue center; Manufacturing Division: cost center; France Operations: profit center.

Sales Division: profit center; Manufacturing Division: cost center; France Operations: cost center.

Sales Division: profit center; Manufacturing Division: revenue center; France Operations: revenue center.

Rationale
 Sales Division: cost center; Manufacturing Division: revenue center; France Operations: profit center.
This answer is incorrect. The Sales Division is not a cost center as it is set up to focus exclusively on generating sales and revenue, without
responsibility for cost. The Manufacturing Division is not a revenue center as it does not generate any revenue, only costs.

Rationale
 Sales Division: revenue center; Manufacturing Division: cost center; France Operations: profit center.
Because the Sales Division is set up to focus exclusively on generating sales and revenue, without responsibility for cost, it is a revenue center, not a
profit center. The Manufacturing Division does not generate any revenue, but it does generate costs, making it a cost center. France Operations
generates both revenue and expenses, making it a profit center.

Rationale
 Sales Division: profit center; Manufacturing Division: cost center; France Operations: cost center.
This answer is incorrect. The Sales Division is not a profit center as it is set up to focus exclusively on generating sales and revenue, without
responsibility for cost. France Operations is not a cost center because it also generates revenue.

Rationale
 Sales Division: profit center; Manufacturing Division: revenue center; France Operations: revenue center.
This answer is incorrect. The Sales Division is not a profit center as it is set up to focus exclusively on generating sales and revenue, without
responsibility for cost. The Manufacturing Division is not a revenue center as it does not generate any revenue, only costs. France Operations is not
a revenue center because it also generates costs.
Question 27
1.C.2.d
perev.bs.tb.023_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Wild Bill’s has two divisions—boots and apparel. It is preparing an estimate of the controllable margin for the apparel division. The following information
for the division is available:

Revenue $975,000
Variable costs
Labor and material $335,000
Selling and administrative $150,000
Fixed costs
Manufacturing $75,000
Direct fixed $35,000
Corporate indirect cost allocation $60,000

Based on this information, what is the apparel division’s controllable margin?

Correct

$380,000

$320,000
Your Answer

$490,000

$565,000

Rationale
 $380,000
A division’s controllable margin is defined as the contribution margin less total controllable fixed costs. The controllable fixed costs should be
deducted when calculating controllable margin as these costs are controllable by the division. Indirect corporate fixed costs should not be
deducted when calculating controllable margin since these costs are not controllable by the division. In this example, the apparel division’s
contribution margin is $490,000 ($975,000 − $335,000 − $150,000) and the controllable fixed costs equal $110,000 ($75,000 + $35,000); therefore, the
apparel division’s controllable margin equals $380,000 ($490,000 − $110,000).

Rationale
 $320,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the sum of all expenses from the division’s revenue, the
toy division’s controllable margin would be $320,000 ($975,000 − $335,000 − $150,000 − $75,000 − $35,000 − $60,000). This is not the correct formula
because only costs that are controllable by the division should be considered when calculating a division’s controllable margin.

Rationale
 $490,000
This answer is incorrect. The apparel division’s contribution margin is $490,000 ($975,000 − $335,000 − $150,000); however, a division’s contribution
margin is not the same as its controllable margin. To calculate a division’s controllable margin, all costs that are controllable by the division need to
be considered, not just the variable costs.

Rationale
 $565,000
This answer is incorrect. The apparel division’s gross margin is $565,000 ($975,000 − $335,000 − $75,000); however, a division’s contribution margin
is not the same as the controllable margin. To calculate a division’s controllable margin, all costs that are controllable by the division need to be
considered.
Question 28
1.C.2.a
1C2-AT01d
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Characteristics of a responsibility accounting system include all of the following except that:
Correct

cost centers are responsible for revenues as well as common costs.

responsibility for performance according to budget must be linked to the appropriate authority.
Your Answer

each level of management is responsible for their department's operations and employees.

the system should encourage employee involvement and participation.

Rationale
 cost centers are responsible for revenues as well as common costs.
A responsibility accounting system is a formal financial and non-financial information communication system used to control operations and
evaluate performance. A responsibility accounting system is based upon responsibility centers, where activities are under managers' control. A cost
center is a responsibility center whose manager is responsible for costs, but not for revenues. In addition, common costs should not be charged to a
cost center, but allocated among all centers involved.

Rationale
 responsibility for performance according to budget must be linked to the appropriate authority.
This answer is incorrect. Responsibility for performance according to budget must be linked to the appropriate authority is a characteristic of a
responsibility accounting system.

Rationale
 each level of management is responsible for their department's operations and employees.
This answer is incorrect. Each level of management is responsible for their department's operations and employees is a characteristic of a
responsibility accounting system.

Rationale
 the system should encourage employee involvement and participation.
This answer is incorrect. The system should encourage employee involvement and participation is a characteristic of a responsibility accounting
system.
Question 29
1.C.2.f
perev.bs.tb.034_0120
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
Controllable margin for the fiction publishing division of Hall and Small Books was based on $2,500,000 variable selling and administrative cost,
$1,200,000 traceable fixed cost, and $1,750,000 in indirect cost allocation. If sales next year increase by 10%, the controllable margin for fiction book
publishing will:
increase by $175,000.

decrease by $250,000.
Your Answer

cannot be determined.
Correct

increase by 10% of this year’s contribution margin.

Rationale
 increase by $175,000.
This answer is incorrect. If sales increase by 10%, indirect costs would increase by 10% only if all the indirect costs are variable. Even if this
occurred, this increase would not impact the controllable margin since allocated indirect costs are not a part of the calculation.

Rationale
 decrease by $250,000.
This answer is incorrect. If sales increase by 10%, variable costs will also increase by 10%. This means that the variable selling and administrative
costs will increase by $250,000, resulting in a $250,000 decrease in contribution margin and controllable margin. However, this ignores the impact
of changes in revenue and other variable costs on the controllable margin.

Rationale
 cannot be determined.
This answer is incorrect. The dollar amount of the change cannot be determined, but the percentage change can be.

Rationale
 increase by 10% of this year’s contribution margin.
A segment’s controllable margin is defined as the Contribution Margin less Controllable Fixed Costs. It does not take allocated indirect costs into
consideration. If sales increase by 10%, variable costs will also increase by 10%, resulting in a 10% increase in contribution margin. Traceable fixed
costs will not increase as fixed costs do not change when sales change. This means that the only change in the controllable margin will be the
change in the contribution margin. The result is that the controllable margin will increase by 10% of the current year’s contribution margin.
Question 30
1.C.2.a
aq.perev.bs.001_0820
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
Any organizational unit in which the manager of that unit has control only over the costs incurred best describes what type of responsibility center?
Investment center

Revenue center
Your Answer

Profit center
Correct

Cost center

Rationale
 Investment center
This answer is incorrect. The key responsibility that belongs solely to an investment center is the stewardship to manage assets, revenue, and costs
for the business unit.

Rationale
 Revenue center
This answer is incorrect. If a business unit is set up to focus exclusively on generating sales and revenue, without any responsibility for costs, that
unit would be designated as a revenue center.

Rationale
 Profit center
This answer is incorrect. A profit center manager has responsibility for both costs and revenues.

Rationale
 Cost center
A cost center is any organizational unit in which the manager of that unit has control only over the costs incurred. The manager of a cost center has
no responsibility for revenues or assets, either because revenues are not generated in the center or because revenues and assets are controlled
somewhere else in the organization.
Question 31
1.C.2.a
1C3-AT08d
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
In responsibility accounting, a center's performance is measured by those costs which are controllable. Controllable costs are best described as
including:
only direct material and direct labor.
Your Answer

only discretionary costs.

incremental and fixed costs.

Correct

only those costs that the manager can influence in the current time period.

Rationale
 only direct material and direct labor.
This answer is incorrect. Controllable costs are not best described as including only direct material and direct labor.

Rationale
 only discretionary costs.
This answer is incorrect. Controllable costs are not best described as including only discretionary costs.

Rationale
 incremental and fixed costs.
This answer is incorrect. Controllable costs are not best described as including only incremental and fixed costs.

Rationale
 only those costs that the manager can influence in the current time period.
The manager should only be held responsible for those things over which he/she can exercise control over during the performance measurement
time period.
Question 32
1.C.2.d
aq.perev.bs.006_0820
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

Pregnancy Pillows Co. (PPC) has provided the following operating profit & loss report for its U.S. Region:

U.S. Region - Profit & Loss Report (for Pregnancy Pillows Co.)
(in millions) West Central East Total
Revenue $200 $150 $150 $500
Variable COGS (35) (30) (15) (80)
Variable S&A costs (45) (30) (35) (110)
Contribution margin $120 $90 $100 $310
Fixed COGS (50) (90) (70) (210)
Fixed S&A costs (20) (40) (20) (80)
Allocated corporate costs (20) (15) (15) (50)
Operating profit (loss) $30 ($55) ($5) ($30)
Allocation percent 40.0% 30.0% 30.0% 100.0%
(based on revenue)

70% of the fixed COGS and S&A in each operation is avoidable if the operation is shut down.

Based on the provided information, which, if any, operations should PPC shut down in order to increase total profit?

PPC should shut down all the operations.

Correct

PPC should shut down the Central operation.

PPC should shut down the Central and East operations.

PPC should not shut down any of the operations.

Rationale
 PPC should shut down all the operations.
While the entire region has an overall operating loss, not all the operations (West, Central, and East) should be shut down.

Rationale
 PPC should shut down the Central operation.

When considering only avoidable costs, PPC should shut down Central operations. After removing unavoidable fixed costs and allocated corporate
costs, Central operations still has an operating loss. Therefore, shutting down the Central operations will increase PPC's overall operating profit by
$1 million. See the calculations below:

U.S. Region - Profit & Loss Report Avoidable Costs (for Pregnancy Pillows Co.)
(in millions) West Central East Total
Revenue $200 $150 $150 $500
Variable COGS (35) (30) (15) (80)
Variable S&A costs (45) (30) (35) (110)
Contribution margin $120 $90 $100 $310
Fixed COGS (avoidable) (50) × .7 = (35) (90) × .7 = (63) (70) × .7 = (49) (147)
Fixed S&A costs (avoidable) (20) × .7 = (14) (40) × .7 = (28) (20) × .7 = (14) (56)
Operating profit (loss) based on avoidable costs $71 ($1) $37 $107

70% of the fixed COGS and S&A in all operations is avoidable if the operation is shut down.

Rationale
 PPC should shut down the Central and East operations.
This answer is incorrect. Allocated corporate costs should not be considered when deciding whether to shut down an operation.

Rationale
 PPC should not shut down any of the operations.
At least one of PPC's operations should be shut down.
Question 33
1.C.2.a
1C2-LS36
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
The basic purpose of a responsibility accounting system of reporting is:
Correct

motivation.

authority.
Your Answer

variance analysis.

budgeting.

Rationale
 motivation.
The basic purpose of a responsibility accounting system is to motivate management to perform in a manner consistent with overall company
objectives. The assignment of responsibility implies that some revenues and costs can be influenced through effective management. The system
should have certain controls that provide for feedback reports indicating variations from expectations. Higher-level management may focus on
those variations for either reinforcement or correction.

Rationale
 authority.
This answer is incorrect. Authority is not the basic purpose of a responsibility accounting system of reporting.

Rationale
 variance analysis.
This answer is incorrect. Variance analysis is not the basic purpose of a responsibility accounting system of reporting.

Rationale
 budgeting.
This answer is incorrect. Budgeting is not the basic purpose of a responsibility accounting system of reporting.
Question 34
1.C.2.b
perev.bs.tb.013_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
National Advertisers has advertising divisions for several different product categories. Matthew is the senior manager over the sports division, where he
is responsible for human resource decisions, obtaining clients, negotiating fees, and ensuring quality advertising campaigns. Matthew is compensated
based on commissions from clients. Based on this information, Matthew’s business unit is likely regarded as a(n):
Correct

Profit center.
Your Answer

Investment center.

Cost center.

Accounting center.

Rationale
 Profit center.
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In a profit center, managers
are responsible for decisions that impact profitability in the center, but they are not responsible for long-run strategic decisions. Since Matthew is
responsible for decisions impacting the profitability of his business unit but not for long-run decisions impacting the entire company, the sports
division should be regarded as a profit center.

Rationale
 Investment center.
This answer is incorrect. In an investment center, managers are responsible for short-run decisions that impact profitability in the center as well as
long-run strategic decisions. Since Matthew is not responsible for long-run strategic decisions that impact the entire company, the sports division is
not an investment center.

Rationale
 Cost center.
This answer is incorrect. In a cost center, managers are only responsible for the costs that are incurred in the center. Since Matthew is responsible
for more than just the costs incurred in his business unit, the sports division is not a cost center.

Rationale
 Accounting center.
This answer is incorrect. An accounting center is not a part of a responsibility system.
Question 35
1.C.2.b
perev.bs.tb.008_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Bloomington Clothing Inc., has been growing steadily over the years and has created a reputation for reasonably priced contemporary clothing for both
men and women. The Powell division manufactures and sells men’s fashions. The divisional president is responsible for all short-run decisions regarding
the manufacturing and sale of clothing and accessories; however, all long-run strategic decisions are made at the corporate level by a committee of
senior executives. Based on these facts, the Powell division should be held accountable as a(n) ________ center.
cost

investment
Your Answer

operating
Correct

profit

Rationale
 cost
This answer is incorrect. In a cost center, managers are only responsible for costs incurred in the center. The Powell division president is responsible
for more than just the costs incurred in the division.

Rationale
 investment
This answer is incorrect. In an investment center, managers are responsible for short-run decisions impacting profitability in the center as well as
long-run strategic decisions. Since the Powell division president is not responsible for long-run strategic divisions, it is not an investment center.

Rationale
 operating
This answer is incorrect. An operating center is not used to establish accountability within a responsibility system.

Rationale
 profit
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In a profit center, managers
are responsible for short-run decisions impacting profitability in the center, but not for long-run, strategic decisions. This definition correctly
describes the responsibilities of the Powell division president.
Question 36
1.C.2.f
1C2-LS31
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Which of the following is a true statement regarding the allocation of common costs when using segment reporting?
Common costs must be allocated using the incremental cost allocation method.
Your Answer

Common costs cannot be allocated using the contribution approach.

Correct

Common costs reduce the value of the segment margin when reporting profitability.

Common costs deduct all traceable fixed costs for the segment.

Rationale
 Common costs must be allocated using the incremental cost allocation method.
This answer is incorrect. "Common costs must be allocated using the incremental cost allocation method" is not a true statement regarding the
allocation of common costs when using segment reporting.

Rationale
 Common costs cannot be allocated using the contribution approach.
This answer is incorrect. "Common costs cannot be allocated using the contribution approach" is not a true statement regarding the allocation of
common costs when using segment reporting.

Rationale
 Common costs reduce the value of the segment margin when reporting profitability.
Common costs dilute the value of the segment margin on reporting profitability, so some businesses allocate common costs to segments only when
all or most of the cost would disappear if the segment were to be discontinued.

Rationale
 Common costs deduct all traceable fixed costs for the segment.
This answer is incorrect. "Common costs deduct all traceable fixed costs for the segment" is not a true statement regarding the allocation of
common costs when using segment reporting.
Question 37
1.C.2.g
aq.perev.bs.010_0820
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: hard
Bloom Code: 5

Classy Purses, Inc. (CPI) is an international manufacturer of stylish shoulder bags. CPI is split up into three regions: Europe Region, Asia Eastern Region,
U.S. Region. CPI has provided the following operating profit & loss report for their Europe Region:

Europe Region - Profit & Loss Report (for Classy Purses, Inc.)
(in millions) England France Germany Total
Revenue €270 €340 €390 €1000
Variable COGS (140) (90) (100) (330)
Variable S&A costs (30) (50) (90) (170)
Fixed COGS (80) (100) (90) (270)
Fixed S&A costs (20) (30) (20) (70)
Allocated corporate costs ? ? ? (100)

When CPI began operations in the Europe Region, England was the first operation, increasing corporate costs by €50M. France was the second operation,
increasing corporate costs by €30M. Finally, the Germany operation was started, resulting in a €20M increase in corporate costs.

What would be the operating profit for Germany operations using a stand-alone cost allocation method based on contribution margin? And what would
be the operating profit for Germany operations using the incremental method?

Stand-alone Cost Allocation Method: €51M; Incremental Method: €70 M.

Correct

Stand-alone Cost Allocation Method: €50M; Incremental Method: €70 M.

Stand-alone Cost Allocation Method: €70M; Incremental Method: €50 M.

Stand-alone Cost Allocation Method: €70M; Incremental Method: €51 M.

Rationale
 Stand-alone Cost Allocation Method: €51M; Incremental Method: €70 M.
This answer is incorrect. This answer calculated operating profit using the stand-alone cost allocation method based on revenue, not contribution
margin.

Rationale
 Stand-alone Cost Allocation Method: €50M; Incremental Method: €70 M.

The following shows the calculation of contribution margin for each CPI European operation and the allocation of corporate costs using stand-
alone cost allocation based on contribution margin.

Europe Region - Profit & Loss Report (for Classy Purses, Inc.)
(in millions) England France Germany Total
Revenue €270 €340 €390 €1000
Variable COGS (140) (90) (100) (330)
Variable S&A costs (30) (50) (90) (170)
Contribution margin €100 €200 €200 €500
Fixed COGS (80) (100) (90) (270)
Fixed S&A costs (20) (30) (20) (70)
Allocated corporate costs (20) (40) (40) (100)
Operating profit (€20) €30 €50 €60
Allocation percent 20.0% 40.0% 40.0% 100.0%
(based on cont. margin)

The contribution margin calculation subtracts variable COGS and variable S&A costs from revenue.

Using the stand-alone cost allocation method based on contribution margin, €40 M of corporate costs was allocated to Germany because
Germany's contribution margin was 40% (€200 M ÷ €500 M) of the total contribution margin for the Europe Region. Alternately, €20 M of corporate
costs was allocated to Germany under the incremental method because that was the amount corporate costs increased when the Germany
operation started:

Europe Region - Profit & Loss Report (for Classy Purses, Inc.)
(in millions) England France Germany Total
Revenue €270 €340 €390 €1000
 Europe Region - Profit & Loss Report (for Classy Purses, Inc.)
Variable COGS (140) (90) (100) (330)
Variable S&A costs (30) (50) (90) (170)
Contribution margin €100 €200 €200 €500
Fixed COGS (80) (100) (90) (270)
Fixed S&A costs (20) (30) (20) (70)
Allocated corporate costs (50) (30) (20) (100)
Operating profit (€50) €40 €70 €60

Rationale
 Stand-alone Cost Allocation Method: €70M; Incremental Method: €50 M.
This answer is incorrect. This answer mixed up the stand-alone cost allocation method and the incremental method.

Rationale
 Stand-alone Cost Allocation Method: €70M; Incremental Method: €51 M.
This answer is incorrect. This answer mixed up the stand-alone cost allocation method and the incremental method. Additionally, this answer
calculated operating profit using a stand-alone cost allocation based on revenue, not contribution margin.
Question 38
1.C.2.a
1C3-AT23
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n):
revenue center.
Correct

profit center.
Your Answer

investment center.

division.

Rationale
 revenue center.
This answer is incorrect. Responsibility accounting does not define an operating center that is responsible for revenue and costs as a revenue
center.

Rationale
 profit center.
Since profit equals revenues less expenses (costs), a profit center is responsible for both revenues and costs.

Rationale
 investment center.
This answer is incorrect. Responsibility accounting does not define an operating center that is responsible for revenue and costs as an investment
center.

Rationale
 division.
This answer is incorrect. Responsibility accounting does not define an operating center that is responsible for revenue and costs as a division.
Question 39
1.C.2.c
perev.bs.tb.017_0120
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Based on the following information from CDF Corporation, calculate its contribution margin per unit.
Selling price per unit $150
Direct materials per unit $30
Direct labor per unit $22
Variable manufacturing overhead per unit $21
Fixed manufacturing overhead per unit $20
Sales commissions per unit $12
Fixed selling costs per unit $9
Correct

$65 per unit

Your Answer

$57 per unit

$36 per unit

$77 per unit

Rationale
 $65 per unit
One type of cost is a variable cost. Examples include direct materials, direct labor, and sales commissions. A unit’s contribution margin represents
the amount of revenue left over after all the unit variable costs have been paid. CDF’s variable costs consist of direct materials, direct labor, variable
manufacturing overhead, and sales commissions per unit; consequently, the variable costs total $85 per unit ($30 + $22 + $21 + $12). Based on CDF
Corporation’s revenue and variable costs, CDF’s contribution margin per unit equals $65 ($150 − $85).

Rationale
 $57 per unit
This answer is incorrect. CDF’s gross profit per unit is $57 ($150 − $30 − $22 − $21 − $20). Only the variable costs are included in the contribution
margin.

Rationale
 $36 per unit
This answer is incorrect. CDF’s operating income per unit is $36 ($150 − $30 − $22 − $21 − $20 − $12 − $9). Only the variable costs are included in the
contribution margin calculation.

Rationale
 $77 per unit
This answer is incorrect. If a unit’s contribution margin were calculated by subtracting the sum of the variable manufacturing costs from the unit
revenue, the contribution margin would equal $77 per unit ($150 − ($30 + $22 + $21)). All the variable costs must be included in the contribution
margin calculation, not just the variable manufacturing costs.
Question 40
1.C.2.f
perev.bs.tb.036_0120
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
After reviewing the following financial information about the riding toy division at Rainbow Toys, management has considered closing the riding toy
division. During its review, management discovered that $395,200 of corporate fixed overhead has been allocated to the division. With this additional
information, should Rainbow close the riding toy division? Why or why not?
Riding Toy Division Company Total
Revenue $950,500 $49,600,000
Less: Variable expenses
Cost of goods sold 425,000 16,005,000
Selling & administrative 285,700 12,015,450
Equals: Contribution margin $239,800 $21,579,550
Less: Fixed expenses 402,500 8,750,900
Equals: Operating income ($162,700) $12,828,650

Yes; its controllable margin is ($557,900).

Correct

No; its controllable margin is $232,500.

Yes; its controllable margin is ($232,500).

No; its controllable margin is $557,900.

Rationale
 Yes; its controllable margin is ($557,900).
This answer is incorrect. A division’s controllable margin is defined as the contribution margin less the division’s controllable fixed costs. In this
problem, the controllable margin is not ($557,900) as the allocated fixed overhead costs are not subtracted from operating income to determine the
controllable margin.

Rationale
 No; its controllable margin is $232,500.
A division’s controllable margin is typically used to help determine whether a division should be closed. If the controllable margin is positive, then it
is contributing positively to the organization’s profitability and should remain open. A division’s controllable margin is defined as the contribution
margin less the controllable fixed costs. Indirect corporate fixed costs should not be deducted when calculating the controllable margin because
these costs will be reallocated to other divisions if the riding toy division is closed. In this example, management should add back the allocated
fixed overhead of $395,200 to Rainbow’s operating income to determine its controllable margin. Since Rainbow’s controllable margin is $232,500 (−
$162,700 + $395,200), it is contributing positively to income and should not be closed.

Rationale
 Yes; its controllable margin is ($232,500).
This answer is incorrect. A division’s controllable margin is defined as the contribution margin less the division’s controllable fixed costs. In this
problem, the controllable margin is not ($232,500).

Rationale
 No; its controllable margin is $557,900.
This answer is incorrect. A division’s controllable margin is defined as the contribution margin less the division’s controllable fixed costs. In this
problem, the controllable margin is not $557,900.
Question 41
1.C.2.f
perev.bs.tb.038_0120
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
Which of the following most appropriately finishes the following sentence? Responsibility accounting cannot be used effectively:
when budget data can be developed for evaluating the manager’s effectiveness in controlling costs.

for costs that are controllable at the level of responsibility with which they are associated.
Your Answer

for costs that can be directly associated with a specific level of responsibility.
Correct

for costs allocated to the responsibility level.

Rationale
 when budget data can be developed for evaluating the manager’s effectiveness in controlling costs.
This answer is incorrect. Responsibility accounting can be used effectively in this situation since the budgeted controllable costs can be compared
to actual controllable costs.

Rationale
 for costs that are controllable at the level of responsibility with which they are associated.
This answer is incorrect. Responsibility accounting can be used effectively in this situation since this results in performance measures that reflect
what the manager or unit is responsible for.

Rationale
 for costs that can be directly associated with a specific level of responsibility.
This answer is incorrect. Responsibility accounting can be used effectively in this situation since this results in performance measures that reflect
what the manager or unit is responsible for.

Rationale
 for costs allocated to the responsibility level.
Responsibility accounting is designed to facilitate the preparation of performance reports based on the items (cost, revenue, profit, and
investment) that managers are responsible for. It is not effective for costs allocated to the responsibility level as allocated costs are not controllable
by the manager or operating unit.
Question 42
1.C.2.g
perev.bs.tb.041_0120
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
Which common cost allocation method is being used if a company designates one user of a common cost as the primary user and the other users as
incremental users?
Stand-alone cost allocation
Correct

Incremental cost allocation

Either stand-alone or incremental cost allocation

Neither stand-alone nor incremental cost allocation

Rationale
 Stand-alone cost allocation
This answer is incorrect. It is not necessary to identify a primary user to implement the stand-alone cost allocation method.

Rationale
 Incremental cost allocation
Common costs can be allocated using either the stand-alone allocation or incremental allocation method. Under the incremental allocation
method, costs are allocated based on whether users are primary users or incremental users of the resource. Under the stand-alone allocation
method, costs are allocated to users based on their relative use of the resource which means that a primary user must only be identified under the
incremental method.

Rationale
 Either stand-alone or incremental cost allocation
This answer is incorrect. Identifying a primary user is only necessary under one of the allocation methods.

Rationale
 Neither stand-alone nor incremental cost allocation
This answer is incorrect. Identifying a primary user is necessary under one of the allocation methods.
Question 43
1.C.2.d
1C3-LS07d
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
Which of the following business unit profitability measures would allow a manager to be evaluated based on whether or not the business unit can be
profitable even when common costs are deducted from the unit's profits?
Contribution margin

Indirect profit
Your Answer

Controllable profit
Correct

Income before taxes

Rationale
 Contribution margin
This answer is incorrect. Contribution margin does not allow a manager to be evaluated based on whether or not the business unit can be
profitable even when common costs are deducted from the unit's profits.

Rationale
 Indirect profit
This answer is incorrect. Indirect profit does not allow a manager to be evaluated based on whether or not the business unit can be profitable even
when common costs are deducted from the unit's profits.

Rationale
 Controllable profit
This answer is incorrect. Controllable profit does not allow a manager to be evaluated based on whether or not the business unit can be profitable
even when common costs are deducted from the unit's profits.

Rationale
 Income before taxes
Income before taxes deducts all fixed and variable costs from a business unit's profits except taxes. This measure forces a manager to be realistic
about the level of profitability needed to sustain the unit.
Question 44
1.C.2.d
1C3-AT18
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
When using a contribution margin format for internal reporting purposes, the major distinction between segment manager performance and segment
performance is:
direct variable cost of selling the product.
Correct

direct fixed cost controllable by others.

Your Answer

unallocated fixed cost.

direct fixed cost controllable by the segment manager.

Rationale
 direct variable cost of selling the product.
This answer is incorrect. When using a contribution margin format for internal reporting purposes, the major distinction between segment manager
performance and segment performance is not direct variable cost of selling the product.

Rationale
 direct fixed cost controllable by others.

The segment manager's performance is measured by the controllable segment margin. Segment performance is measured by deducting fixed costs
which are controllable by others from the controllable segment margin.

Controllable segment margin = contribution margin − fixed costs controllable by segment manager

Contribution margin = sales − all variable costs.

Rationale
 unallocated fixed cost.
This answer is incorrect. When using a contribution margin format for internal reporting purposes, the major distinction between segment manager
performance and segment performance is not unallocated fixed cost.

Rationale
 direct fixed cost controllable by the segment manager.
This answer is incorrect. When using a contribution margin format for internal reporting purposes, the major distinction between segment manager
performance and segment performance is not direct fixed cost controllable by the segment manager.
Question 45
1.C.2.a
1C2-LS03d
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
The manager for a profit center is responsible for generating profits:
and making investments but not controlling costs.
Correct

and controlling costs but not making investments.

Your Answer

and controlling costs and making investments.

but not controlling costs or making investments.

Rationale
 and making investments but not controlling costs.
This answer is incorrect. The manager for a profit center is responsible for generating profits and controlling costs but not for making investments.

Rationale
 and controlling costs but not making investments.
A manager for a profit center is responsible for generating profits and controlling costs, but usually has no control over making investments.

Rationale
 and controlling costs and making investments.
This answer is incorrect. The manager for a profit center is responsible for generating profits and controlling costs but not for making investments.

Rationale
 but not controlling costs or making investments.
This answer is incorrect. The manager for a profit center is responsible for generating profits and controlling costs but not for making investments.
Question 46
1.C.2.b
perev.bs.tb.007_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
An outdoor recreational supply store has retail centers in over 500 major cities. Each retail center is responsible for staffing, inventory, and pricing
decisions as well as expansion decisions. Based on this information, each retail center is a(n):
Cost center.
Your Answer

Profit center.
Correct

Investment center.

Independent center.

Rationale
 Cost center.
This answer is incorrect. In a cost center, managers are only responsible for costs incurred in the center. In this example, each retail center is
responsible for more than just the costs incurred.

Rationale
 Profit center.
This answer is incorrect. In a profit center, managers are only responsible for profitability in the center. Since each retail center is responsible for its
own expansion decisions, the managers are responsible for more than just profitability.

Rationale
 Investment center.
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In an investment center,
managers are responsible for profitability in the center as well as the investment decisions to generate that profit. In this case, each retail center is
responsible for deciding how to use its assets to generate profit.

Rationale
 Independent center.
This answer is incorrect. There is not a responsibility center known as an independent center.
Question 47
1.C.2.d
perev.bs.tb.029_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
The responsibility report for the Hayward division shows actual contribution margin of $1,600,000 and actual controllable fixed costs of $800,000.
Budgeted contribution margin for the division was $1,680,000 and budgeted controllable fixed costs were $720,000. Based on this information, the
manager’s overall performance is:
Correct

16.7% below expectations.

20% below expectations.

Your Answer

equal to expectations.

4.8% below expectations.

Rationale
 16.7% below expectations.
A segment’s controllable margin is defined as the Contribution Margin less Controllable Fixed Costs. The controllable fixed costs should be
deducted when assessing a manager’s performance as these costs are controllable by the manager. Hayward’s budgeted controllable margin is
$960,000 ($1,680,000 − $720,000) and its actual controllable margin is $800,000 ($1,600,000 − $800,000). This means actual performance is 16.7%
below expectations ($160,000 decrease from expectations ÷ $960,000 expected controllable margin).

Rationale
 20% below expectations.
This answer is incorrect. Hayward’s budgeted controllable margin is $960,000 ($1,680,000 − $720,000) and its actual controllable margin is $800,000
($1,600,000 − $800,000). If the $160,000 difference is divided by the actual controllable margin of $800,000 rather than the budgeted controllable
margin of $960,000, then it would appear that actual performance is 20% below expectations. However, this is not the correct formula for a
percentage change in performance.

Rationale
 equal to expectations.
This answer is incorrect. If budgeted controllable costs are subtracted from actual contribution margin and actual controllable costs are subtracted
from budgeted contribution margin, then actual performance will equal expected performance ($880,000). However, these are not the correct
calculations.

Rationale
 4.8% below expectations.
This answer is incorrect. The controllable fixed costs should be deducted when assessing a manager’s performance as these costs are controllable
by the manager. If these costs are not subtracted and the contribution margin is used to assess performance, it would appear that Hayward’s actual
performance is 4.8% below expectations ($80,000 contribution margin below expectations ÷ $1,680,000 expected contribution margin). However,
this does not take controllable fixed costs into consideration.
Question 48
1.C.2.b
1C3-AT19
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
Which one of the following best identifies a profit center?
The production operations department of a small job-order machine shop company.
Correct

A new car sales division for a large local auto agency.

Your Answer

A large toy company.

The information technology department of a large consumer products company.

Rationale
 The production operations department of a small job-order machine shop company.
This answer is incorrect. The production operations department of a small job-order machine shop company does not best identify a profit center.

Rationale
 A new car sales division for a large local auto agency.
A profit center is a responsibility center whose manager is responsible for revenues as well as costs. Profit is used to measure performance of a new
car sales division of a local auto agency, which best identifies a profit center as it has its own costs and revenues.

Rationale
 A large toy company.
This answer is incorrect. A large toy company does not best identify a profit center.

Rationale
 The information technology department of a large consumer products company.
This answer is incorrect. The information technology department of a large consumer products company does not best identify a profit center.
Question 49
1.C.2.a
perev.bs.tb.004_0120
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
Which of the following statements best describes the role of a revenue center manager?
A revenue center manager is responsible for making capital investments needed to generate revenue.
Correct

A revenue center manager is responsible for using assets to generate revenue for the center.
Your Answer

A revenue center manager is responsible for managing costs incurred to generate revenue.

A revenue center manager is responsible for the profitability of the center.

Rationale
 A revenue center manager is responsible for making capital investments needed to generate revenue.
This answer is incorrect. Revenue center managers are not responsible for asset management in their centers which means they are not responsible
for making capital investments.

Rationale
 A revenue center manager is responsible for using assets to generate revenue for the center.
Revenue center managers are responsible for using assets to generate revenue for the center, but they are not responsible for cost control or asset
management.

Rationale
 A revenue center manager is responsible for managing costs incurred to generate revenue.
This answer is incorrect. Revenue center managers are not responsible for managing costs in their centers.

Rationale
 A revenue center manager is responsible for the profitability of the center.
This answer is incorrect. Revenue center managers are responsible for generating revenue but not for managing costs in their centers.
Question 50
1.C.2.e
perev.bs.tb.030_0120
LOS: 1.C.2.e
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
Each of the following are reasons for an organization to divide its operations into reporting segments, except:
To facilitate the evaluation of the profitability of a product line.

To facilitate the evaluation of the profitability of a geographic region.

To facilitate the evaluation of the profitability of a department.

Correct

To facilitate the evaluation of the profitability of the organization as a whole.

Rationale
 To facilitate the evaluation of the profitability of a product line.
This answer is incorrect. Reporting segments facilitate the evaluation of the profitability of a product line as it reports the results of the product
separately from the remainder of the organization’s activities.

Rationale
 To facilitate the evaluation of the profitability of a geographic region.
This answer is incorrect. Reporting segments facilitate the evaluation of the profitability of a geographic region as it reports the results of the
geographic region separately from the remainder of the organization’s activities.

Rationale
 To facilitate the evaluation of the profitability of a department.
This answer is incorrect. Reporting segments facilitate the evaluation of the profitability of a department as it reports the results of the department
separately from the remainder of the organization’s activities.

Rationale
 To facilitate the evaluation of the profitability of the organization as a whole.
Organizations can divide their operations into reporting segments in order to evaluate the profitability of product lines, geographic regions, or
other segments of the business. Reporting segments do not facilitate the evaluation of the profitability of the organization as a whole because each
segment report only contains information on a single part of the organization.
Question 51
1.C.2.a
1C2-LS02
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
Which of the following usually makes a manager resposible for all financial business decisions?
Correct

Investment center

Profit center

Revenue center
Your Answer

Cost center

Rationale
 Investment center
The investment center gives its manager control over that center's investments, costs, and revenues. The other types listed have less autonomy
than an investment center.

Rationale
 Profit center
This answer is incorrect. Profit center does not make a manager responsible for all financial business decisions.

Rationale
 Revenue center
This answer is incorrect. Revenue center does not make a manager responsible for all financial business decisions.

Rationale
 Cost center
This answer is incorrect. Cost center does not make a manager responsible for all financial business decisions.
Question 52
1.C.2.d
1C3-AT27
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: hard
Bloom Code: 5

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 expense 75
Net sales 4,000
Average plant and equipment 1,775
Cost of goods sold 3,525

If Hinzel treats the Western Division as an investment center for performance measurement purposes, what is the before-tax return on investment for last
year?

26.8%
Your Answer

19.8%
Correct

16.7%

22.5%

Rationale
 26.8%
This answer is incorrect. This answer did not consider general and administrative expense or average working capital in the calculation of before-
tax return on investment for last year.

Rationale
 19.8%
This answer is incorrect. This answer did not consider general and administrative expense in the calculation of before-tax return on investment for
last year.

Rationale
 16.7%

The before-tax return on investment (ROI) is calculated as follows:

Before-tax ROI = (Western Division operating income) ÷ (Western Division Investment)

Before-tax ROI = $400 ÷ $2,400 = 0.167, or 16.7%

Operating Income and the Western Division Investment are calculated as follows:

Operating Income = Sales − Cost of Goods Sold − General and Administrative Expense

Operating Income = $4,000 − $3,525 − $75 = $400

Western Division Investment = Average Plant & Equipment + Average Working Capital

Western Division Investment = $1,775 + $625 = $2,400

Rationale
 22.5%
This answer is incorrect. This answer did not consider average working capital in the calculation of before-tax return on investment for last year.
Question 53
1.C.2.e
aq.perev.bs.007_0820
LOS: 1.C.2.e
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
Quick Microwaves, Inc. (QMI) is preparing for external reporting and performance evaluation at the end of the year. QMI is split up into two companies:
Microwave Company and Microwave Oven Company. Each company is split up into geographical regions with those regions being split up into different
operations. Each operation has a sales division, manufacturing division, and service division. Based on the organizational structure of QMI, identify
business units that QMI should evaluate each year based on performance.
Correct

Companies, regions, operations, and divisions

Companies, regions, and operations

Operations and divisions

Your Answer

Companies and regions

Rationale
 Companies, regions, operations, and divisions
QMI should evaluate all companies, regions, operations, and divisions during the end-of-year performance evaluation. When evaluating the
performance of a manager for a cost, profit, or investment center, it is important to use only controllable costs. When evaluating the performance
of the business unit itself, particularly for decisions regarding keeping or dropping the business unit from the organization, it is crucial to use only
direct costs in the analysis.

Rationale
 Companies, regions, and operations
This answer is incorrect. Companies, regions, and operations are not the only segments that QMI should evaluate during performance evaluation at
the end of the year.

Rationale
 Operations and divisions
This answer is incorrect. Operations and divisions are not the only segments that QMI should evaluate during performance evaluation at the end of
the year.

Rationale
 Companies and regions
This answer is incorrect. Companies and regions are not the only segments that QMI should evaluate during performance evaluation at the end of
the year.
Question 54
1.C.2.f
aq.perev.bs.009_0820
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Arnhall Co. is a firm with several departments that function as investment centers. The allocation of the overhead of the corporate headquarters is a
persistent problem in Arnhall's responsibility accounting system because it is not readily traceable to the segments. In its approach to income
statements based on contribution margin, Arnhall should take what action in the interests of objectivity and managerial motivation?
Allocate the corporate-level costs based on contribution margin.

Allocate the corporate-level costs based on sales.

Your Answer

Allocate the corporate-level costs based on budgeted revenue.

Correct

Not allocate corporate-level costs.

Rationale
 Allocate the corporate-level costs based on contribution margin.
This answer is incorrect. In the interests of objectivity and managerial motivation, Arnhall should not allocate the corporate-level costs based on
contribution margin.

Rationale
 Allocate the corporate-level costs based on sales.
This answer is incorrect. In the interests of objectivity and managerial motivation, Arnhall should not allocate the corporate-level costs based on
sales.

Rationale
 Allocate the corporate-level costs based on budgeted revenue.
This answer is incorrect. In the interests of objectivity and managerial motivation, Arnhall should not allocate the corporate-level costs based on
budgeted revenue.

Rationale
 Not allocate corporate-level costs.
Not allocating these costs avoids the arbitrary assignment of costs. It also is motivationally positive because allocation of nontraceable costs
distorts the measure of a manager's performance. Not allocating the overhead of the corporate headquarters to the departments does not mean
that the costs can be ignored, however. The corporate overhead costs will still be subtracted from total firm contribution margin instead of the
contribution margin of each individual department. The other answers are incorrect because each is an arbitrary allocation that is more typical of
traditional segmented income statements than of a contribution margin approach with its clear emphasis on controllability.
Question 55
1.C.2.f
1C2-LS35
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

An organization plans to implement a bonus plan based on segment performance. In addition, the company plans to convert to a responsibility
accounting system for segment reporting. The following costs, which have been included in the segment performance reports that have been prepared
under the current system, are being reviewed to determine if they should be included in the responsibility accounting segment reports:

I. Corporate CEO salary allocated on the basis of net segment sales

II. Corporate training costs assigned on the basis of the number of employees in each segment
III. Fixed computer facility costs divided equally among each segment
IV. Variable computer operational costs charged to each segment based on actual hours used times a predetermined standard rate; any variable cost
efficiency or inefficiency remains in the computer department.

Of the four cost items, the item that would most logically be included in the segment performance reports prepared on a responsibility accounting basis
would be the:

fixed computer facility costs.

corporate administrative costs.

Your Answer

training costs.
Correct

variable computer operational costs.

Rationale
 fixed computer facility costs.
This answer is incorrect. Fixed computer facility costs would not most logically be included in the segment performance reports prepared on a
responsibility accounting basis.

Rationale
 corporate administrative costs.
This answer is incorrect. Corporate administrative costs would not most logically be included in the segment performance reports prepared on a
responsibility accounting basis.

Rationale
 training costs.
This answer is incorrect. Training costs would not most logically be included in the segment performance reports prepared on a responsibility
accounting basis.

Rationale
 variable computer operational costs.
The variable computer costs should be included since the segments are charged for actual usage, which is under their control. The standard rate
used is set at the beginning of the year and is known by the segment managers. The efficiencies and inefficiencies of the computer department are
not passed on to the segments. Both procedures promote a degree of control by segments.
Question 56
1.C.2.d
perev.bs.tb.024_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
The physical therapy division of American Medi-Spa, Inc., generated $500,000 in revenues during the most recent quarter. During the same quarter, the
variable expenses totaled $120,000, direct fixed expenses totaled $160,000, and indirect fixed expenses allocated to the division were $180,000. What was
the physical therapy division’s controllable margin for the quarter?
$40,000
Correct

$220,000

$200,000
Your Answer

$380,000

Rationale
 $40,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the sum of all expenses from the division’s revenue, the
physical therapy division’s controllable margin would be $40,000 ($500,000 − $120,000 − $160,000 − $180,000). This is not the correct formula
because only costs that are controllable by the division should be considered when calculating the controllable margin.

Rationale
 $220,000
A division’s controllable margin is defined as the contribution margin less total controllable fixed costs. The controllable fixed costs should be
deducted when calculating controllable margin as these costs are controllable by the division. Indirect corporate fixed costs should not be
deducted when calculating controllable margin since these costs are not controllable by the division. In this example, the physical therapy
division’s contribution margin is $380,000 ($500,000 − $120,000) and the controllable fixed costs equal $160,000; therefore, the physical therapy
division’s controllable margin equals $220,000 ($380,000 − $160,000).

Rationale
 $200,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the total variable costs and the indirect fixed costs from
the division’s revenue, the controllable margin would be $200,000 ($500,000 − $120,000 − $180,000). This is not the correct formula because only
costs that are controllable by the division should be deducted when calculating the controllable margin.

Rationale
 $380,000
This answer is incorrect. The physical therapy division’s contribution margin is $380,000 ($500,000 − $120,000); however, a division’s contribution
margin is not the same as its controllable margin. To calculate a division’s controllable margin, all costs that are controllable by the division need to
be considered, not just the variable costs.
Question 57
1.C.2.a
perev.bs.tb.001_0120
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
A manager at which of the following centers will have the highest number of assets to manage in order to have a positive performance evaluation?
Correct

Investment center

Profit center

Cost center
Your Answer

Sales center

Rationale
 Investment center
In an investment center, managers are responsible for profitability in the center as well as the investment used to generate that profit. Because of
this, the manager of an investment center has the highest number of assets to manage.

Rationale
 Profit center
This answer is incorrect. In a profit center, managers are responsible for profitability in the center. They are not responsible for the investment used
to generate that profit. This means the manager of a profit center does not have assets to manage.

Rationale
 Cost center
This answer is incorrect. In a cost center, managers are responsible for costs incurred in the center. They are not responsible for the revenue earned
or the investment used to generate revenue and costs. This means the manager of a cost center does not have assets to manage.

Rationale
 Sales center
This answer is incorrect. In a sales center, managers are responsible for revenue generated in the center. They are not responsible for the costs
incurred or the investment used to generate revenue and costs. This means the manager of a cost center does not have assets to manage.
Question 58
1.C.2.g
perev.bs.tb.039_0120
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
Each of the following statements concerning the stand-alone cost allocation method are correct, except:
The stand-alone cost allocation method is less susceptible to manipulation than the incremental cost allocation method.
Correct

The stand-alone cost allocation method requires the organization to designate one user as the primary user.

The stand-alone cost allocation method is easier to implement than the incremental cost allocation method.
Your Answer

The stand-alone cost allocation method allocates common costs to users based on their relative use of the resource.

Rationale
 The stand-alone cost allocation method is less susceptible to manipulation than the incremental cost allocation method.
This answer is incorrect. The incremental cost allocation method requires the organization to designate one user as the primary user so the total
amount of common cost allocated to each user will differ depending on which user is designated as the primary user. This is not the case under
stand-alone allocation which means allocation results are less susceptible to manipulation under the stand-alone allocation method.

Rationale
 The stand-alone cost allocation method requires the organization to designate one user as the primary user.
Common costs can be allocated using either the stand-alone allocation method or the incremental allocation method. When using the stand-alone
allocation method, costs are allocated based on their relative use of the resource. No user is designated as the primary user under the stand-alone
allocation method like under the incremental cost allocation method.

Rationale
 The stand-alone cost allocation method is easier to implement than the incremental cost allocation method.
This answer is incorrect. The only information needed to implement the stand-alone allocation method is the amount of the resource used by each
user which is easier to implement than the incremental allocation.

Rationale
 The stand-alone cost allocation method allocates common costs to users based on their relative use of the resource.
This answer is incorrect. The stand-alone allocation method does allocate costs based on their relative use of the resource.
Question 59
1.C.2.e
1C3-CQ14
LOS: 1.C.2.e
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
XYZ Company has two business units selling two different products. Business unit A produces and sells sprinkler heads and requires customers to pay for
their purchase prior to the production of the sprinkler heads. Business unit A recognizes revenue at the time of payment. Business unit B produces and
sells household faucets and allows customers to pay for their faucets after they are delivered to the customer. Business unit B recognizes revenue when
the customer receives the product. What is the likely effect that will occur by management in measuring and comparing the performance of each
business unit?
Business unit A will have overstated revenue in comparison to business unit B.

Business unit A and business unit B can be effectively compared.

Business unit A will have understated revenue in comparison to business unit B.

Correct

Management cannot effectively compare the business units.

Rationale
 Business unit A will have overstated revenue in comparison to business unit B.
This answer is incorrect. The likely effect that will occur by management in measuring and comparing the performance of each business unit is not
that business unit A will have overstated revenue in comparison to business unit B.

Rationale
 Business unit A and business unit B can be effectively compared.
This answer is incorrect. The likely effect that will occur by management in measuring and comparing the performance of each business unit is not
that business unit A and business unit B can be effectively compared.

Rationale
 Business unit A will have understated revenue in comparison to business unit B.
This answer is incorrect. The likely effect that will occur by management in measuring and comparing the performance of each business unit is not
that business unit A will have understated revenue in comparison to business unit B.

Rationale
 Management cannot effectively compare the business units.
In comparing business units that have different revenue recognition policies, it is necessary for executive management to understand that business
units will report results separately based on their individual revenue and expense recognition policies and as such the reports cannot be compared
without reconciliation that negates the impact of the different accounting policies.
Question 60
1.C.2.b
1C2-CQ19
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

Fox Enterprises' income statement for profit center store number 2 for July includes:

Contribution margin $90,000

Manager's salary $50,000
Depreciation on facilities $10,500
Allocated corporate expenses $9,500

The profit center's manager would most likely be able to control which of the following:

$140,000.

$150,500.
Your Answer

$160,000.
Correct

$90,000.

Rationale
 $140,000.
This answer is incorrect. The profit center's manager would not be able to control their own salary.

Rationale
 $150,500.
This answer is incorrect. The profit center's manager would not be able to control their own salary or depreciation on facilities.

Rationale
 $160,000.
This answer is incorrect. The profit center's manager would not be able to control their own salary, depreciation on facilities, or allocated corporate
expenses.

Rationale
 $90,000.
Profit centers are responsible for both costs and revenues. Since profit is a function of both revenue and costs, a manager for a profit center is
responsible for generating profits. The contribution margin is the amount that contributed towards fixed expenses and profits. Therefore, the
manager can only have control over the contribution margin (sales − variable costs). The other items included are not under the manager's control.
Question 61
1.C.2.b
perev.bs.tb.014_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Chester K. owns a consulting firm and hires freelance consultants to provide investment counseling services to a variety of clients. The firm shares rented
office space with another company, which helps keep overhead costs low. When explaining investment options, Chester frequently refers to strategies he
has used to manage the funds of his own firm. How would you classify this firm?
As possibly a profit center, but not an investment center
Correct

As an investment center

As a profit center
Your Answer

As possibly a cost center, but not a profit center

Rationale
 As possibly a profit center, but not an investment center
This answer is incorrect. In this case, Chester is responsible for using assets to generate profit. This means he is responsible for profit and
investment. This makes this an investment center, not a profit center.

Rationale
 As an investment center
In an investment center, managers are responsible for profitability in the center as well as the investment used to generate that profit. In this case,
Chester is responsible for using assets to generate profit. This makes this an investment center.

Rationale
 As a profit center
This answer is incorrect. Chester is responsible for using assets to generate profit. This means he is responsible for profit and investment. This
makes this an investment center, not a profit center.

Rationale
 As possibly a cost center, but not a profit center
This answer is incorrect. Chester is responsible for using assets to generate profit. This means he is responsible for more than merely costs and
because of that, this firm cannot be a cost center.
Question 62
1.C.2.c
perev.bs.tb.019_0120
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Based on the following information from ASX Corporation, calculate its total contribution margin.
Revenue $133,500
Direct materials $26,700
Direct labor $19,580
Variable manufacturing overhead $18,690
Fixed manufacturing overhead $17,800
Sales commissions $10,680
Fixed selling costs $8,010

$50,730

$32,040
Correct

$57,850

$68,530

Rationale
 $50,730
This answer is incorrect. ASX’s gross profit is $50,730 ($133,500 − $26,700 − $19,580 − $18,690 − $17,800). Only the variable costs are included in the
contribution margin calculation.

Rationale
 $32,040
This answer is incorrect. ASX’s operating income is $32,040 ($133,500 − $26,700 − $19,580 − $18,690 − $17,800 − $10,680 − $8,010). Only the variable
costs are included in the contribution margin calculation.

Rationale
 $57,850
A corporation’s contribution margin represents the amount of revenue left over after all variable costs have been paid. ASX’s variable costs consist
of direct materials, direct labor, variable manufacturing overhead, and sales commissions; consequently, the variable costs equal $75,650 ($26,700
+ $19,580 + $18,690 + $10,680). Based on ASX Corporation’s revenue and total variable costs, ASX’s contribution margin equals $57,850 ($133,500 −
$75,650).

Rationale
 $68,530
This answer is incorrect. If a unit’s contribution margin were calculated by subtracting the sum of the variable manufacturing costs from the total
revenue, the contribution margin would equal $68,530 ($133,500 − ($26,700 + $19,580 + $18,690)). All the variable costs must be included in the
contribution margin calculation, not just the variable manufacturing costs.
Question 63
1.C.2.d
perev.bs.tb.028_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4
The responsibility report for the Augusta division shows budgeted contribution margin of $2,000,000 and budgeted controllable fixed costs of $1,000,000.
Actual contribution margin for the division was $2,100,000 and actual controllable fixed costs were $900,000. Based on these figures, the manager’s
overall performance is:
20% below expectations.

equal to expectations.

5% above expectations.
Correct

20% above expectations.

Rationale
 20% below expectations.
This answer is incorrect. Augusta’s budgeted controllable margin is $1,000,000 ($2,000,000 − $1,000,000) and its actual controllable margin is
$1,200,000 ($2,100,000 − $900,000). This means actual performance is above expectations, not below, since actual segment controllable margin is
higher than expected.

Rationale
 equal to expectations.
This answer is incorrect. If budgeted controllable costs are subtracted from actual contribution margin and actual controllable costs are subtracted
from budgeted contribution margin, then actual performance will equal expected performance ($1,100,000). However, these are not the correct
calculations.

Rationale
 5% above expectations.
This answer is incorrect. The controllable fixed costs should be deducted when assessing a manager’s performance as these costs are controllable
by the manager. If these costs are not subtracted and the contribution margin is used to assess performance, it would appear that Augusta’s actual
performance is 5% above expectations ($100,000 contribution margin above expectations ÷ $2,000,000 expected contribution margin). However,
this does not take controllable fixed costs into consideration.

Rationale
 20% above expectations.
A segment’s controllable margin is defined as the Contribution Margin less Controllable Fixed Costs. The controllable fixed costs should be
deducted when assessing a manager’s performance as these costs are controllable by the manager. Augusta’s budgeted controllable margin is
$1,000,000 ($2,000,000 − $1,000,000) and its actual controllable margin is $1,200,000 ($2,100,000 − $900,000). This means actual performance is
20% above expectations ($200,000 increase over expectations ÷ $1,000,000 expected controllable margin).
Question 64
1.C.2.f
perev.bs.tb.035_0120
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Patricia Zubek, director of operations at Ready Homes, Inc., has received the following financial information about the company’s commercial
prefabricated warehouse division.

Prefab Division Company Total

Revenue $53,650,625 $194,565,700
Less: Variable expenses
Cost of goods sold 24,600,345 83,650,010
Selling & administrative 12,500,750 34,005,600
Equals: Contribution margin $16,549,530 $76,910,090
Less: Fixed expenses 18,750,500 55,640,900
Equals: Operating income ($2,200,970) $21,269,190

Patricia is disappointed in the performance of this division and wonders if she should recommend closing it. Later, in talking with the company
controller, Patricia learns that $5,250,800 of corporate fixed overhead is allocated to the division. With this additional information, should Patricia
recommend closing the division? Why or why not?

Correct

No; its controllable margin is $3,049,830.

Yes; its controllable margin is ($3,049,830).

Your Answer

Yes; its controllable margin is ($2,200,970).

No; its controllable margin is $2,200,970.

Rationale
 No; its controllable margin is $3,049,830.
A division’s controllable margin is typically used to help determine whether a division should be closed. If the controllable margin is positive, then it
is contributing positively to the organization’s profitability and should remain open. The controllable margin is defined as the contribution margin
less the controllable fixed costs. Indirect corporate fixed costs should not be deducted when calculating controllable margin because these costs
will be reallocated to the remaining divisions if the commercial prefabricated warehouse division is closed. In this example, Patricia should add
back the allocated fixed overhead of $5,250,800 to Prefab’s operating income to determine its controllable margin. Since Prefab’s controllable
margin is $3,049,830 (−$2,220,970 + $5,250,800), it is contributing positively to income and should not be closed.

Rationale
 Yes; its controllable margin is ($3,049,830).
This answer is incorrect. A division’s controllable margin is defined as the contribution margin less the division’s controllable fixed costs. In this
problem, the controllable margin is not ($3,049,830).

Rationale
 Yes; its controllable margin is ($2,200,970).
This answer is incorrect. A division’s controllable margin is defined as the contribution margin less the division’s controllable fixed costs. In this
problem, the operating income is ($2,200,970), not the controllable margin.

Rationale
 No; its controllable margin is $2,200,970.
This answer is incorrect. A division’s controllable margin is defined as the contribution margin less the division’s controllable fixed costs. In this
problem, the controllable margin is not $2,200,970.
Question 65
1.C.2.f
perev.bs.tb.037_0120
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Bergeron Corporation’s fine furniture division reported a net operating income of $3,200,000 in the most recent reporting period and the division
absorbed indirect fixed corporate expenses of $1,400,000. What was the division’s controllable margin?
$3,200,000

$1,400,000
Correct

$4,600,000
Your Answer

$1,800,000

Rationale
 $3,200,000
This answer is incorrect. The fine furniture division’s operating income is $3,200,000, not its controllable margin.

Rationale
 $1,400,000
This answer is incorrect. The fine furniture division had $1,400,000 of absorbed or allocated indirect fixed costs. The amount of absorbed or
allocated indirect fixed costs is different from a division’s controllable margin.

Rationale
 $4,600,000
A division’s controllable margin is defined as the contribution margin less controllable fixed costs. Another way of calculating the controllable
margin is to add absorbed or allocated indirect fixed costs back to a division’s net operating income. In this problem, the fine furniture division’s
controllable margin equals $4,600,000 ($3,200,000 + $1,400,000).

Rationale
 $1,800,000
This answer is incorrect. If a division’s controllable margin were calculated by subtracting the absorbed or allocated indirect fixed costs from
operating income, then the fine furniture division’s controllable margin would be $1,800,000 ($3,200,000 − $1,400,000). This is not the correct way
to calculate a division’s controllable margin.
Question 66
1.C.2.a
1C2-AT25
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 2
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?
Profit center

Cost center

Revenue center
Correct

Investment center

Rationale
 Profit center
This answer is incorrect. A profit center is not the organizational segment that is most like an independent business.

Rationale
 Cost center
This answer is incorrect. A cost center is not the organizational segment that is most like an independent business.

Rationale
 Revenue center
This answer is incorrect. A revenue center is not the organizational segment that is most like an independent business.

Rationale
 Investment center
An investment center is much like an independent, autonomous business. It has control over profits (revenues and costs), the investment in the
center, and the return on the investment.
Question 67
1.C.2.g
1C2-LS32
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
A company has $80,000 in common costs, plus departments 1 and 2 have $40,000 and $60,000 in individual costs, respectively. The segments share a
fleet of vehicles (the costs of which are included in common costs): department 1 uses the vehicles for five months out of the year and department 2 uses
the vehicles for the remaining seven months. Using stand-alone cost allocation, what is allocated to department 1?
$40,000

$80,000
Your Answer

$66,667
Correct

$33,333

Rationale
 $40,000
This answer is incorrect. Using stand-alone cost allocation, $40,000 would not be allocated to department 1.

Rationale
 $80,000
This answer is incorrect. Using stand-alone cost allocation, $80,000 would not be allocated to department 1.

Rationale
 $66,667
This answer is incorrect. Using stand-alone cost allocation, $66,667 would not be allocated to department 1.

Rationale
 $33,333
The stand-alone cost allocation method allocates common costs, so the individual costs are ignored. The common cost is allocated by months of
use: $80,000 × 5/12 = $33,333.
Question 68
1.C.2.d
perev.bs.tb.021_0120
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
During the most recent reporting period, the Delta division of Southern Agricultural Corporation generated net revenues of $7,400,000, had direct fixed
expenses of $3,000,000, and had indirect corporate fixed costs of $1,000,000. If the division’s controllable margin was $1,200,000, what are the division’s
variable costs?
$3,400,000

$5,600,000
Correct

$3,200,000

$4,400,000

Rationale
 $3,400,000
This answer is incorrect. If both fixed costs are deducted from revenue, then the variable costs would be $3,400,000 ($7,400,000 − $3,000,000 −
$1,000,000). This is not the correct calculation because the controllable margin needs to be accounted for and costs that are not controllable by the
division should not be a part of the controllable margin calculation.

Rationale
 $5,600,000
This answer is incorrect. If the variable costs could be solved for by adding the controllable margin to the difference between revenue and the
controllable fixed costs, then the variable costs would be $5,600,000 ($7,400,000 − $3,000,000 + $1,200,000). This is not the correct formula to solve
for the variable costs.

Rationale
 $3,200,000
A division’s controllable margin is defined as the contribution margin less the controllable fixed costs. Because the contribution margin equals
revenue minus total variable costs, the division’s variable costs can be solved for by rearranging the figures and setting the variable costs equal to
revenue minus the controllable fixed costs minus the controllable margin. In this example, Delta’s variable costs are $3,200,000 ($7,400,000 −
$3,000,000 − $1,200,000).

Rationale
 $4,400,000
This answer is incorrect. The difference between revenue and the controllable fixed costs is $4,400,000 ($7,400,000 − $3,000,000). This difference
between revenue and the controllable fixed costs is not the same as the variable costs.
Question 69
1.C.2.c
2C2-CQ26
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: hard
Bloom Code: 5

Current business segment operations for Whitman, a mass retailer, are presented below.

Merchandise Automotive Restaurant Total

Sales $500,000 $400,000 $100,000 $1,000,000
Variable costs $300,000 $200,000 $70,000 $570,000
Fixed costs $100,000 $100,000 $50,000 $250,000
Operating income (loss) $100,000 $100,000 ($20,000) $180,000

Management is contemplating the discontinuance of the Restaurant segment since "it is losing money." If this segment is discontinued, $30,000 of its
fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels. When considering the decision,
Whitman's controller advised that one of the financial aspects Whitman should review is contribution margin. Which one of the following options reflects
the current contribution margin ratios for each of Whitman's business segments?

*Source: Retired ICMA CMA Exam Questions.

Correct

Merchandising: 40%, Automotive: 50%, Restaurant: 30%.

Merchandising: 60%, Automotive: 50%, Restaurant: 70%.

Your Answer

Merchandising: 40%, Automotive: 50%, Restaurant: 70%.

Merchandising: 60%, Automotive: 50%, Restaurant: 30%.

Rationale
 Merchandising: 40%, Automotive: 50%, Restaurant: 30%.
Contribution margin is sales less variable costs. Contribution margin ratio is contribution margin divided by sales. The contribution margin for
Merchandising is $200,000, which is 40% of sales. The contribution margin for Automotive is $200,000, which is 50% of sales. The contribution
margin for Restaurant is $30,000, which is 30% of sales.

Rationale
 Merchandising: 60%, Automotive: 50%, Restaurant: 70%.
This answer is incorrect. This answer represents the variable cost as a percentage of sales for Merchandising, Automotive, and Restaurant.

Rationale
 Merchandising: 40%, Automotive: 50%, Restaurant: 70%.
This answer is incorrect. Restaurant was calculated as variable cost as a percentage of sales instead of the contribution margin percentage.

Rationale
 Merchandising: 60%, Automotive: 50%, Restaurant: 30%.
This answer is incorrect. Merchandising was calculated as variable cost as a percentage of sales instead of the contribution margin percentage.
Question 70
1.C.2.d
1C2-CQ18
LOS: 1.C.2.d
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

The receipt of raw materials for its production of certain products and the shipping of the completed goods to its customers is under the control of the
warehouse supervisor. The warehouse supervisor's time is spent approximately 70% on receiving activities and 30% on shipping activities. Separate
staffs of employees are employed for the receiving and shipping functions. The labor-related costs for the warehousing function are:

Warehouse supervisor's salary $ 65,000

Receiving clerks' wages $ 85,000
Shipping clerks' wages $ 67,000
Employee benefit costs (40% of salary and wage costs) $ 86,800

The company utilizes a responsibility accounting system for reporting the performance of business segments. All costs on the report are classified as
period or product costs. The total labor-related costs attributable to product costs under the control of the warehouse supervisor would appear on the
responsibility accounting performance report as:

$152,000.
Correct

$119,000.
Your Answer

$238,800.

$303,800.

Rationale
 $152,000.
This answer is incorrect. The shipping clerks' wages are excluded as they are considered a selling expense. Additionally, this answer did not
consider employee benefit costs.

Rationale
 $119,000.
The responsibility accounting report lists only the costs over which the warehousing supervisor controls. The supervisor's salary should be excluded
from the report as the salary is controlled by a superior. Only the product costs should be considered in the responsibility accounting report.
Therefore, the shipping clerks' wages are excluded as well, as they are considered a selling expense (period cost). The only product cost included is
the receiving clerks' wages of $85,000 and the fringe benefit associated with the receiving clerks of $34,000 ($85,000 × 40%) for a total of $119,000.

Rationale
 $238,800.
This answer is incorrect. Shipping clerks' wages are excluded as they are considered a selling expense. Only a portion of the employee benefit costs
would be included.

Rationale
 $303,800.
This answer is incorrect. The warehousing supervisor's salary is excluded as a superior would control that cost. Shipping clerks' wages are excluded
as they are considered a selling expense. Only a portion of the employee benefit costs would be included.
Question 71
1.C.2.c
aq.perev.bs.005_0820
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 4

Classy Purses, Inc. (CPI) is an international manufacturer of stylish shoulder bags. CPI is split up into three regions: Europe Region, Asia Eastern Region,
U.S. Region. CPI has provided the following operating profit & loss report for their Europe Region:

Europe Region - Profit & Loss Report (for Classy Purses, Inc.)
(in millions) England France Germany Total
Revenue €260 €350 €390 €1,000
Variable COGS (40) (80) (100) (220)
Variable S&A costs (30) (50) (90) (170)
Fixed COGS (80) (100) (90) (270)
Fixed S&A costs (20) (30) (20) (70)
Allocated corporate costs (26) (35) (39) (100)
Allocation percent 26.0% 35.0% 39.0% 100.0%
(based on revenue)

Which of the following correctly orders CPI European operations by contribution margin from highest to lowest?

Germany, France, England

England, France, Germany

Correct

France, Germany, England

England, Germany, France

Rationale
 Germany, France, England
This answer is incorrect. This answer orders the CPI European operations by revenue from highest to lowest instead of contribution margin.

Rationale
 England, France, Germany
This answer is incorrect. This answer orders the CPI European operations by operating profit highest to lowest instead of contribution margin.

Rationale
 France, Germany, England

The following shows the calculation of contribution margin for each CPI European operation:

Europe Region - Profit & Loss Report (for Classy Purses, Inc.)
(in millions) England France Germany Total
Revenue €260 €350 €390 €1,000
Variable COGS (40) (80) (100) (220)
Variable S&A costs (30) (50) (90) (170)
Contribution margin €190 €220 €200 €610
Fixed COGS (80) (100) (90) (270)
Fixed S&A costs (20) (30) (20) (70)
Allocated corporate costs (26) (35) (39) (100)
Operating profit €64 €55 €51 €170
Allocation percent 26.0% 35.0% 39.0% 100.0%
(based on revenue)

The contribution margin calculation subtracts variable COGS and variable S&A costs from revenue.

Rationale
 England, Germany, France
This answer is incorrect. This answer orders the CPI European operations by contribution margin from lowest to highest.
Question 72
1.C.2.b
1C3-LS52
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Consider the following categories of performance measures.

I. Profitability measures.

II. Customer-satisfaction measures.

III. Efficiency, quality, and time measures.

IV. Innovation measures.

A cruise line operates on a national scale in a very competitive marketplace. In view of this information, which measures should the company use in the
evaluation of its managers?

* Source: Retired ICMA CMA Exam Questions.

I only

II and III

I and II
Correct

I, II, III, and IV

Rationale
 I only
This answer is incorrect. The cruise line should evaluate more measures than just profitability measures.

Rationale
 II and III
This answer is incorrect. The cruise line should evaluate more measures than just customer-satisfaction measures and efficiency, quality, and time
measures.

Rationale
 I and II
This answer is incorrect. The cruise line should evaluate more measures than just profitability measures and customer-satisfaction measures.

Rationale
 I, II, III, and IV
Regardless of industry, a firm should always evaluate managers based on profitability, customer satisfaction, efficiency, quality, time, and
innovation measures.
Question 73
1.C.2.b
perev.bs.tb.009_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Blackwell Electronics is a multinational corporation that sells computers, tablets, cameras, and portable music players. The Mayfield division is
responsible for designing, manufacturing, and selling the latest in camera technology; however, corporate headquarters still retains control over all
expansion and major equipment purchases. Based on these facts, the Mayfield division is best described as a(n):
Correct

Profit center.

Cost center.

Investment center.
Your Answer

Internal center.

Rationale
 Profit center.
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In a profit center, managers
are responsible for decisions impacting profitability in the center but not for long-run strategic decisions. Since the Mayfield division president is
responsible for short-run decisions impacting profitability but not long-run decisions concerning expansion and major equipment purchases, it
should be held accountable as a profit center.

Rationale
 Cost center.
This answer is incorrect. In a cost center, managers are only responsible for the costs incurred in the center. Because the Mayfield division president
is responsible for more than just the costs incurred in the division, it is not a cost center.

Rationale
 Investment center.
This answer is incorrect. In an investment center, managers are responsible for short-run decisions impacting profitability in the center as well as
long-run strategic decisions. Since the Mayfield division president is not responsible for long-run strategic divisions concerning expansion and
major equipment purchases, it is not an investment center.

Rationale
 Internal center.
This answer is incorrect. An internal center is not used to establish accountability within a responsibility system.
Question 74
1.C.2.b
perev.bs.tb.011_0120
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
The human resources department at a large university would be classified as a(n):
Profit center.

Investment center.
Correct

Cost center.
Your Answer

Controllable center.

Rationale
 Profit center.
This answer is incorrect. In a profit center, managers are responsible for both revenues and costs. Since a human resources department at a large
university does not directly generate revenue, it should not be classified as a profit center.

Rationale
 Investment center.
This answer is incorrect. In an investment center, managers are responsible for short-run decisions that impact profitability in the center as well as
long-run strategic decisions. Since a human resources department in a large university does not directly generate revenue and is not responsible for
long-run strategic decisions, it should not be classified as an investment center.

Rationale
 Cost center.
Responsibility centers are classified based on the items under the control or influence of the managers in the center. In a cost center, managers are
only responsible for the costs that are incurred in the center. They are not responsible for generating revenue; rather, they provide support and
services to centers that do generate revenue without incurring excessive costs. A human resources department at a large university meets this
definition of a cost center; therefore, this is the correct answer.

Rationale
 Controllable center.
This answer is incorrect. A controllable center is not a part of a responsibility system.
Question 75
1.C.2.g
1C3-LS60
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Vincent Hospital has installed a new computer system. The system was designed and constructed based on the anticipated number of hours of usage
required by the various hospital departments according to projections made by the departmental managers. Virtually all of the operating costs of the
system are fixed. What would be the most systematic and rational manner in which to allocate the new computer system costs to the various hospital
departments?

* Source: Retired ICMA CMA Exam Questions.

By actual usage by each department

Correct

By the anticipated number of hours of usage

Your Answer

To each department equally

By the revenue generated in each department

Rationale
 By actual usage by each department
This answer is incorrect. Allocating the new computer system costs to the various hospital departments by actual usage by each department would
not be the most systematic and rational manner of allocation.

Rationale
 By the anticipated number of hours of usage
When new costs are allocated, there should be an adequate understanding of the activity level of the asset being purchased. In this case, a
computer system is being purchased for use by multiple departments. Understanding the hours of usage each department will be utilizing the new
computer system will assist the appropriate allocation of costs among the departments.

Rationale
 To each department equally
This answer is incorrect. Allocating the new computer system costs to the various hospital departments equally would not be the most systematic
and rational manner of allocation.

Rationale
 By the revenue generated in each department
This answer is incorrect. Allocating the new computer system costs to the various hospital departments by the revenue generated in each
department would not be the most systematic and rational manner of allocation.
Question 76
1.C.2.b
1C2-LS04d
LOS: 1.C.2.b
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
A company's sales department is responsible for generating income but has few controllable costs. Conversely, the production department manager is
responsible for controlling costs but not setting prices. Which of the following places each department in the best responsibility center based on the
managers' responsibilities?
Sales: cost center; production: profit center.

Sales: profit center; production: cost center.

Sales: cost center; production: revenue center.

Correct

Sales: revenue center; production: cost center.

Rationale
 Sales: cost center; production: profit center.
This answer is incorrect. "Sales: cost center; production: profit center" does not place each department in the best responsibility center based on
the manager's responsibilities.

Rationale
 Sales: profit center; production: cost center.
This answer is incorrect. "Sales: profit center; production: cost center" does not place each department in the best responsibility center based on
the manager's responsibilities.

Rationale
 Sales: cost center; production: revenue center.
This answer is incorrect. "Sales: cost center; production: revenue center" does not place each department in the best responsibility center based on
the manager's responsibilities.

Rationale
 Sales: revenue center; production: cost center.
A revenue center is often used in place of a profit center when the manager is not expected to control costs and thus is concerned only with
revenue. The production facility cannot directly sell or generate profits, so it is treated as a cost center because it is responsible only for costs.
Question 77
1.C.2.g
1C2-LS01d
LOS: 1.C.2.g
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3

Lawson Company discloses segment financial information for its operating segments. The following information is available for Year 1:

Operating Segments Sales Traceable Expenses Nontraceable Expenses

Segment A $ 600,000 $ 360,000
Segment B $ 800,000 $ 600,000
Segment C $ 400,000 $ 340,000
Total $1,800,000 $1,300,000 $300,000

Nontraceable expenses are allocated based on the ratio of a segment's income before nontraceable expenses. The segment profit for Operating Segment
B is (approximately):

Correct

$80,000.

$66,667.

$61,538.
Your Answer

$200,000.

Rationale
 $80,000.

Segment Profit = Sales − Traceable Expenses − Nontraceable Expenses

First, calculate income before nontraceable expenses for each segment:

Segment A: $600,000 − $360,000 = $240,000

Segment B: $800,000 − $600,000 = $200,000
Segment C: $400,000 − $340,000 = $60,000
Total income before nontraceable expenses is $500,000 ($240,000 + $200,000 + $60,000)

Second, calculate the percentage of total income before nontraceable expenses for each segment:

Segment A: $240,000 ÷ $500,000 = 48%

Segment B: $200,000 ÷ $500,000 = 40%
Segment C: $60,000 ÷ $500,000 = 12%

Third, allocate nontraceable expenses to each segment:

Segment A: 48% × $300,000 = $144,000

Segment B: 40% × $300,000 = $120,000
Segment C: 12% × $300,000 = $36,000

Fourth, calculate segment profit for each segment:

Segment A: $600,000 − $360,000 − $144,000 = $96,000

Segment B: $800,000 − $600,000 − $120,000 = $80,000
Segment C: $400,000 − $340,000 − $36,000 = $24,000

Rationale
 $66,667.
This answer is incorrect. This answer allocated nontraceable expenses based on sales, not based on the ratio of a segment's income before
nontraceable expenses.

Rationale
 $61,538.
This answer is incorrect. This answer allocated nontraceable expenses based on traceable expenses, not based on the ratio of a segment's income
before nontraceable expenses.
Rationale
 $200,000.
This answer is incorrect. This amount represents Segment B income before nontraceable expenses, not segment profit, which is determined after
nontraceable expenses are allocated.
Question 78
1.C.2.a
1C2-AT05
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
The least complex segment or area of responsibility for which costs are allocated is a(n):
Correct

cost center.

profit center.

investment center.
Your Answer

contribution center.

Rationale
 cost center.
A cost center is responsible for costs, only. A classic example of a cost center would be a "captive supplier." A captive supplier is a division
producing only for other divisions in the same corporation.

Rationale
 profit center.
This answer is incorrect. The least complex segment or area of responsibility for which costs are allocated is not a profit center.

Rationale
 investment center.
This answer is incorrect. The least complex segment or area of responsibility for which costs are allocated is not an investment center.

Rationale
 contribution center.
This answer is incorrect. The least complex segment or area of responsibility for which costs are allocated is not a contribution center.
Question 79
1.C.2.c
perev.bs.tb.018_0120
LOS: 1.C.2.c
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Based on the following information from SDE Corporation, calculate its total contribution margin.
Revenue $71,400
Direct materials $14,280
Direct labor $10,472
Variable manufacturing overhead $9,996
Fixed manufacturing overhead $9,520
Sales commissions $5,712
Fixed selling costs $4,284

$27,132
Correct

$30,940
Your Answer

$17,136

$36,652

Rationale
 $27,132
This answer is incorrect. SDE’s gross profit is $27,132 ($71,400 − $14,280 − $10,472 − $9,996 − $9,520). Only the variable costs are included in the
contribution margin calculation.

Rationale
 $30,940
A corporation’s contribution margin represents the amount of revenue left over after all variable costs have been paid. SDE’s variable costs consist
of direct materials, direct labor, variable manufacturing overhead, and sales commissions; consequently, the variable costs equal $40,460 ($14,280
+ $10,472 + $9,996 + $5,712). Based on SDE Corporation’s revenue and total variable costs, SDE’s contribution margin equals $30,940 ($71,400 −
$40,460).

Rationale
 $17,136
This answer is incorrect. SDE’s operating income is $17,136 ($71,400 − $14,280 − $10,472 − $9,996 − $9,520 − $5,712 − $4,284). Only the variable
costs are included in the contribution margin calculation.

Rationale
 $36,652
This answer is incorrect. If a unit’s contribution margin were calculated by subtracting the sum of the variable manufacturing costs from the total
revenue, the contribution margin would equal $36,652 ($71,400 − ($14,280 + $10,472 + $9,996)). All the variable costs must be included in the
contribution margin calculation, not just the variable manufacturing costs.
Question 80
1.C.2.a
perev.bs.tb.003_0120
LOS: 1.C.2.a
Lesson Reference: Business Units and Performance Evaluation
Difficulty: easy
Bloom Code: 1
Which of the following statements best describes the role of a cost center manager?
Correct

A cost center manager is responsible for providing services to other centers at an acceptable level of cost.

A cost center manager is responsible for helping other center managers control costs incurred in their centers.

A cost center manager is responsible for the cost of investments made in the center.
Your Answer

A cost center manager is responsible for the cost of all responsibility centers in an organization.

Rationale
 A cost center manager is responsible for providing services to other centers at an acceptable level of cost.
Cost center managers are responsible for providing services to other centers at an acceptable level of cost, but they are not responsible for revenue
generation or asset management.

Rationale
 A cost center manager is responsible for helping other center managers control costs incurred in their centers.
This answer is incorrect. Cost center managers are not responsible for the costs incurred in other centers.

Rationale
 A cost center manager is responsible for the cost of investments made in the center.
This answer is incorrect. Cost center managers are not responsible for asset management in their centers.

Rationale
 A cost center manager is responsible for the cost of all responsibility centers in an organization.
This answer is incorrect. Cost center managers are not responsible for the costs incurred in other centers.
Question 81
1.C.2.f
perev.bs.tb.032_0120
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Patricia Zubek, director of operations at Ready Homes Inc., is disappointed with another year of operating losses at the industrial warehousing division
and is considering recommending its closure to the vice president. Upon talking with Jacob Fermi, Patricia learns that Jacob, the controller, has
allocated $5,250,800 as corporate fixed overhead. Patricia realizes this allocation needs to be removed from the financial results of the prefab division to
compute its controllable margin. How will this adjustment affect the company’s total operating income?
It will increase by $5,250,800.
Correct

It will remain unchanged.

It will decrease by $5,250,800.

Your Answer

It depends upon its reallocation to other divisions of the company.

Rationale
 It will increase by $5,250,800.
This answer is incorrect. Changing the allocation (or even removing it entirely from an area’s income statement) does not change the operating
income of the organization as changing the allocation is not the same as reducing the cost. The same amount of cost has been incurred regardless
of the way it is allocated. The area’s operating income will increase by $5,250,880, but the company’s operating income will not change.

Rationale
 It will remain unchanged.
Corporate fixed overhead costs cannot be traced to specific areas of an organization. It needs to be allocated to the various areas of the
organization. Changing the allocation (or even removing it entirely from an area’s income statement) does not change the operating income of the
organization as changing the allocation is not the same as reducing the cost. The same amount of cost has been incurred regardless of the way it is
allocated.

Rationale
 It will decrease by $5,250,800.
This answer is incorrect. Changing the allocation (or even removing it entirely from an area’s income statement) does not change the operating
income of the organization as changing the allocation is not the same as reducing the cost. The same amount of cost has been incurred regardless
of the way it is allocated. The area’s operating income will increase, not decrease, by $5,250,800, but the company’s operating income will not
change.

Rationale
 It depends upon its reallocation to other divisions of the company.
This answer is incorrect. Changing the allocation (or even removing it entirely from an area’s income statement) does not change the operating
income of the organization as changing the allocation is not the same as reducing the cost. The same amount of cost has been incurred regardless
of the way it is allocated.
Question 82
1.C.2.f
aq.perev.bs.008_0820
LOS: 1.C.2.f
Lesson Reference: Business Units and Performance Evaluation
Difficulty: medium
Bloom Code: 3
Which of the following statements best explains why the allocation of common costs among segments can be an issue in performance evaluation?
External reporting requirements typically mandate that common corporate costs are allocated across all reporting segments. The practice of
allocating indirect (common) costs can interfere with effective performance evaluation decisions that are internal to the organization.

Different allocation methods result in different amounts of indirect costs being allocated to each operation. Each manager has an incentive to choose
the allocation method that allocates the least amount of indirect costs to their operation. This makes it difficult for managers to agree on a certain
allocation method.

When evaluating the performance of business units for decisions regarding keeping or dropping the business unit from the organization, or even for
decisions involving distribution of investment resources to business units, analysis of profits computed with allocated indirect costs can lead to
decisions with death-spiral results.
Correct

All of the other statements are reasons why the allocation of common costs among segments can be an issue in performance evaluation.

Rationale
 External reporting requirements typically mandate that common corporate costs are allocated across all reporting segments. The
practice of allocating indirect (common) costs can interfere with effective performance evaluation decisions that are internal to the
organization.
This answer is incorrect because this statement is true. When evaluating the performance of a manager for a cost, profit, or investment center, it is
important to use only controllable costs. When evaluating the performance of the business unit itself, particularly for decisions regarding keeping
or dropping the business unit from the organization, it is crucial to use only direct costs in the analysis. However, this answer isn't the only
statement that explains why the allocation of common costs among segments can be an issue in performance evaluation.

Rationale
 Different allocation methods result in different amounts of indirect costs being allocated to each operation. Each manager has an
incentive to choose the allocation method that allocates the least amount of indirect costs to their operation. This makes it difficult for
managers to agree on a certain allocation method.
This answer is incorrect because this statement is true. Managers frequently disagree on which indirect cost allocation base to use, favoring the
method that allocates the least indirect costs to their operations. However, this answer isn't the only statement that explains why the allocation of
common costs among segments can be an issue in performance evaluation.

Rationale
 When evaluating the performance of business units for decisions regarding keeping or dropping the business unit from the
organization, or even for decisions involving distribution of investment resources to business units, analysis of profits computed with
allocated indirect costs can lead to decisions with death-spiral results.
This answer is incorrect because this statement is true. The death spiral is when a company chooses to drop certain operations from the business
because they have a reported loss due to the allocation of indirect costs. When the operation is dropped, the indirect costs are then reallocated to
other operations. However, this answer isn't the only statement that explains why the allocation of common costs among segments can be an issue
in performance evaluation.

Rationale
 All of the other statements are reasons why the allocation of common costs among segments can be an issue in performance evaluation.

Correct. All three statements are true. When evaluating the performance of a manager for a cost, profit, or investment center, it is important to use
only controllable costs. When evaluating the performance of the business unit itself, particularly for decisions regarding keeping or dropping the
business unit from the organization, it is crucial to use only direct costs in the analysis.

Managers frequently disagree on which indirect cost allocation base to use, favoring the method that allocates the least indirect costs to their
operations.

The death spiral can result when a company chooses to drop certain operations from the business that have a reported loss due to the allocation of
indirect costs. When the operation is dropped, the indirect costs are then reallocated to other operations.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.2.j
aq.tran.pri.006_0820
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

Business Unit A produces a widget product that can be sold either to external customers or internally to Business Unit B. Business Unit B is currently
purchasing 15,000 widgets from an external supplier for $42 per unit. Both Business Unit A and Business Unit B are evaluated as profit centers.
Production and sales data for Business Unit A are provided below. Assuming that variable costs of $4 per widget can be avoided by Business Unit A if an
internal transfer takes place, should Business Unit A transfer widgets to Business Unit B? If so, what should the transfer price be?

Business Unit A:
Capacity in units 80,000
Number of units being sold to external customers 80,000
Selling price per unit to external customers $45
Variable costs per widget $20
Fixed costs per unit (based on capacity) $10

Your Answer

No transfer should take place.

A transfer should take place; the transfer price should be $45.

A transfer should take place; the transfer price should be between $20 and $45.
Correct

A transfer should take place; the transfer price should be between $41 and $42.

Rationale
 No transfer should take place.
This answer is incorrect. In this situation, a transfer should take place. Remember to consider the variable costs that can be avoided if an internal
transfer takes place.

Rationale
 A transfer should take place; the transfer price should be $45.
This answer is incorrect. This answer represents the price that Business Unit A sells widgets to external customers. However, Business Unit B can
purchase widgets from an external supplier for $42 and would not purchase them at a price of $45.

Rationale
 A transfer should take place; the transfer price should be between $20 and $45.
This answer is incorrect. Remember that Business Unit A does not have excess capacity and the contribution margin lost for Business Unit A should
be considered in the calculation of the transfer cost.

Rationale
 A transfer should take place; the transfer price should be between $41 and $42.
A transfer should take place. Unit A will spend $16 in variable costs ($20 – $4) to produce the widgets to transfer. In addition, due to lack of capacity,
Unit A will lose a $25 contribution margin ($45 – $20) due to lost external sales. Hence, Unit A will demand at minimum a $41 price ($16 + $25) to
transfer, and Unit B will pay no more than $42 (equal to the current price it is paying to an external supplier).

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.2.h
tran.pri.tb.001_0120
LOS: 1.C.2.h
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
Within the Gamma Company, the Alpha division produces a product that can be used by the Beta division. If Alpha transfers the product to Beta, the
transfer price represents:
Correct

revenue to Alpha and a cost to Beta.

revenue to Beta and a cost to Alpha.

Your Answer

profit to Alpha and a cost to Beta.

profit to Beta and a cost to Alpha.

Rationale
 revenue to Alpha and a cost to Beta.
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. It is revenue to the “selling” division and a cost to the “buying” division when internal income statements are prepared. In this
instance, Alpha is the seller and Beta is the buyer.

Rationale
 revenue to Beta and a cost to Alpha.
This answer is incorrect. In an internal transfer of goods or services, the “selling” division receives revenue and the “buying” division incurs a cost.

Rationale
 profit to Alpha and a cost to Beta.
This answer is incorrect. The price for any transaction (whether internal or external) is revenue to the seller.

Rationale
 profit to Beta and a cost to Alpha.
This answer is incorrect. In an internal transfer, the “selling” division receives revenue and the “buying” division incurs a cost.
Question 3
1.C.2.k
1C2-LS47
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3

Kern Manufacturing has several divisions and evaluates performance using segment income. Since sales include transfers to other divisions, Kern has
established a price for internal sales as cost plus 10%. Red Division has requested 10,000 units of Green Division's product. Green Division is selling its
product externally at a 60% markup over cost. The corporate policy will encourage the Green Division to:

* Source: Retired ICMA CMA Exam Questions.

reject the sale to the Red Division because it does not provide the same markup as external sales.

transfer the product to the Red Division because all costs are being covered and the division will earn a 10% profit.
Your Answer

accept the sale to the Red Division if it is operating at full capacity and the sale will contribute to fixed costs.
Correct

transfer the product to the Red Division if it does not require the Green Division to give up any external sales.

Rationale
 reject the sale to the Red Division because it does not provide the same markup as external sales.
This answer is incorrect. The corporate policy will not encourage the Green Division to reject the sale to the Red Division because it does not provide
the same markup as external sales.

Rationale
 transfer the product to the Red Division because all costs are being covered and the division will earn a 10% profit.
This answer is incorrect. The corporate policy will not encourage the Green Division to transfer the product to the Red Division because all costs are
being covered and the division will earn a 10% profit.

Rationale
 accept the sale to the Red Division if it is operating at full capacity and the sale will contribute to fixed costs.
This answer is incorrect. The corporate policy will not encourage the Green Division to accept the sale to the Red Division if it is operating at full
capacity and the sale will contribute to fixed costs.

Rationale
 transfer the product to the Red Division if it does not require the Green Division to give up any external sales.
Kern Manufacturing established a corporate policy for internal sales as cost plus 10%. This policy would encourage Green Division to transfer the
product to the Red Division if it does not require Green Division to give up any external sales.
Question 4
1.C.2.l
1C3-CQ15
LOS: 1.C.2.l
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
Vroom Motorcycle Company, headquartered in the United States, presently manufactures their motorcycles in the country of Utopia due to their lower
costs of production, low tariffs, favorable exchange rates, and access to lower cost raw materials, which are 50% lower than that of the U.S.. However, in
recent years, Utopia has seen a boom in companies relocating their production to Utopia. Due to this factor, the exchange rates have become
unfavorable to Vroom, and as a result the cost of raw materials has increased over 25% in the past year. Which of the following actions would you
recommend Vroom's management take?
Do nothing.
Your Answer

Relocate all operations back to the U.S. immediately as costs of production has become too high.

Wait out the economic situation in Utopia. Economic factors are cyclical and will return to normal.
Correct

Continue operations as they are, however, closely monitor the current economic situation in Utopia.

Rationale
 Do nothing.
This answer is incorrect. Do nothing is not the proper action to recommend to Vroom's management if the exchange rates become unfavorable and
raw materials increase by over 25%.

Rationale
 Relocate all operations back to the U.S. immediately as costs of production has become too high.
This answer is incorrect. Relocate all operations back to the U.S. immediately as costs of production has become too high is not the proper action to
recommend to Vroom's management if the exchange rates become unfavorable and raw materials increase by over 25%.

Rationale
 Wait out the economic situation in Utopia. Economic factors are cyclical and will return to normal.
This answer is incorrect. Wait out the economic situation in Utopia as economic factors are cyclical and will return to normal is not the proper
action to recommend to Vroom's management if the exchange rates become unfavorable and raw materials increase by over 25%.

Rationale
 Continue operations as they are, however, closely monitor the current economic situation in Utopia.
When evaluating the performance of Vroom, management will see deterioration in income as materials costs have increased. However, since the
cost of raw materials is still lower than that of the U.S., costs of production are still lower in the country of Utopia. It is important for the segment
manager in Utopia to appropriately represent the current economic conditions in Utopia to the executive management of Vroom. And, while
executive management should never lose their focus on profits, they could target their performance measures on other more stable indicators,
such as revenues, market share, and operating efficiencies.
Question 5
1.C.2.j
tran.pri.tb.024_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
Jamison Textiles has two divisions. One division makes bolts of cloth, and the other division makes t-shirts. The cloth division makes 2 square yards of
cloth for $0.27 but sells the cloth to customers for $0.45. The t-shirt division can make t-shirts for $0.59 plus the cost of 2 square yards of cloth and sells t-
shirts for $6.00. The company can purchase cloth from a different company for $0.43 per 2 square yards. If Jamison Textiles has excess capacity and
wants to use a negotiated transfer price to sell cloth from the cloth division to the t-shirt division, what should be the minimum and maximum transfer
costs?
Minimum = $0.43, Maximum = $0.45
Your Answer

Minimum = $0.27, Maximum = $0.59

Correct

Minimum = $0.27, Maximum = $0.43

Minimum = $0.45, Maximum = $0.59

Rationale
 Minimum = $0.43, Maximum = $0.45
This answer is incorrect. The cloth division would not incur $0.43 to fulfill this internal order, so the minimum acceptable transfer price would not
be $0.43 per 2 square yards. In addition, the t-shirt division would be unwilling to pay $0.45 since cloth can be purchased cheaper in the external
market.

Rationale
 Minimum = $0.27, Maximum = $0.59
This answer is incorrect. The t-shirt division’s cost of $0.59 to produce a t-shirt (not including cloth) is not related to the maximum transfer price
that the t-shirt division is willing to pay to purchase cloth.

Rationale
 Minimum = $0.27, Maximum = $0.43
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. The maximum acceptable transfer price to the buying division is the price it would pay for the good or service in the external market
which would be $0.43 per 2 square yards in this problem. For a seller operating with excess capacity, the minimum acceptable transfer price is
equal to the variable costs incurred to fulfill the order, or $0.27 for the cloth division. Any price within this range of $0.27 to $0.43 should be
acceptable to both parties.

Rationale
 Minimum = $0.45, Maximum = $0.59
This answer is incorrect. A transfer price of $0.45 would be the minimum acceptable price if the cloth division did not have excess capacity, but the
cloth division has excess capacity in this problem, so the minimum price is not $0.45. In addition, the t-shirt division’s cost of $0.59 to produce a t-
shirt (not including cloth) is not related to the maximum transfer price that it is willing to pay to purchase cloth.
Question 6
1.C.2.j
aq.tran.pri.004_0820
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

Business Unit X produces a widget product that can be sold either to external customers or internally to Business Unit Y. Business Unit Y is currently
purchasing 20,000 widgets from an external supplier for $47 per unit. Both Business Unit X and Business Unit Y are evaluated as profit centers. Production
and sales data for Business Unit X are provided below. Assuming that variable costs of $2 per widget can be avoided if an internal transfer takes place,
should Business Unit X transfer widgets to Business Unit Y? If so, what should the transfer price be?

Business Unit X:
Capacity in units 100,000
Number of units being sold to external customers 100,000
Selling price per unit to external customers $50
Variable costs per widget $30
Fixed costs per unit (based on capacity) $8

Correct

No transfer should take place.

A transfer should take place; the transfer price should be $47.

A transfer should take place; the transfer price should be between $30 and $47.

A transfer should take place; the transfer price should be between $28 and $50.

Rationale
 No transfer should take place.
No transfer should take place. The value to the company of selling widgets to external customers is the $20 contribution margin ($50 – $30). Should
the transfer take place, the company will spend $28 in variable costs ($30 – $2) and lose $20 in contribution margin on missed outside sales. This
total cost of $48 ($28 + 20) exceeds the market price to purchase from an outside vendor. [Note that fixed costs are not relevant to this decision
since these costs will not change based on the decision to transfer widgets internally.]

Rationale
 A transfer should take place; the transfer price should be $47.
This answer is incorrect. This answer represents the price Business Unit Y is paying to purchase widgets at externally. Remember that Business Unit
X does not have excess capacity and the contribution margin lost should be considered in the minimum transfer price.

Rationale
 A transfer should take place; the transfer price should be between $30 and $47.
This answer is incorrect. These prices represent the variable cost per widget to Business Unit X and the price Business Unit Y is paying to purchase
widgets at externally, respectively. Remember that Business Unit X does not have excess capacity and the contribution margin lost should be
considered in the minimum transfer price.

Rationale
 A transfer should take place; the transfer price should be between $28 and $50.
This answer is incorrect. These prices represent the variable cost per widget to Business Unit X less the variable costs avoided if an internal transfer
takes place and Business Unit X's selling price to external customers, respectively. Business Unit Y will not purchase a widget at a price higher than
$47 because that's the price it is currently paying externally.
Question 7
1.C.2.j
tran.pri.tb.021_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
The socket division of Lehigh Lighting manufactures bulb sockets and sells them to customers for $6.20 per unit. Each bulb socket has a variable cost of
$3.00 per unit, and a fixed cost of $0.85. Lehigh’s management would like the socket division to transfer 25,000 sockets to another division within the
company. If the socket division sold sockets internally, it would avoid $0.60 of variable packaging costs per unit. Assuming the socket division has
enough extra capacity to manufacture the 25,000 sockets, what is its minimum transfer price per unit?
$5.60

$3.25
Your Answer

$4.75
Correct

$2.40

Rationale
 $5.60
This answer is incorrect. The minimum transfer price per unit would be $5.60 if the transfer price was calculated by subtracting the variable cost
that is saved by selling the product internally from the cost charged to external customers ($6.20 − $0.60). This is not the correct way to calculate
the minimum transfer price, especially because the socket division has excess capacity.

Rationale
 $3.25
This answer is incorrect. A minimum transfer price of $3.25 per socket assumes that the fixed costs of $0.85 per unit will be incurred only if the
internal order is accepted ($3.00 − $0.60 + $0.85). Since fixed costs will be incurred whether the socket division sells internally or externally, this is
an incorrect answer.

Rationale
 $4.75
This answer is incorrect. The minimum transfer price would be $4.75 per socket if the transfer price was calculated by subtracting the variable
packaging costs and fixed cost per unit from the cost charged to external customers ($6.20 − $0.60 − $0.85). This is not the correct way to calculate
the minimum transfer price when a division has excess capacity.

Rationale
 $2.40
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. Because there is no lost contribution margin from selling internally when excess capacity exists, the minimum acceptable transfer
price equals the variable costs incurred to fulfill the order. If the socket division sells internally, the net variable costs per unit and the minimum
acceptable transfer price will be $2.40 ($3.00 − $0.60).
Question 8
1.C.2.i
1C2-LS10
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
Which of the following transfer pricing models would be best for when a company is producing an intermediate product at full capacity and the company
wants to encourage the purchasing department to purchase externally if possible?
Correct

Market price

Full cost (absorption)

Variable cost
Your Answer

Negotiated price

Rationale
 Market price
The market price model is best for this situation because the department could sell the item at full price on the open market due to its full capacity
situation. Any other price used would reduce the company's overall profits. The market price model will encourage the purchasing department to
purchase externally if a better price can be found.

Rationale
 Full cost (absorption)
This answer is incorrect. The full cost (absorption) transfer pricing model would not be best for when a company is producing an intermediate
product at full capacity and the company wants to encourage the purchasing department to purchase externally if possible.

Rationale
 Variable cost
This answer is incorrect. The variable cost transfer pricing model would not be best for when a company is producing an intermediate product at
full capacity and the company wants to encourage the purchasing department to purchase externally if possible.

Rationale
 Negotiated price
This answer is incorrect. The negotiated price transfer pricing model would not be best for when a company is producing an intermediate product
at full capacity and the company wants to encourage the purchasing department to purchase externally if possible.
Question 9
1.C.2.j
tran.pri.tb.019_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
The fabric division of Sweet Petunia’s Baby Gear produces fabric designs to be used by the furniture division. The fabric division sells fabric to outside
customers for $800 per bolt. Variable product costs total $575 per bolt, while variable selling and marketing costs are $75 per bolt. What is the transfer
price if a market-based transfer policy is in effect?
$575 per bolt

$650 per bolt

Correct

$725 per bolt

$800 per bolt

Rationale
 $575 per bolt
This answer is incorrect. The transfer price would be $575 per bolt if the transfer price was based on variable production costs instead of a market-
based transfer policy.

Rationale
 $650 per bolt
This answer is incorrect. The transfer price would be $650 per bolt if the transfer price was based on total variable costs instead of a market-based
transfer policy.

Rationale
 $725 per bolt
This answer is correct. Petunia's transfer price policy is based on the market price, which is $800. However, since an internal transfer to the furniture
division should avoid the variable selling and marketing costs of $75, then the price used to value the transfer should be $800 − $75 = $725.

Rationale
 $800 per bolt
This answer is incorrect. Petunia’s policy is to use market prices as the transfer price. However, that price should be adjusted for any costs that are
saved by transferring internally rather than selling the product externally.
Question 10
1.C.2.j
tran.pri.tb.014_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: hard
Bloom Code: 5
The wiring division of Edwards Electrical Products manufactures 500,000 spools of insulated wire each year and sells them to outside customers for $95
each. The variable cost per spool is $48, and the division is currently operating at full capacity. Edwards’ management would like the wiring division to
transfer 80,000 spools to the fixtures division. Edwards’ VP of Operations wants the two divisions to arrange the sale via cost-based pricing, while the CFO
wants the wiring division to sell each spool to the fixtures division for $98 each. Based on these figures, how much more does the VP’s plan cost the
wiring division than the CFO’s plan?
$3.76 million

$4.08 million
Correct

$4 million

$3.84 million

Rationale
 $3.76 million
This answer is incorrect. If the transfer price is based on the VP’s plan, the wiring division will have an opportunity cost of $47 per unit as it will
receive $48 in revenue rather than $95 from selling to an outside customer. At 80,000 units this translates into $3,760,000. However, this is not the
cost of using the VP’s plan rather than the CFO’s plan, as one needs to take the profit from the CFO’s plan into consideration.

Rationale
 $4.08 million
This answer is incorrect. If the transfer price is based on the CFO’s plan, the wiring division will show an additional profit of $3 per unit from the
internal sale since it will receive $98 in revenue rather than $95 in revenue. With 80,000 units this translates into $240,000. The variable cost to
produce 80,000 units is $3,840,000 ($48 per unit × 80,000). If the variable cost of $3,840,000 is added to the additional revenue of $240,000, the result
is $4,080,000. However, this is not the correct way to determine the cost of using the VP’s plan rather than the CFO’s plan.

Rationale
 $4 million
The key to this situation is that there is no excess capacity available in the wiring division. If the transfer price is based on the CFO’s plan, the wiring
division will show an additional profit of $3 per unit from the internal sale since it will receive $98 in revenue rather than $95 in revenue and the
costs are the same regardless of the revenue. With 80,000 units this translates into $240,000. If the transfer price is based on the VP’s plan, the
wiring division will have an opportunity cost of $47 per unit as it will receive $48 in revenue rather than $95 from selling to an outside customer. At
80,000 units this translates into $3,760,000. The difference between a profit of $240,000 and an opportunity cost of $3,760,000 is a loss of $4 million.

Rationale
 $3.84 million
This answer is incorrect. The variable cost to produce 80,000 units is $3,840,000 ($48 per unit × 80,000). However, this is not the cost of using the
VP’s plan rather than the CFO’s plan. The $3,840,000 is the same regardless of which transfer price plan is used. It is necessary to compare the
revenue under each plan.
Question 11
1.C.2.k
tran.pri.tb.031_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
The cushion division of Fritz Furniture manufactures foam rubber seat cushions and sells them to customers for $18.25 per unit. Its variable cost is $8.45
per unit, and its fixed cost per unit is $2.20. Fritz’s management would like the cushion division to transfer 35,000 of these cushions to another division
within the company. Given these figures, the cushion division’s minimum transfer price would be _____ lower if it was manufacturing with adequate
excess capacity as opposed to manufacturing at full capacity.
$8.45

$7.60
Correct

$9.80

$6.25

Rationale
 $8.45
This answer is incorrect. If the cushion division has excess capacity, the minimum transfer price is the variable cost of $8.45 per unit. However, the
question asks for the difference between the minimum transfer price with excess capacity and without excess capacity, not the minimum transfer
price with excess capacity.

Rationale
 $7.60
This answer is incorrect. If the cushion division has excess capacity, the minimum transfer price is the variable cost of $8.45 per unit. If the fixed
costs are incorrectly included (they are not included because they are incurred regardless of whether the transfer occurs), the new minimum
transfer price with excess capacity would be $10.65. If no excess capacity is available, $9.80 ($18.25 − $8.45) needs to be added to the $8.45 to
compensate for the lost contribution margin from selling internally. This results in a minimum transfer price of $18.25 per unit ($8.45 + $9.80), which
is the current selling price. This means the minimum transfer price with excess capacity would be $7.60 less than the minimum transfer price at full
capacity ($10.65 versus $18.25). However, the fixed costs should not be included in the minimum transfer price with excess capacity.

Rationale
 $9.80
When a provider has excess capacity available, the minimum transfer price is the incremental costs of fulfilling the order. When a provider does not
have excess capacity available, the lost contribution margin from selling internally must be added to the incremental costs to compensate for the
opportunity cost of selling internally. If the cushion division has excess capacity, the minimum transfer price is the variable cost of $8.45 per unit. If
no excess capacity is available, $9.80 ($18.25 − $8.45) needs to be added to the $8.45 to compensate for the lost contribution margin from selling
internally. This results in a minimum transfer price of $18.25 per unit ($8.45 + $9.80), which is the current selling price. This means the minimum
transfer price with excess capacity is $9.80 less than the minimum transfer price at full capacity ($8.45 versus $18.25).

Rationale
 $6.25
This answer is incorrect. If the cushion division has excess capacity, the minimum transfer price is the variable cost of $8.45 per unit. If the fixed
costs of $2.20 are incorrectly subtracted, the minimum transfer price would be $6.25 per unit. However, the fixed costs are excluded from the
calculation of the minimum transfer price with excess capacity, not subtracted from the variable manufacturing costs per unit. In addition, the
question asks for the difference between the minimum transfer price with excess capacity and without excess capacity, not the minimum transfer
price with excess capacity.
Question 12
1.C.2.h
aq.tran.pri.001_0820
LOS: 1.C.2.h
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following correctly describes a transfer price?
A price that allows profit centers within the organization to be reestablished as cost centers and revenue centers
Correct

A price at which business units of a company will transact with each other to exchange goods and services
Your Answer

A price that is essentially a budget transfer between business units, which changes overall profits in the organization, even when the organization
conducts business within a single economic geography

A price that benefits one business unit of a company at the expense of another

Rationale
 A price that allows profit centers within the organization to be reestablished as cost centers and revenue centers
This answer is incorrect. Cost centers and revenue centers often struggle with incentives that aren't aligned well with the overall organization. Cost
centers are incentivized to reduce costs, but that incentive can motivate a cost center to minimize or delay support and services to other business
units and damage overall company profitability. Revenue centers are incentivized to increase revenue without respect to costs. This kind of
motivation can lead revenue centers to be very efficient with resources of other business units, also leading to reduced overall profits in the
company. By effectively transforming them into profit centers, transfer pricing systems align cost centers and revenue centers with the
organization's profit focus.

Rationale
 A price at which business units of a company will transact with each other to exchange goods and services

As organizations increase in size and complexity, competitive internal pricing can be used to motivate performance and discipline processes in cost
centers and revenue centers. Transfer pricing systems align cost centers and revenue centers with the organization's profit focus. A transfer price is
essentially a budget transfer between business units that by itself doesn't actually change overall profits in the organization. However, transfer
prices allow both cost centers and revenue centers to be reestablished as profit centers, and that new orientation will better align incentives with
the organization at large.

Since the transfer price represents a revenue to the supplying business unit and a cost to the receiving business unit, managers of both business
units will be focused on maximizing the “profit” in this internal transaction. If the price is set correctly, the receiving business unit will expect quality
and timeliness in the transaction, and the supplying unit will be incentivized to provide quality and timeliness. Setting an appropriate transfer price
is key for the transaction to take place.

Rationale
 A price that is essentially a budget transfer between business units, which changes overall profits in the organization, even when the
organization conducts business within a single economic geography
This answer is incorrect. A transfer price by itself doesn't change overall profits in the organization. However, if one business unit can buy a product
from another business unit at a cost that is lower than the market price for the product, profits overall will be affected. What affects profits, then, is
not the transfer price itself, but if the internal transaction actually happens.

Rationale
 A price that benefits one business unit of a company at the expense of another
This answer is incorrect. Since the transfer price represents a revenue to the supplying business unit and a cost to the receiving business unit,
managers of both business units will be focused on maximizing the “profit” in this internal transaction. If the price is set correctly, the receiving
business unit will expect quality and timeliness in the transaction, and the supplying unit will be incentivized to provide quality and timeliness.
Setting an appropriate transfer price is key for the transaction to take place.
Question 13
1.C.2.j
cma11.p1.t1.me.0054_0820
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: hard
Bloom Code: 4

A corporation maintains a manufacturing division that manufactures printed circuit boards and an assembly division that produces final products.
Currently, the manufacturing division has sufficient capacity to manufacture an additional 5,000 circuit boards. An external market exists for circuit
boards. The market price for one circuit board is $80 and the cost to sell is $10. The fixed manufacturing cost per circuit board is $15, and the unit
variable cost is $50. The assembly division plans to purchase 4,500 circuit boards. Management of the assembly division thinks that it can purchase from
the manufacturing division at a lower price since both divisions are under common control of the corporation. What is the minimum transfer price
between the manufacturing division and the assembly division?

*Source: Retired ICMA CMA Exam Questions.

Correct

$50
Your Answer

$65

$70

$80

Rationale
 $50
The minimum transfer price between the manufacturing division and the assembly division would include only the unit variable cost of $50.

Rationale
 $65
This answer is incorrect. The minimum transfer price does not include fixed manufacturing cost per unit since this cost will be incurred whether the
transfer happens or not.

Rationale
 $70
This answer is incorrect. The minimum transfer price is not based on the cost to sell and the external market price.

Rationale
 $80
This answer is incorrect. The external market price is the maximum an internal buyer would be willing to pay for an internal transfer.
Question 14
1.C.2.k
tran.pri.tb.030_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
The microchip division of CompuTech has the capacity to manufacture 1 million chips per year, although it currently manufactures just 800,000. Because
the division has excess capacity, CompuTech wants it to provide 200,000 chips to the firm’s server division. The microchip division has variable costs of
$4.25 per chip and a per-unit contribution margin of $8.60. The server division has been buying chips from an outside supplier for $13.25 each. Given
these figures, which of the following statements is correct?
An acceptable negotiated transfer price is not possible.
Correct

The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $4.25 to $13.25 per unit.

We do not have enough information to determine whether an acceptable negotiated transfer price is possible.

The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $12.85 to $13.25 per unit.

Rationale
 An acceptable negotiated transfer price is not possible.
This answer is incorrect. An acceptable negotiated transfer price is possible in this scenario.

Rationale
 The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $4.25 to $13.25 per unit.
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. The maximum acceptable transfer price to the buying division is the price it would pay for the good or service in the external market.
For a seller operating with excess capacity, the minimum acceptable transfer price is the variable costs incurred to fulfill the order. In this example,
the buyer’s maximum acceptable price is $13.25 per chip and the seller’s minimum acceptable transfer price is $4.25 per chip. Any price within this
range should be acceptable to both parties.

Rationale
 We do not have enough information to determine whether an acceptable negotiated transfer price is possible.
This answer is incorrect. There is enough information provided in this problem to determine whether an acceptable transfer price can be
negotiated or not.

Rationale
 The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $12.85 to $13.25 per unit.
This answer is incorrect. The maximum acceptable transfer price to the buying division is the price it would pay for the good or service in the
external market which is $13.25. If the seller is operating at full capacity, the minimum acceptable transfer price is the sum of the variable costs
incurred to fulfill the order and the contribution margin lost from selling internally which would be $12.85 per unit ($4.25 + $8.60). Because the
microchip division is not operating at full capacity, this is not the correct range.
Question 15
1.C.2.i
tran.pri.tb.010_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
Which of the following is a disadvantage of using the variable cost model for determining transfer prices?
It limits the autonomy of business units to make transfers as they see fit.

It cannot be used when there is no external market price for the product or service.
Correct

It is not appropriate to use this model when an internal supplier does not have excess capacity available.

There is no motivation for the internal supplier to produce the good or service in an efficient way.

Rationale
 It limits the autonomy of business units to make transfers as they see fit.
This answer is incorrect. Business units retain autonomy under the variable cost model as they can make transfers at the variable cost as they see
fit.

Rationale
 It cannot be used when there is no external market price for the product or service.
This answer is incorrect. An external market price is not needed to use the variable cost model.

Rationale
 It is not appropriate to use this model when an internal supplier does not have excess capacity available.
The variable cost model should not be used when an internal supplier does not have excess capacity as the opportunity cost of lost sales to external
buyers needs to be accounted for when a division is operating at full capacity. This is a disadvantage of the variable cost method.

Rationale
 There is no motivation for the internal supplier to produce the good or service in an efficient way.
This answer is incorrect. There is a motivation for the internal supplier to produce the good or service in an efficient way under the variable cost
model because the internal buyer will object to paying an excessive price.
Question 16
1.C.2.k
aq.tran.pri.008_1807
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
Business Unit A, the supplying business unit, is selling to an outside market but running out of production capacity and giving up outside business in
order to transfer product to the receiving business unit, Business Unit B. Business Unit A incurs incremental fixed costs in the production of the units
supplied to Business Unit B. The formula to calculate the transfer price in this scenario is:
(Total variable costs + incremental fixed costs) ÷ total units supplied
Correct

(Total variable costs + contribution margin lost + incremental fixed costs) ÷ total units supplied
Your Answer

(Total variable costs + contribution margin lost) ÷ total units supplied

(Total variable costs) ÷ total units supplied

Rationale
 (Total variable costs + incremental fixed costs) ÷ total units supplied
This answer is incorrect. This formula does not consider the contribution margin lost in the calculation of transfer price from Business Unit A to
Business Unit B.

Rationale
 (Total variable costs + contribution margin lost + incremental fixed costs) ÷ total units supplied
If the supplying business unit has to give up any outside business in order to transfer product to the receiving business unit, then the lost
contribution margin on that outside business is an opportunity cost that needs to be factored into the transfer price. And if there is an incremental
fixed cost for the supplying business unit to produce and transfer product to the receiving business unit (e.g., special equipment or training), that
fixed cost also needs to be factored into the minimal transfer price, as follows: (Total variable costs + contribution margin lost + incremental fixed
costs) ÷ total units supplied.

Rationale
 (Total variable costs + contribution margin lost) ÷ total units supplied
This answer is incorrect. This answer does not consider incremental fixed costs incurred in the calculation of transfer price from Business Unit A to
Business Unit B.

Rationale
 (Total variable costs) ÷ total units supplied
This answer is incorrect. This formula does not consider the contribution margin lost or the incremental fixed costs incurred in the calculation of
transfer price from Business Unit A to Business Unit B.
Question 17
1.C.2.j
1C2-CQ17
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

Manhattan Corporation has several divisions that operate as decentralized profit centers. At the present time, the Fabrication Division has excess
capacity of 5,000 units with respect to the UT-371 circuit board, a popular item in many digital applications. Information about the circuit board follows:

Market price $48

Variable selling/distribution costs on external sales 5
Variable manufacturing cost 21
Fixed manufacturing cost 10

Manhattan's Electronic Assembly Division wants to purchase 4,500 circuit boards either internally, or else use a similar board in the marketplace that
sells for $46. The Electronic Assembly Division's management feels that if the first alternative is pursued, a price concession is justified, given that both
divisions are part of the same firm. To optimize the overall goals of Manhattan, the minimum price to be charged for the board from the Fabrication
Division to the Electronic Assembly Division should be:

$46.
Your Answer

$31.
Correct

$21.

$26.

Rationale
 $46.
This answer is incorrect. This answer represents the price of a similar board in the marketplace that sells for $46. This is not the minimum price to
be charged for the board, however.

Rationale
 $31.
This answer is incorrect. This answer represents the variable manufacturing cost plus the fixed manufacturing cost. This is not the minimum price
to be charged for the board, however.

Rationale
 $21.

The optimal transfer price is calculated as follows:

Optimal transfer price, T(o) = (manufacturing division's opportunity cost of production) + (any avoidable fixed costs) + (any foregone contribution
from manufacturing the product)

The manufacturing division's opportunity cost of production is equal to its relevant unit variable cost per unit, or $21 in this case.

Since the Fabrication Division has excess capacity, the foregone contribution = $0.

There is no mention of avoidable fixed costs.

T(o) = $21 + $0 + $0 = $21.

Rationale
 $26.
This answer is incorrect. This answer represents the variable manufacturing cost plus the variable selling/distribution costs on external sales. This is
not the minimum price to be charged for the board, however.
Question 18
1.C.2.j
tran.pri.tb.022_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

The alternator division of Moto Motorcycles manufactures alternators and sells them to customers for $80 each. The cost breakdown for each alternator
is as follows:

Direct materials cost $23

Variable labor cost $9
Variable overhead cost $7
Fixed overhead cost $5

Moto’s upper management wants the alternator division to sell 10,000 alternators to another division within the company. If the alternator division sold
internally, it could avoid variable overhead costs of $2 per unit. Assuming the alternator division is operating at full capacity, what would be the
minimum transfer price per alternator?

Correct

$78

$73

$75

$80

Rationale
 $78
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. For a seller operating at full capacity, the minimum acceptable transfer price is the sum of the variable costs incurred to fulfill the
order and the contribution margin lost from selling internally. The alternator division will incur a net of $37 per unit in variable costs ($23 + $9 + $7 −
$2) and it will give up $41 per unit in contribution margin if it sells internally ($80 − $39); therefore, the minimum acceptable transfer price equals
$78 per alternator ($37 + $41).

Rationale
 $73
This answer is incorrect. The transfer price would be $73 if the minimum acceptable transfer price was calculated by subtracting the fixed overhead
cost and the variable overhead costs that the company would avoid by selling internally from the price that the alternator division charges external
customers ($80 − $5 − $2). This is not the correct calculation.

Rationale
 $75
This answer is incorrect. The transfer price would be $75 if the minimum acceptable transfer price was calculated by subtracting fixed overhead
cost from the price that the alternator division charges the external customers ($80 − $5). This is not the correct calculation.

Rationale
 $80
This answer is incorrect. A transfer price of $80 assumes that no costs will be saved if the internal order is accepted.
Question 19
1.C.2.k
tran.pri.tb.029_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
The sprockets division of General Industries manufactures 800,000 sprockets per year and sells them to outside customers. General Industries’
management wants the sprockets division to sell 250,000 of the sprockets to the widgets division. The sprockets division is currently operating at full
capacity, has variable costs of $2.50 per unit, and has a per-unit contribution margin of $5.30. The widgets division has been buying its sprockets from an
outside supplier for $8.05 each. Given these figures, which of the following statements is correct?
Correct

The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $7.80 to $8.05 per unit.

An acceptable negotiated transfer price is not possible.

We do not have enough information to determine whether an acceptable negotiated transfer price is possible.

The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $2.50 to $8.05 per unit.

Rationale
 The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $7.80 to $8.05 per unit.
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. The maximum acceptable transfer price to the buying division is the price it would pay for the good or service in the external market.
For a seller operating at full capacity, the minimum acceptable transfer price is the sum of the variable costs incurred to fulfill the order and the
contribution margin lost from selling internally. In this example, the buyer’s maximum acceptable price is $8.05 per unit and the seller’s minimum
acceptable transfer price is $7.80 per unit ($2.50 + $5.30). Any price within this range should be acceptable to both parties.

Rationale
 An acceptable negotiated transfer price is not possible.
This answer is incorrect. An acceptable negotiated transfer price is possible.

Rationale
 We do not have enough information to determine whether an acceptable negotiated transfer price is possible.
This answer is incorrect. There is enough information provided in this problem to determine whether an acceptable transfer price can be
negotiated or not.

Rationale
 The two divisions should be able to arrive at an acceptable negotiated transfer price within the range of $2.50 to $8.05 per unit.
This answer is incorrect. Since the seller is operating at full capacity, a transfer price of $2.50 per unit is not an acceptable price.
Question 20
1.C.2.i
tran.pri.tb.007_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following is an advantage of using the full-cost model for determining transfer prices?
Correct

The selling division will not lose money on a transfer occurring at full cost.
Your Answer

It forces internal suppliers to be competitive with external suppliers.

Tax authorities consider it to be the most objective way to determine transfer prices.

A company can use this method to encourage internal transfers when the seller has excess capacity available.

Rationale
 The selling division will not lose money on a transfer occurring at full cost.
One advantage of using the full-cost model is that when the transfer price is based on the seller’s full cost, the selling division will not lose money on
the transfer.

Rationale
 It forces internal suppliers to be competitive with external suppliers.
This answer is incorrect. Forcing internal providers to be competitive with external suppliers is an advantage of the market price model, not the full-
cost model. If they are not competitive with external suppliers, internal buyers will purchase from external suppliers at the lower market price
rather than from internal suppliers. If the transfer price is based on the seller’s full cost, the seller is not penalized for not being competitive with
external suppliers.

Rationale
 Tax authorities consider it to be the most objective way to determine transfer prices.
This answer is incorrect. Tax authorities consider the market price model to be the most objective way to determine transfer prices, not the full-cost
model.

Rationale
 A company can use this method to encourage internal transfers when the seller has excess capacity available.
This answer is incorrect. Encouraging internal transfers when the seller has excess capacity available is an advantage of the variable cost model
because the variable cost to produce a product or service is likely to be less than the market price.
Question 21
1.C.2.j
1C2-CQ20
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

An appropriate transfer price between two divisions of Vroom Motorcycle Company can be determined from the following data:

Fabricating division:
Market price of subassembly $75
Variable cost of subassembly $30
Excess capacity (in units) 50
Assembling Division:
Number of units needed 45

What is the natural bargaining range for the two divisions?

Your Answer

Any amount over $75.

Correct

Any amount between $30 and $75.

Any amount less than $75.

Any amount between $75 and $105.

Rationale
 Any amount over $75.
This answer is incorrect. Any amount over $75 is not the natural bargaining range for the two divisions.

Rationale
 Any amount between $30 and $75.
Each division should have the ability to operate independently of one another, and strive for achieving its divisional goals, as well as working
towards the goals of the overall company. Figuring transfer prices can be determined using normal market price, negotiated price, variable costs, or
full absorption costs. In this case, if the fabrication division has no excess capacity, it would charge the assembling division the regular market
price. However, the Fabrication division has excess capacity sufficient to meet Assembly division's need so negotiation is possible. Any price greater
than the variable costs of subassembly of $30 is acceptable, and will increase profits of the Fabrication division by accepting any negotiated price
between $30 and $75.

Rationale
 Any amount less than $75.
This answer is incorrect. Not every amount less than $75 is in the natural bargaining range for the two divisions.

Rationale
 Any amount between $75 and $105.
This answer is incorrect. Any amount between $75 and $105 is not the natural bargaining range for the two divisions.
Question 22
1.C.2.i
1C2-LS21d
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3

Morrison's Plastics Division, a profit center, sells its products to external customers as well as to other internal profit centers. Which one of the following
circumstances would justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer
price?

* Source: Retired ICMA CMA Exam Questions.

Correct

Routine sales commissions and collection costs would be avoided.

The selling unit is operating at full capacity.

Your Answer

The profit centers' managers are evaluated on the basis of unit operating income.

The buying unit has excess capacity.

Rationale
 Routine sales commissions and collection costs would be avoided.
In day-to-day operations of a business, a cost conscious approach needs to be taken. A cost savings justification can be used in the problem as well.
As justification for the Plastics Division to sell a product internally to another profit center at a price that is below the market-based transfer price
would be to avoid the routine sales commissions and collection costs from selling externally.

Rationale
 The selling unit is operating at full capacity.
This answer is incorrect. The selling unit is operating at full capacity is not a circumstance that would justify the Plastics Division selling a product
internally to another profit center at a price that is below the market-based transfer price.

Rationale
 The profit centers' managers are evaluated on the basis of unit operating income.
This answer is incorrect. The profit centers’ managers are evaluated on the basis of unit operating income is not a circumstance that would justify
the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price.

Rationale
 The buying unit has excess capacity.
This answer is incorrect. The buying unit has excess capacity is not a circumstance that would justify the Plastics Division selling a product
internally to another profit center at a price that is below the market-based transfer price.
Question 23
1.C.2.l
tran.pri.tb.040_0120
LOS: 1.C.2.l
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning using transfer prices in multinational companies is correct?
If an internal supplier operates in a country with a lower corporate tax rate than an internal buyer, it is in the organization’s best interest that the
transfer price be relatively low.
Correct

If an internal supplier operates in a country with a lower corporate tax rate than an internal buyer, it is in the organization’s best interest that the
transfer price be relatively high.
Your Answer

The corporate tax rate for an internal supplier and internal buyer should not impact the preferred transfer price used for the transaction.

If an internal supplier operates in a country with a higher corporate tax rate than an internal buyer, it is in the organization’s best interest that the
transfer price be relatively high.

Rationale
 If an internal supplier operates in a country with a lower corporate tax rate than an internal buyer, it is in the organization’s best
interest that the transfer price be relatively low.
This answer is incorrect. If the transfer price is relatively low in this scenario, taxable income for the supplier in a low-tax environment will be
relatively low. This is not in the best interests of the organization.

Rationale
 If an internal supplier operates in a country with a lower corporate tax rate than an internal buyer, it is in the organization’s best
interest that the transfer price be relatively high.
Transfer prices can be used to “shift” taxable income between subsidiaries in different countries. If an internal supplier has a lower corporate tax
rate than an internal buyer, the company is better off if the supplier has relatively high taxable income and the buyer has relatively low taxable
income. One way this can be achieved is with a relatively high transfer price.

Rationale
 The corporate tax rate for an internal supplier and internal buyer should not impact the preferred transfer price used for the
transaction.
This answer is incorrect. Transfer prices can be used to “shift” taxable income between subsidiaries in different countries. As a result, different
corporate tax rates in different countries can have an impact on the preferred transfer price used for a transaction.

Rationale
 If an internal supplier operates in a country with a higher corporate tax rate than an internal buyer, it is in the organization’s best
interest that the transfer price be relatively high.
This answer is incorrect. If the transfer price is relatively high in this scenario, taxable income for the supplier in a high-tax environment will be
relatively high. This is not in the best interests of the organization.
Question 24
1.C.2.j
tran.pri.tb.015_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: hard
Bloom Code: 5
The noodles division of Presto Pasta manufactures 500,000 pounds of dried spaghetti each year and sells it to outside customers for $1.80 per pound.
The variable cost per pound is $0.75, and the division is currently operating at full capacity. Presto’s management wants the noodles division to sell
100,000 pounds of spaghetti to the Frozen Foods division. Presto’s CEO wants the noodles division to sell the spaghetti for $0.95 per pound, while the
CFO wants the two divisions to arrange the sale via cost-based pricing. Based on these figures, going with the CFO’s plan will:
save the noodles division $20,000 more than going with the CEO’s plan.

cost the noodles division $10,000 more than going with the CEO’s plan.
Your Answer

save the noodles division $10,000 more than going with the CEO’s plan.
Correct

cost the noodles division $20,000 more than going with the CEO’s plan.

Rationale
 save the noodles division $20,000 more than going with the CEO’s plan.
This answer is incorrect. If the transfer price is based on the CFO’s plan, the noodles division will show an opportunity cost of $1.05 per pound from
the internal sale since it will receive $0.75 per pound in revenue rather than $1.80 per pound in revenue and the costs are the same regardless of the
revenue. With 100,000 pounds this translates into an opportunity cost of $105,000. If the transfer price is based on the CEO’s plan, the noodles
division will have an opportunity cost of $0.85 per unit as it will receive $0.95 per pound in revenue rather than $1.80 from selling to an outside
customer. At 100,000 pounds this translates into an opportunity cost of $85,000. Since these are opportunity costs and not revenue, the $20,000
difference represents additional cost, not additional savings.

Rationale
 cost the noodles division $10,000 more than going with the CEO’s plan.
This answer is incorrect. If the transfer price is based on the CFO’s plan, the noodles division will show an opportunity cost of $1.05 per pound from
the internal sale since it will receive $0.75 per pound in revenue rather than $1.80 per pound in revenue and the costs are the same regardless of the
revenue. With 100,000 pounds this translates into an opportunity cost of $105,000. If this is compared to the transfer price of $0.95 per pound under
the CEO’s plan, it will appear as if the CFO’s plan will cost an extra $0.10 per pound or $10,000 in total. However, the $1.05 per pound opportunity
cost of the CFO’s plan needs to be compared to the opportunity cost of the CEO’s plan, not to the revenue from the CEO’s plan.

Rationale
 save the noodles division $10,000 more than going with the CEO’s plan.
This answer is incorrect. If the transfer price is based on the CEO’s plan, the noodles division will have an opportunity cost of $0.85 per unit as it will
receive $0.95 per pound in revenue rather than $1.80 from selling to an outside customer. At 100,000 pounds this translates into an opportunity cost
of $85,000. If this is compared to the transfer price of $0.75 per pound under the CFO’s plan, it will appear as if the CFO’s plan is less costly by $0.10
per pound or $10,000 in total. However, the $0.85 per pound opportunity cost of the CEO’s plan needs to be compared to the opportunity cost of the
CFO’s plan, not to the revenue from the CFO’s plan.

Rationale
 cost the noodles division $20,000 more than going with the CEO’s plan.
The key to this situation is that there is no excess capacity available in the noodles division. If the transfer price is based on the CFO’s plan, the
noodles division will show an opportunity cost of $1.05 per pound from the internal sale since it will receive $0.75 per pound in revenue rather than
$1.80 per pound in revenue and the costs are the same regardless of the revenue. With 100,000 pounds this translates into an opportunity cost of
$105,000. If the transfer price is based on the CEO’s plan, the noodles division will have an opportunity cost of $0.85 per unit as it will receive $0.95
per pound in revenue rather than $1.80 from selling to an outside customer. At 100,000 pounds this translates into an opportunity cost of $85,000.
While both plans result in less income than selling to external customers, the CFO’s plan results in a $20,000 higher opportunity cost.
Question 25
1.C.2.j
aq.tran.pri.007_1807
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

Business Unit A produces a widget product that can be sold either to external customers or internally to Business Unit B. Business Unit B is currently
purchasing 15,000 widgets from an external supplier for $25 per unit. Both Business Unit A and Business Unit B are evaluated as profit centers.
Production and sales data for Business Unit A are provided below. Assuming that no costs can be avoided if an internal transfer takes place, should
Business Unit A transfer widgets to Business Unit B? If so, what should the transfer price be?

Business Unit A:
Capacity in units 90,000
Number of units being sold to external customers 75,000
Selling price per unit to external customers $29
Variable costs per widget $26
Fixed costs per unit (based on capacity) $2

Correct

No transfer should take place.

Your Answer

A transfer should take place; the transfer price should be $25.

A transfer should take place; the transfer price should be between $26 and $29.

A transfer should take place; the transfer price should be between $25 and $29.

Rationale
 No transfer should take place.
No transfer should take place. Business Unit A has the capacity to supply widgets to Business Unit B without losing any external sales. However, the
incremental cost to supply the widgets is $26. Since Business Unit B can purchase widgets for $25 from an external supplier, no transfer should take
place.

Rationale
 A transfer should take place; the transfer price should be $25.
This answer is incorrect. This answer represents the price that Business Unit B is currently paying to purchase widgets from an external supplier.
Business Unit A cannot sell units to Business Unit B for $25.

Rationale
 A transfer should take place; the transfer price should be between $26 and $29.
This answer is incorrect. These prices represent the variable cost per widget to Business Unit A and the selling price per unit to external customers
from Business Unit A, respectively. Since Business Unit B can purchase widgets for $25 from an external supplier, the transfer should not be
between $26 and $29.

Rationale
 A transfer should take place; the transfer price should be between $25 and $29.
This answer is incorrect. These prices represent the price that Business Unit B is currently paying to purchase widgets from an external supplier and
the selling price per unit to external customers from Business Unit A, respectively. Since Business Unit B can purchase widgets for $25 from an
external supplier, the transfer should not be above $25. However, the incremental cost to Business Unit A to supply the widgets is $26, which is
above $25.
Question 26
1.C.2.i
1C2-LS22d
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2

With respect to a firm's transfer pricing policy, an advantage of using a dual pricing arrangement is that it:

* Source: Retired ICMA CMA Exam Questions.

Correct

promotes goal congruence between the supplying and buying subunits of the firm.

provides an incentive for the supplying subunit to control costs.

Your Answer

exposes the supplying subunit to the discipline of market prices.

simplifies tax calculations when the buying and supplying subunits are taxed in different jurisdictions.

Rationale
 promotes goal congruence between the supplying and buying subunits of the firm.
A dual pricing arrangement promotes goal congruence between the supplying and buying subunits of the firm.

Rationale
 provides an incentive for the supplying subunit to control costs.
This answer is incorrect. With respect to a firm's transfer pricing policy, an advantage of using a dual pricing arrangement is not that it provides an
incentive for the supplying subunit to control costs.

Rationale
 exposes the supplying subunit to the discipline of market prices.
This answer is incorrect. With respect to a firm's transfer pricing policy, an advantage of using a dual pricing arrangement is not that it exposes the
supplying subunit to the discipline of market prices.

Rationale
 simplifies tax calculations when the buying and supplying subunits are taxed in different jurisdictions.
This answer is incorrect. With respect to a firm's transfer pricing policy, an advantage of using a dual pricing arrangement is not that it simplifies tax
calculations when the buying and supplying subunits are taxed in different jurisdictions.
Question 27
1.C.2.i
1C2-AT31
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3

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 2.35 3.00
Variable overhead 1.00 1.50
Fixed overhead .40 2.25
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.

A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would:

allow evaluation of both divisions on a competitive basis.

encourage the Entertainment Division to purchase video cards from an outside source.
Your Answer

demotivate the Entertainment Division and cause mediocre performance.

Correct

provide no profit incentive for the Video Cards Division to control or reduce costs.

Rationale
 allow evaluation of both divisions on a competitive basis.
This answer is incorrect. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost would not allow evaluation
of both divisions on a competitive basis.

Rationale
 encourage the Entertainment Division to purchase video cards from an outside source.
This answer is incorrect. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost would not encourage the
Entertainment Division to purchase video cards from an outside source. This is because the transfer price of $9.15 is still less than the market price
of $10.98.

Rationale
 demotivate the Entertainment Division and cause mediocre performance.
This answer is incorrect. A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost would not demotivate the
Entertainment Division and would not cause mediocre performance in the Entertainment Division.

Rationale
 provide no profit incentive for the Video Cards Division to control or reduce costs.
Using full costs as a transfer price would allow the Video Cards Division, which is the selling division, to pass on any cost increases to the
Entertainment Division, which is the buying division. The seller would have no incentive to control the costs of the item transferred.
Question 28
1.C.2.i
tran.pri.tb.009_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following is a disadvantage of using the negotiated price model for determining transfer prices?
It cannot be used when there is no external market price for the product or service.
Correct

It limits the autonomy of business units to make transfers as they see fit.
Your Answer

There is no motivation for the internal supplier to produce the good or service in an efficient way.

It is not appropriate to use if the internal supplier has excess capacity.

Rationale
 It cannot be used when there is no external market price for the product or service.
This answer is incorrect. An external market price is not needed to use the negotiated price model.

Rationale
 It limits the autonomy of business units to make transfers as they see fit.
The negotiated price model may limit the autonomy of business units as they are “forced” into an internal transfer under negotiated transfer prices.
Business units have some influence over the price, but not over the decision concerning whether the transfer should occur.

Rationale
 There is no motivation for the internal supplier to produce the good or service in an efficient way.
This answer is incorrect. There is a motivation for the internal supplier to produce the good or service in an efficient way under the negotiated price
model as the internal buyer will object to paying an excessive price through the negotiation process.

Rationale
 It is not appropriate to use if the internal supplier has excess capacity.
This answer is incorrect. The negotiated price model can be used whether the internal supplier has excess capacity or not.
Question 29
1.C.2.i
aq.tran.pri.003_0820
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following correctly describes negotiated transfer pricing?
With negotiated transfer pricing, the executive management team steps in to negotiate with two business units to set price and make transfers that
are most beneficial to the organization.

With negotiated transfer pricing, the accounting system is designed to allow the supplying business unit to use a full cost-based price to recognize
revenue into its profit performance report while allowing the receiving business unit to use a variable cost-based price to recognize costs into its profit
performance report.
Correct

Negotiated transfer pricing creates an “open market” within the organization wherein business units compete and negotiate with each other to set
prices and make transfers.
Your Answer

Negotiated transfer pricing makes it so managers of business units always make the most optimal decisions for the organization.

Rationale
 With negotiated transfer pricing, the executive management team steps in to negotiate with two business units to set price and make
transfers that are most beneficial to the organization.
This answer is incorrect. When managers of business units are making suboptimal decisions whether to engage in a transfer, it is tempting for
executive management teams to step in and force the optimal decision. Generally, this is not advisable; otherwise, the benefits of important
management objectives related to delegation, decision speed, and management training are lost.

Rationale
 With negotiated transfer pricing, the accounting system is designed to allow the supplying business unit to use a full cost-based price to
recognize revenue into its profit performance report while allowing the receiving business unit to use a variable cost-based price to
recognize costs into its profit performance report.
This answer is incorrect. This answer describes a compromise approach to encourage managers of business units to make optimal decisions by
establishing an accounting system that allows dual pricing. This answer does not describe negotiated transfer pricing.

Rationale
 Negotiated transfer pricing creates an “open market” within the organization wherein business units compete and negotiate with each
other to set prices and make transfers.
A key aspect of successful management using transfer pricing is to create an “open market” within the organization wherein business units
compete and negotiate with each other to set prices and make transfers. This approach creates positive competitive pressure to keep costs down
and quality up on goods and services being delivered within the organization.

Rationale
 Negotiated transfer pricing makes it so managers of business units always make the most optimal decisions for the organization.
This answer is incorrect. The challenge with an “open market” approach is that managers of business units don't always make the most optimal
decisions for the organization. That is, due to poor accounting information or misaligned incentives, managers of business units may choose to not
transfer when it's actually optimal for the organization.
Question 30
1.C.2.i
tran.pri.tb.006_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following is an advantage of using the variable cost model for determining transfer prices?
A company can use this method to encourage internal transfers when the seller does not have excess capacity.

Tax authorities consider it to be the most objective way to determine transfer prices.
Correct

A company can use this method to encourage internal transfers when the seller has excess capacity.

It allows for business units to retain the autonomy to make transfers as they see fit.

Rationale
 A company can use this method to encourage internal transfers when the seller does not have excess capacity.
This answer is incorrect. When the seller does not have excess capacity, the market price model should be used instead of the variable cost model.
Under the variable cost model, the seller would not have an incentive to sell internally since it would have to give up sales at higher market prices to
transfer internally at its variable cost.

Rationale
 Tax authorities consider it to be the most objective way to determine transfer prices.
This answer is incorrect. Tax authorities consider the market price model to be the most objective way to determine transfer prices, not the variable
cost model.

Rationale
 A company can use this method to encourage internal transfers when the seller has excess capacity.
Encouraging internal transfers when the seller has excess capacity is an advantage of the variable cost model because the variable cost to produce
a product or service is likely to be less than the market price. Using this model will reduce costs for the entire organization, encourage buyers to use
an internal supplier over an external supplier, and provide a way for the seller to utilize existing capacity.

Rationale
 It allows for business units to retain the autonomy to make transfers as they see fit.
This answer is incorrect. The market price model allows business units to retain the autonomy to make transfers as they see fit, not the variable
cost model.
Question 31
1.C.2.k
tran.pri.tb.033_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

Robert Scott Lumber Company has a cutting division that cuts red oak trees into boards and a finishing division that makes red oak boards into custom
woodwork used in renovation of historic buildings. Costs per board foot for the cutting division are:

Direct material $3.00

Direct labor $1.25
Variable overhead $0.75
Fixed overhead $0.20

The cutting division sells boards to external customers for $6.50 per board foot, but has capacity to sell to the finishing division as well. The finishing
department has been purchasing 50,000 board feet of lumber annually from an outside vendor for $6.50 per board foot. The division managers negotiate
a transfer price of $6.00 per board foot. How much will the cutting division’s contribution margin increase?

Correct

$50,000
Your Answer

$75,000

$12,500

$40,000

Rationale
 $50,000
When a provider has excess capacity available, the minimum transfer price is the incremental costs of fulfilling the order. When a provider does not
have excess capacity available, the lost contribution margin from selling internally must be added to the incremental costs to compensate for the
opportunity cost of selling internally. Since the cutting division has excess capacity, the incremental cost to fulfill the order is the variable cost of
$5.00 per board foot. At a transfer price of $6.00 per board foot, the cutting division’s contribution margin from the order will be $1.00 per board
foot, or $50,000 total.

Rationale
 $75,000
This answer is incorrect. Since the cutting division has excess capacity, the incremental cost to fulfill the order is the variable cost of $5.00 per board
foot. If the transfer price is mistakenly assumed to be $6.50 per board foot, the cutting division’s contribution margin from the order would be $1.50
per board foot, or $75,000 total. However, the transfer price is $6.00 per board foot, not $6.50 per board foot.

Rationale
 $12,500
This answer is incorrect. If the cutting division did not have excess capacity, it would incur an opportunity cost of $0.50 per board foot by selling to
the finishing division (selling for $6.00 per board foot instead of $6.50 per board foot). At 50,000 board feet, this is a total of $12,500. However, the
cutting division does have excess capacity and the question asks for the increase in contribution margin from the order, not the opportunity cost
from the order.

Rationale
 $40,000
This answer is incorrect. Since the cutting division has excess capacity, the incremental cost to fulfill the order is the variable cost of $5.00 per board
foot. If the fixed cost of $0.20 is incorrectly included, then the cost would be $5.20 per board foot. At a transfer price of $6.00 per board foot, the
cutting division’s contribution margin from the order would be $0.80 per board foot, or $40,000 total. However, the fixed costs should not be
included as they are incurred regardless of whether the internal transfer occurs.
Question 32
1.C.2.j
tran.pri.tb.020_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
The socket division of Lehigh Lighting manufactures bulb sockets and sells them to customers for $6.20 per unit. Its variable cost is $3.00 per unit, and its
fixed cost per unit is $0.85. Lehigh’s management would like the socket division to transfer 25,000 of these sockets to another division within the
company. If the socket division sold sockets internally, they would avoid $0.60 of variable packaging costs per unit. Assuming the socket division is
operating at full capacity, what is its minimum transfer price per socket?
$6.45

$6.20
Correct

$5.60

$5.35

Rationale
 $6.45
This answer is incorrect. The minimum transfer price would be $6.45 if the price equaled the sum of all the costs incurred to fulfill the order and the
contribution margin lost from selling internally. The total costs incurred per unit would equal $3.25 ($3.00 + $0.85 − $0.60) and the lost contribution
margin would equal $3.20 ($6.20 − $3.00). Since fixed costs will be incurred whether the socket division sells internally or externally, they are not a
part of the minimum acceptable transfer price.

Rationale
 $6.20
This answer is incorrect. A transfer price of $6.20 per socket does not consider the expected cost savings from selling internally.

Rationale
 $5.60
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. For a seller operating at full capacity, the minimum acceptable transfer price is the sum of the variable costs incurred to fulfill the
order and the contribution margin lost from selling internally. The socket division will incur a net $2.40 per unit in variable costs because it will
avoid $0.60 in packaging costs ($3.00 − $0.60) and it will give up $3.20 per unit in contribution margin if it sells internally ($6.20 − $3.00). The
minimum acceptable transfer price is $5.60 per socket ($2.40 + $3.20).

Rationale
 $5.35
This answer is incorrect. The minimum transfer price would be $5.35 per socket if the price was calculated by subtracting the fixed cost per unit
from the cost that the socket division charges external customers ($6.20 − $0.85). This is not the correct way to calculate the minimum transfer
price.
Question 33
1.C.2.j
1C2-CQ22
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

An appropriate transfer price between two divisions of Speaker's Warehouse can be determined from the following data:

Fabricating division:
Market price of subassembly $50
Variable cost of subassembly $25
Excess capacity (in units) 40
Assembling division:
Number of units needed 30

What is the natural bargaining range for the two divisions?

Any amount between $50 and $75.

Your Answer

Any amount less than $50.

Correct

Any amount between $25 and $50.

Any amount over $50.

Rationale
 Any amount between $50 and $75.
This answer is incorrect. Any amount between $50 and $75 is not the natural bargaining range for the two divisions.

Rationale
 Any amount less than $50.
This answer is incorrect. Not every amount less than $50 is in the natural bargaining range for the two divisions.

Rationale
 Any amount between $25 and $50.
Each division should have the ability to operate independently of one another, and strive for achieving its divisional goals, as well as working
towards the goals of the overall company. Figuring transfer prices can be determined using normal market price, negotiated price, variable costs, or
full absorption costs. In this case, if the fabrication division has no excess capacity, it would charge the assembling division the regular market
price. However, the Fabrication division has excess capacity sufficient to meet Assembly division's need so negotiation is possible. Any price greater
than the variable costs of subassembly of $25 is acceptable, and will increase profits of the Fabrication division by accepting any negotiated price
between $25 and $50.

Rationale
 Any amount over $50.
This answer is incorrect. Any amount over $50 is not the natural bargaining range for the two divisions.
Question 34
1.C.2.i
tran.pri.tb.008_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following is a disadvantage of using the market price model for determining transfer prices?
It limits the autonomy of business units to make transfers as they see fit.

It does not penalize internal suppliers for not being as efficient as external suppliers.

Tax authorities consider it to be too subjective.

Correct

A market price does not always exist for a good or service.

Rationale
 It limits the autonomy of business units to make transfers as they see fit.
This answer is incorrect. Business units retain autonomy under the market price model as they are able to make transfers at the market price as
they see fit.

Rationale
 It does not penalize internal suppliers for not being as efficient as external suppliers.
This answer is incorrect. The market price model forces internal sellers to be competitive with external suppliers as internal buyers will purchase
from external suppliers at the lower market price rather than from internal suppliers at a higher price.

Rationale
 Tax authorities consider it to be too subjective.
This answer is incorrect. Tax authorities consider the market price model to be the most objective way to determine transfer prices.

Rationale
 A market price does not always exist for a good or service.
Although the market price model is typically the most objective way to determine transfer prices, a market price does not always exist for a good or
service.
Question 35
1.C.2.k
tran.pri.tb.025_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
At New Age Beverage, the fruit juice division produces juice concentrates that are ingredients in bottled fruit juice drinks, smoothies, and sodas. The soda
division wishes to purchase some juice concentrates. For which of the following situations would the transfer cost be somewhere between the total
variable cost incurred for New Age Beverage to produce the concentrates and the market price?
There is no external market for the juice concentrates and the concentrate division is not operating at full capacity.

There is an external market for the juice concentrates and the concentrate division is operating at full capacity.

There is no external market for the juice concentrates and the concentrate division is operating at full capacity.
Correct

There is an external market for the juice concentrates and the concentrate division is not operating at full capacity.

Rationale
 There is no external market for the juice concentrates and the concentrate division is not operating at full capacity.
This answer is incorrect. Since the maximum acceptable transfer price is the market price, there must be an external market for the juice
concentrates.

Rationale
 There is an external market for the juice concentrates and the concentrate division is operating at full capacity.
This answer is incorrect. Since the minimum acceptable transfer price is equal to the variable cost incurred to produce the product, the concentrate
division must have excess capacity; otherwise, it would need to be compensated for the lost contribution margin from selling internally with a
higher transfer price.

Rationale
 There is no external market for the juice concentrates and the concentrate division is operating at full capacity.
This answer is incorrect. Since the maximum acceptable transfer price is the market price, there must be an external market for the juice
concentrates. In addition, since the minimum acceptable transfer price is equal to the variable cost incurred to produce the product, the
concentrate division must have excess capacity; otherwise, it would need to be compensated for the lost contribution margin from selling internally
with a higher transfer price.

Rationale
 There is an external market for the juice concentrates and the concentrate division is not operating at full capacity.
When a provider has excess capacity available, the minimum acceptable transfer price for the provider is equal to the incremental costs of fulfilling
the order. When a provider does not have excess capacity available, the lost contribution margin from selling internally must be added to the
incremental costs to compensate for the opportunity cost of selling internally. If an external market exists, the maximum acceptable transfer price
for a buyer is the external market price. Since the maximum transfer price is the market price, there must be an external market for the juice
concentrates. In addition, since the minimum acceptable transfer price is equal to the variable cost incurred, the concentrate division must have
excess capacity; otherwise, it would need to be compensated for the lost contribution margin from selling internally with a higher transfer price.
Question 36
1.C.2.l
aq.tran.pri.009_0820
LOS: 1.C.2.l
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
Considered a company that conducts business between business units spread across international boundaries. All of the following scenarios accurately
describe issues to be considered by the company EXCEPT:
If the company is concerned that Country A is going to restrict the flow of currency out of its country because of strict currency restriction laws, it may
encourage the use of full cost-based transfer pricing to increase the amount of cash that the business unit in Country A is paying the business unit in
Country B.

If Country A places a high tariff rate on the value of automobiles coming into its country, then the company is likely to encourage lower transfer prices
on the automobiles that the business unit in Country B ships to the business unit in Country A.

If the company uses internal transfer prices primarily to reduce income tax expense, avoid paying tariffs, or work around currency restriction laws,
country governments may pay close attention and regulate its actions.
Correct

If the income tax rate in Country A is comparatively higher than in Country B, the company may encourage transfer prices that result in most of the
cost savings being split toward Country A operations.

Rationale
 If the company is concerned that Country A is going to restrict the flow of currency out of its country because of strict currency
restriction laws, it may encourage the use of full cost-based transfer pricing to increase the amount of cash that the business unit in
Country A is paying the business unit in Country B.
This answer is incorrect because it accurately describes a transfer pricing policy a company may use to conduct business across international
boundaries. In order to manage the economic impact of large outflows of cash or assets from its country, governments can use currency restriction
laws to limit how much cash a company can transfer out of the country's economy over a certain period of time. Organizations may try to use
transfer pricing to manage this risk (sometimes called “expropriation risk” or “policy risk”) of having its cash retained in one country when it's
needed in another country. If the company is concerned that Country A is going to restrict the flow of currency out of its country, it may encourage
the use of full cost-based transfer pricing to increase the amount of cash that the business unit in Country A pays the business unit in Country B.

Rationale
 If Country A places a high tariff rate on the value of automobiles coming into its country, then the company is likely to encourage lower
transfer prices on the automobiles that the business unit in Country B ships to the business unit in Country A.
This answer is incorrect because it accurately describes a transfer pricing policy a company may use to conduct business across international
boundaries. The company will encourage lower transfer prices on the automobiles that Country B ships to Country A, which will result in lower
tariffs. For example, when choosing between variable cost and full cost pricing, the company will reduce the cost of tariffs by using variable costs to
set transfer prices.

Rationale
 If the company uses internal transfer prices primarily to reduce income tax expense, avoid paying tariffs, or work around currency
restriction laws, country governments may pay close attention and regulate its actions.
This answer is incorrect because it accurately describes the potential result of using a transfer pricing policy to conduct business across
international boundaries. Most country governments pay close attention to companies that use internal transfer prices primarily to reduce income
tax expense, avoid paying tariffs, or work around currency restriction laws. To that end, there is significant government regulation involved in the
process of setting transfer prices for international organizations.

Rationale
 If the income tax rate in Country A is comparatively higher than in Country B, the company may encourage transfer prices that result in
most of the cost savings being split toward Country A operations.
If the income tax rate in Country A is comparatively higher than in Country B, the company may encourage transfer prices that result in most of the
cost savings being split toward Country B operations, not Country A operations. For example, in the choice between variable cost and full cost
pricing, the company will reduce its tax expense if full cost pricing is used to allocate most of the cost savings from the transfer to Country B.
Question 37
1.C.2.k
tran.pri.tb.032_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

We Heart Cows makes animal-free jackets. The fabric division makes the faux leather that is used by the jacket division. Product cost per yard for the
fabric is as follows:

Direct material $1.55

Direct labor $0.75
Variable overhead $0.95
Fixed overhead $0.25

The jacket division needs 28,000 yards of fabric annually. Currently the jacket division purchases fabric from an outside supplier for $4.50 per yard,
because the fabric division has been selling all of their fabric to external buyers for $4.50 per yard. This year, the fabric division has lost a major customer
and has capacity to fill the jacket division’s demand. The managers of the two divisions negotiate a mutually agreeable transfer price of $4.25 per yard.
How much will the fabric division’s contribution margin increase?

$91,000

$21,000
Your Answer

$7,000
Correct

$28,000

Rationale
 $91,000
This answer is incorrect. Since the fabric division has excess capacity, the incremental cost to fulfill the order is the variable cost of $3.25 per yard,
or a total of $91,000 for 28,000 yards. However, the question asks for the increase in contribution margin from the order, not the increase in variable
costs from the order.

Rationale
 $21,000
This answer is incorrect. Since the fabric division has excess capacity, the incremental cost to fulfill the order is the variable cost of $3.25 per yard. If
the fixed cost of $0.25 is incorrectly included, then the cost would be $3.50 per yard. At a transfer price of $4.25 per yard, the fabric division’s
contribution margin from the order would be $0.75 per yard, or $21,000 total. However, the fixed costs should not be included as they are incurred
regardless of whether the internal transfer occurs.

Rationale
 $7,000
This answer is incorrect. If the fabric division did not have excess capacity, it would incur an opportunity cost of $0.25 per yard by selling to the
jacket division (selling for $4.25 per yard instead of $4.50 per yard). At 28,000 yards, this is a total of $7,000. However, the fabric division does have
excess capacity and the question asks for the increase in contribution margin from the order, not the opportunity cost from the order.

Rationale
 $28,000
When a provider has excess capacity available, the minimum transfer price is the incremental costs of fulfilling the order. When a provider does not
have excess capacity available, the lost contribution margin from selling internally must be added to the incremental costs to compensate for the
opportunity cost of selling internally. Since the fabric division has excess capacity, the incremental cost to fulfill the order is the variable cost of
$3.25 per yard. At a transfer price of $4.25 per yard, the fabric division’s contribution margin from the order will be $1.00 per yard, or $28,000 total.
Question 38
1.C.2.i
tran.pri.tb.012_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which transfer pricing method is known to have the disadvantage of leading to a loss of profitability for the company and unfair evaluations of division
performance?
Correct

Cost-based transfer prices

Negotiated transfer prices

Market-based transfer prices

Your Answer

Time-and-material transfer prices

Rationale
 Cost-based transfer prices
There are various methods companies can use to determine transfer prices. The various methods have different advantages and disadvantages.
One disadvantage of cost-based transfer prices is that they can lead to a reduction in company profitability since the selling (providing) division has
no motivation to reduce costs as they are reimbursed for all costs incurred. They can also lead to unfair evaluation of division performance as a
buying division is forced to “over-pay” for something.

Rationale
 Negotiated transfer prices
This answer is incorrect. One disadvantage of negotiated transfer prices is that the units may lose some amount of autonomy as they are “forced”
into an internal transfer. They have some influence over the price, but not over the decision concerning whether the transfer should occur.
However, the negotiations still encourage overall profitability.

Rationale
 Market-based transfer prices
This answer is incorrect. There are various methods companies can use to determine transfer prices. The various methods have different
advantages and disadvantages. One disadvantage of market-based transfer prices is that there may not always be an external market for
something. However, this transfer pricing method generally encourages optimal resource allocation relative to the market.

Rationale
 Time-and-material transfer prices
This answer is incorrect. One disadvantage of time-and-material transfer prices is that these prices may not be known until a product is completed
or service is performed since the time and materials needed are not known until then. However, a loss of profitability is not intrinsically related to
this transfer pricing method.
Question 39
1.C.2.i
1C2-AT02d
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
In theory, the optimal method for establishing a transfer price is:
budgeted cost with or without a markup.
Correct

market price.

incremental cost.
Your Answer

flexible budget cost.

Rationale
 budgeted cost with or without a markup.
This answer is incorrect. The optimal method for establishing a transfer price is not budgeted cost with or without a markup.

Rationale
 market price.
The market price transfer pricing model helps the divisions maintain autonomy and causes the divisions to be competitive with external suppliers.
Market-based transfer prices are objective and verifiable.

Rationale
 incremental cost.
This answer is incorrect. The optimal method for establishing a transfer price is not incremental cost.

Rationale
 flexible budget cost.
This answer is incorrect. The optimal method for establishing a transfer price is not flexible budget cost.
Question 40
1.C.2.j
tran.pri.tb.016_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

Robert Scott Lumber Company has a cutting division that cuts red oak trees into boards and a finishing division that makes red oak boards into custom
woodwork used in renovation of historic buildings. Costs per board foot for the cutting division are:

Direct material $3.00

Direct labor $1.25
Variable overhead $0.75
Fixed overhead $0.20

The cutting division sells boards to external customers for $6.50 per board foot, but has capacity to sell to the finishing division as well. The finishing
department has been purchasing lumber from an outside vendor for $6.50 per board foot. If the cutting department starts transferring lumber to the
finishing department, calculate the minimum transfer price.

$6.50
Correct

$5.00
Your Answer

$5.20

$4.25

Rationale
 $6.50
This answer is incorrect. Total variable manufacturing costs are $5.00 per foot ($3.00 + $1.25 + $0.75). If the cutting division did not have excess
capacity available, it would need to add $1.50 to this to compensate for the lost contribution margin from selling externally ($6.50 − $5.00). This
would give a minimum transfer price of $6.50 per foot. However, there is excess capacity available.

Rationale
 $5.00
The key to this situation is that there is excess capacity available in the cutting division. This means the cutting division will not incur an
opportunity cost by selling to the finishing division. In this situation, the minimum transfer price is the incremental costs of fulfilling the order.
Variable manufacturing costs are included in this figure while fixed manufacturing costs are not. Total variable manufacturing costs are $5.00 per
foot ($3.00 + $1.25 + $0.75). This represents the minimum transfer price.

Rationale
 $5.20
This answer is incorrect. Total variable manufacturing costs are $5.00 per foot ($3.00 + $1.25 + $0.75). If the fixed costs are included, then the cost is
$5.20 per foot. However, fixed costs should not be included as these costs will be the same whether the transfer is completed or not. This means it is
not an incremental cost of fulfilling the order.

Rationale
 $4.25
This answer is incorrect. Total direct variable manufacturing costs are $4.25 per foot ($3.00 + $1.25). However, the $0.75 for variable overhead must
also be included as these costs are incremental to fulfilling the order.
Question 41
1.C.2.h
cma11.p1.t1.me.0052_0820
LOS: 1.C.2.h
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3

A company's senior management has determined that the actual full cost will be used to determine the transfer price for goods sold from one division to
another division. The selling division has excess capacity and can sell goods to other divisions or to outside customers at a higher price. An advantage of
this transfer pricing model is that it

*Source: Retired ICMA CMA Exam Questions.

Correct

achieves goal congruence within the company.

is effective for performance evaluation.

motivates management to achieve cost-effectiveness.

Your Answer

preserves each division's autonomy.

Rationale
 achieves goal congruence within the company.
Using full cost to determine transfer price for good sold from one division to another would achieve goal congruence within the company. This
company has excess capacity and can sell goods to other divisions or to outside customers. Selling for less than cost would not incentivize the
selling department, and selling for more than full cost would have the purchasing department looking for another source for the product.

Rationale
 is effective for performance evaluation.
This answer is incorrect. Using full cost to determine transfer price for good sold from one division to another would not be effective for
performance evaluation.

Rationale
 motivates management to achieve cost-effectiveness.
This answer is incorrect. Using full cost to determine transfer price for good sold from one division to another would not motivate management to
achieve cost-effectiveness.

Rationale
 preserves each division's autonomy.
This answer is incorrect. Using full cost to determine transfer price for good sold from one division to another does not preserve each division's
autonomy. Market-based costs or negotiated cost would preserve each division's autonomy.
Question 42
1.C.2.l
tran.pri.tb.042_0120
LOS: 1.C.2.l
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
A company produces all its products in a facility in its home country. Which of the following scenarios will likely result in a foreign subsidiary of the
company having “better” performance than a subsidiary of the company selling goods domestically?
The cost of labor and other inputs is lower in the foreign country.

The foreign country government imposes a 10% tariff on all imported goods.
Correct

The home country’s government provides low-interest loans to customers in the foreign country to finance purchases of the products.
Your Answer

The foreign country’s government imposes a price ceiling on all imported goods.

Rationale
 The cost of labor and other inputs is lower in the foreign country.
This answer is incorrect. If the cost of labor and other inputs is lower in the foreign country, the foreign subsidiary will likely have to charge a lower
price for its products than the domestic subsidiary. This will reduce the performance of the foreign subsidiary relative to the domestic one.

Rationale
 The foreign country government imposes a 10% tariff on all imported goods.
This answer is incorrect. If the foreign country’s government imposes a 10% tariff on all imported goods, the cost of doing business for the foreign
subsidiary will increase. This will reduce the performance of the foreign subsidiary relative to the domestic one.

Rationale
 The home country’s government provides low-interest loans to customers in the foreign country to finance purchases of the products.
There are a number of unique issues that affect performance evaluation in multinational organizations. If the home country’s government provides
low-interest loans to customers in the foreign country to finance purchases of the products, it will be easier and cheaper for customers in the
foreign country to purchase the products. This will improve the performance of the foreign subsidiary relative to the domestic one.

Rationale
 The foreign country’s government imposes a price ceiling on all imported goods.
This answer is incorrect. If the foreign country government imposes a price ceiling on all imported goods, the foreign subsidiary will likely have to
charge a lower price for its products than the domestic subsidiary. This will reduce the performance of the foreign subsidiary relative to the
domestic one.
Question 43
1.C.2.j
aq.tran.pri.005_0820
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

Business Unit X produces a widget product that can be sold either to external customers or internally to Business Unit Y. Business Unit Y is currently
purchasing 20,000 widgets from an external supplier for $34 per unit. Both Business Unit X and Business Unit Y are evaluated as profit centers. Production
and sales data for Business Unit X are provided below. Assuming that no costs can be avoided if an internal transfer takes place, should Business Unit X
transfer widgets to Business Unit Y? If so, what should the transfer price be?

Business Unit X:
Capacity in units 100,000
Number of units being sold to external customers 80,000
Selling price per unit to external customers $35
Variable costs per widget $20
Fixed costs per unit (based on capacity) $6

No transfer should take place.

Your Answer

A transfer should take place; the transfer price should be $34.

Correct

A transfer should take place; the transfer price should be between $20 and $34.

A transfer should take place; the transfer price should be between $20 and $35.

Rationale
 No transfer should take place.
This answer is incorrect. In this situation, a transfer should take place. Remember that Business Unit X has excess capacity.

Rationale
 A transfer should take place; the transfer price should be $34.
This answer is incorrect. This answer represents the price that Business Unit Y is currently paying to purchase widgets at from an external supplier.
Remember that Business Unit X has excess capacity and Business Unit X has variable costs per unit of $20.

Rationale
 A transfer should take place; the transfer price should be between $20 and $34.
A transfer should take place. Business Unit X has the capacity to supply widgets to Business Unit Y without losing any external sales. The
incremental cost to supply the widgets is $20. Since Business Unit Y can purchase widgets for $34, the transfer price should be between these two
values.

Rationale
 A transfer should take place; the transfer price should be between $20 and $35.
This answer is incorrect. These prices represent the variable cost per widget for Business Unit X and Business Unit X's selling price to external
customers, respectively. Business Unit Y can purchase widgets from an external supplier for $34, so the transfer price will not be $35.
Question 44
1.C.2.k
tran.pri.tb.036_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: hard
Bloom Code: 5

The alternator division of Tiny Autos manufactures alternators and sells them to customers for $120 each. The division is currently operating at full
capacity, and its cost breakdown for each alternator is as follows:

Direct materials cost $33

Variable labor cost $11
Variable overhead cost $10
Fixed overhead cost $9

Tiny’s upper management wants the alternator division to sell 10,000 alternators to another division within the company. The alternator division could
avoid variable overhead costs of $3 per unit by selling internally. If the two divisions ultimately agree to a transfer price of $120 per unit, the alternator
division will make:

$30,000 less than it would have made if it had agreed to its minimum acceptable transfer price.

$120,000 more than it would have made if it had agreed to its minimum acceptable transfer price.
Your Answer

$120,000 less than it would have made if it had agreed to its minimum acceptable transfer price.
Correct

$30,000 more than it would have made if it had agreed to its minimum acceptable transfer price.

Rationale
 $30,000 less than it would have made if it had agreed to its minimum acceptable transfer price.
This answer is incorrect. Since it is at full capacity, the alternator division will lose $66 in contribution margin if it sells internally ($120 − variable
costs of $54). It will incur $51 in variable costs to fulfill the internal order ($33 + $11 + $7) since $3 of variable overhead can be avoided by selling
internally. This results in a minimum acceptable transfer price of $117 per unit ($66 + $51). If the transfer price is $120, the alternator division will
make an additional $3 per unit, not $3 less per unit, than if the minimum acceptable transfer price was used.

Rationale
 $120,000 more than it would have made if it had agreed to its minimum acceptable transfer price.
This answer is incorrect. Since it is at full capacity, the alternator division will lose $66 in contribution margin if it sells internally ($120 − variable
costs of $54). It will incur $51 in variable costs to fulfill the internal order ($33 + $11 + $7) since $3 of variable overhead can be avoided by selling
internally. If the $9 per unit of fixed cost is incorrectly subtracted from this, the incremental cost would be calculated as $42 per unit, resulting in a
minimum acceptable transfer price of $108 per unit ($66 + $42). A transfer price of $120 per unit would result in an additional profit of $12 per unit,
or a total of $120,000. However, the fixed costs represent costs not incurred, which is different from costs being reduced.

Rationale
 $120,000 less than it would have made if it had agreed to its minimum acceptable transfer price.
This answer is incorrect. Since it is at full capacity, the alternator division will lose $66 in contribution margin if it sells internally ($120 − variable
costs of $54). It will incur $51 in variable costs to fulfill the internal order ($33 + $11 + $7) since $3 of variable overhead can be avoided by selling
internally. If the $9 per unit of fixed cost is incorrectly subtracted from this, the incremental cost would be calculated as $42 per unit, resulting in a
minimum acceptable transfer price of $108 per unit ($66 + $42). A transfer price of $120 per unit would result in an additional profit of $12 per unit,
not $12 less profit per unit. In addition, the fixed costs represent costs not incurred, which is different from costs being reduced.

Rationale
 $30,000 more than it would have made if it had agreed to its minimum acceptable transfer price.
When a provider does not have excess capacity available, the lost contribution margin from selling internally must be added to the incremental
costs to compensate for the opportunity cost of selling internally when calculating the minimum acceptable transfer price. Any cost savings from
selling internally reduces the minimum acceptable transfer price. Since it is at full capacity, the alternator division will lose $66 in contribution
margin if it sells internally ($120 − variable costs of $54). It will incur $51 in variable costs to fulfill the internal order ($33 + $11 + $7) since $3 of
variable overhead can be avoided by selling internally. This results in a minimum acceptable transfer price of $117 per unit ($66 + $51). If the
transfer price is $120, the alternator division will make an additional $3 per unit or a total of $30,000 more than if the minimum acceptable transfer
price was used.
Question 45
1.C.2.k
tran.pri.tb.027_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: hard
Bloom Code: 5
The switch division of Leonard Lighting manufactures 125,000 switches each year and has adequate capacity to manufacture 15,000 more. The division’s
variable cost per switch is $2.75, and it sells the finished switches to customers for $5 each. Leonard’s upper management wants the switch division to
sell 25,000 switches to the fixtures division at a transfer price based on the variable cost per switch. Currently, the fixtures division purchases its switches
from another vendor for $4 each. Assuming the two divisions proceed with the transfer using this cost-based price, Leonard Lighting will see an overall:
Correct

Savings of $8,750 as a result of the transfer.

Savings of $2,500 as a result of the transfer.

Loss of $8,750 as a result of the transfer.

Your Answer

Loss of $2,500 as a result of the transfer.

Rationale
 Savings of $8,750 as a result of the transfer.
When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs of fulfilling the order, but
when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the incremental costs to
compensate for the opportunity cost of selling externally. The switch division has the capacity to produce 15,000 of the 25,000 needed switches
which will save Leonard $1.25 per switch because they can purchase them for $2.75 per switch instead of $4.00 per switch for a total savings of
$18,750 (15,000 units × $1.25). To produce the remaining 10,000 units, the switch division will have to give up sales of 10,000 units. The net
opportunity cost of selling 10,000 units internally instead of externally is equal to the lost contribution margin minus the cost savings from selling
internally. The lost contribution margin equals $2.25 per unit ($5.00 − $2.75) and the cost savings equals $1.25 per unit ($4.00 − $2.75); therefore,
the net opportunity cost equals $10,000 (10,000 units × ($2.25 − $1.25)). The net result of this transfer to Leonard Lighting is a savings of $8,750
($18,750 − $10,000).

Rationale
 Savings of $2,500 as a result of the transfer.
This answer is incorrect. When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs
of fulfilling the order, but when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the
incremental costs to compensate for the opportunity cost of selling the products externally. Leonard Lighting will not see a total savings of $2,500
as a result of the transfer.

Rationale
 Loss of $8,750 as a result of the transfer.
This answer is incorrect. When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs
of fulfilling the order, but when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the
incremental costs to compensate for the opportunity cost of selling the products externally. Leonard Lighting will not see a total loss of $8,750 as a
result of the transfer.

Rationale
 Loss of $2,500 as a result of the transfer.
This answer is incorrect. When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs
of fulfilling the order, but when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the
incremental costs to compensate for the opportunity cost of selling the products externally. Leonard Lighting will not see a total loss of $2,500 as a
result of the transfer.
Question 46
1.C.2.k
1C2-LS33
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
A company sets the transfer price for an intermediate product at $12 per unit even though the selling department can sell the unit on the market for $18
per unit. The production department is currently producing with excess capacity. Which of the following is the most likely result of this action?
The selling department will increase its market share by being a price leader.

The purchasing department's profits will be decreased relatively while the selling department's profits will be increased.

The selling department's manager will switch to the market price model.
Correct

The selling department's profits will be decreased relatively while the purchasing department's profits will be increased.

Rationale
 The selling department will increase its market share by being a price leader.
This answer is incorrect. A transfer price of $12 when the market price is $18 and there is excess capacity will not result in the selling department
increasing its market share by being a price leader.

Rationale
 The purchasing department's profits will be decreased relatively while the selling department's profits will be increased.
This answer is incorrect. A transfer price of $12 when the market price is $18 and there is excess capacity will not result in the purchasing
department's profits being decreased relatively while the selling department's profits are increased.

Rationale
 The selling department's manager will switch to the market price model.
This answer is incorrect. A transfer price of $12 when the market price is $18 and there is excess capacity will not result in the selling department's
manager switching to the market price model.

Rationale
 The selling department's profits will be decreased relatively while the purchasing department's profits will be increased.
The intermediate product is being transferred at such a low price compared to the market price that the purchasing department's manager may
not have any incentive to keep costs low.
Question 47
1.C.2.k
tran.pri.tb.038_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
The Epic Company sells suit jackets and buttons. The button division can produce 200,000 buttons per year and sells 160,000 buttons externally for $.30
each. The buttons produce a contribution margin of $.16 per button. The suit jacket division needs 40,000 buttons this year and currently pays $.18 per
button to purchase the buttons externally. Should the button division sell the buttons to the suit division, why or why not?
No, because Epic Company will be better off if the button division sells only externally.
Correct

Yes, the Epic Company will save $.04 per button.

Yes, Epic Company will save $.12 per button.

Your Answer

Yes, Epic Company will save $.02 per button.

Rationale
 No, because Epic Company will be better off if the button division sells only externally.
This answer is incorrect. The button division earns $0.16 per button from selling externally. At the same time, the jacket division pays $0.18 per
button to an external seller. If the jacket division has sufficient demand, Epic will be better off if the button division only sells internally, not
externally.

Rationale
 Yes, the Epic Company will save $.04 per button.
When a provider has excess capacity available, the minimum transfer price is the incremental costs of fulfilling the order. When a provider does not
have excess capacity available, the lost contribution margin from selling internally must be added to the incremental costs to compensate for the
opportunity cost of selling internally. Since the button division has excess capacity, it does not incur an opportunity cost when selling to the jacket
division. The incremental cost to fulfill the order is the variable cost of $0.14 per button (selling price of $0.30 per button less contribution margin of
$0.16 per button). The jacket division will save $0.04 per button by buying them from the button division. Since the button division has no
opportunity cost of selling to the jacket division, Epic will have a net savings of $0.04 per button from the internal sale.

Rationale
 Yes, Epic Company will save $.12 per button.
This answer is incorrect. The $0.12 per button difference compares the button division’s selling price of $0.30 per button to the jacket division’s
purchase price of $0.18 per button. However, this is not the correct comparison when determining whether an internal transfer will benefit a
company. The incremental cost incurred by the buyer ($0.14) as well as any opportunity cost of selling internally ($0.00) must also be considered.
The current selling price does not need to be considered as there is excess capacity available.

Rationale
 Yes, Epic Company will save $.02 per button.
This answer is incorrect. The incremental cost to fulfill the order is the variable cost of $0.14 per button (selling price of $0.30 per button less
contribution margin of $0.16 per button). If it is incorrectly assumed that the incremental cost is $0.16 per button, it will appear that the jacket
division will save $0.02 per button by buying them from the button division (paying $0.16 versus paying $0.18). However, $0.16 is the contribution
margin per button, not the variable cost per button.
Question 48
1.C.2.h
tran.pri.tb.003_0120
LOS: 1.C.2.h
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following is not an objective of using transfer prices?
Transfer prices are used to promote the efficient use of internal resources.

Transfer prices are used to determine a more accurate measure of costs and revenues for responsibility centers.

Transfer prices are used to promote the efficient production of internal resources.
Correct

Transfer prices are used to value transfers to external parties.

Rationale
 Transfer prices are used to promote the efficient use of internal resources.
This answer is incorrect. Using transfer prices does promote the efficient use of internal resources because without them, the buying division would
have no reason to use the resource efficiently since the resource would appear to be free.

Rationale
 Transfer prices are used to determine a more accurate measure of costs and revenues for responsibility centers.
This answer is incorrect. Using transfer prices results in more accurate measures of costs and revenues because without them, internal transfers
would not be valued.

Rationale
 Transfer prices are used to promote the efficient production of internal resources.
This answer is incorrect. Using transfer prices does promote the efficient production of internal resources because without them, the selling
division would have no reason to produce the resource efficiently since buying divisions would not object to excessive costs.

Rationale
 Transfer prices are used to value transfers to external parties.
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. Transfer prices are not used to value transfers to external parties.
Question 49
1.C.2.h
tran.pri.tb.002_0120
LOS: 1.C.2.h
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
At Dakota Biological Supply, several divisions make a product that can be sold externally or used by another division. What transaction must have
occurred if the Biotech division showed a cost of $6,000 and the Reagent division showed a revenue of $6,000?
The Reagent division transferred $12,000 of product to the Biotech division.
Correct

The Reagent division transferred $6,000 of product to the Biotech division.

The Biotech division transferred $6,000 of product to the Reagent division.

Your Answer

Both divisions sold $6,000 of product to external sources.

Rationale
 The Reagent division transferred $12,000 of product to the Biotech division.
This answer is incorrect. In an internal transfer, the “price” used to value the transfer is called a transfer price and it represents revenue to the
“selling” division and a cost to the “buying” division. Since Reagent receives revenue it is the seller and Biotech is the buyer; however, the cost of
the product should match the revenue and cost recorded.

Rationale
 The Reagent division transferred $6,000 of product to the Biotech division.
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. The transfer price is revenue to the “selling” division and a cost to the “buying” division when internal income statements are
prepared. Since Reagent receives revenue it is the seller and Biotech is the buyer in this particular transaction and the product must have cost
$6,000 since that is the amount of revenue and cost recorded.

Rationale
 The Biotech division transferred $6,000 of product to the Reagent division.
This answer is incorrect. An internal transfer represents revenue to the “selling” division and a cost to the “buying” division when internal income
statements are prepared.

Rationale
 Both divisions sold $6,000 of product to external sources.
This answer is incorrect. A division selling $6,000 of product to external sources would show revenue on its internal income statement.
Question 50
1.C.2.i
tran.pri.tb.011_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
Which of the following is a disadvantage of using the full-cost model for determining transfer prices?
It limits the autonomy of business units to make transfers as they see fit.

It cannot be used when there is no external market price for the product or service.

The selling division may be reluctant to sell internally as it could lose money under this model.
Correct

There is no motivation for the internal supplier to produce the good or service in an efficient way.

Rationale
 It limits the autonomy of business units to make transfers as they see fit.
This answer is incorrect. Business units retain autonomy under the full-cost model as they are able to make transfers at the full cost as they see fit.

Rationale
 It cannot be used when there is no external market price for the product or service.
This answer is incorrect. An external market price is not needed to use the full-cost model.

Rationale
 The selling division may be reluctant to sell internally as it could lose money under this model.
This answer is incorrect. When the transfer price is based on the seller’s full cost, the selling division will at least “break even” so it will not lose
money on the transfer.

Rationale
 There is no motivation for the internal supplier to produce the good or service in an efficient way.
Since the internal supplier will receive the full cost incurred to provide the good or service, there is no motivation for it to produce the good or
service in an efficient way under the full-cost model.
Question 51
1.C.2.i
aq.tran.pri.002_1807
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 1
All of the following are methods for determining transfer prices except:
variable cost pricing.

full cost pricing.

Correct

fixed cost pricing.

Your Answer

market-based pricing.

Rationale
 variable cost pricing.
This answer is incorrect. Variable cost pricing is a method for determining transfer prices. Variable cost pricing bases the transfer price on the
variable cost to produce a unit. Setting the transfer price based on variable costs is often profitable for the receiving business unit, but the
supplying business unit has no profit incentive to agree to the transfer at the variable cost price (except that it provides the means to give more
employment for the business unit's employees).

Rationale
 full cost pricing.
This answer is incorrect. Full cost pricing is a method for determining transfer prices. This approach is often used by organizations since it
represents a cost that is typically reported in accounting systems. A full cost transfer price provides a contribution margin to the supplying business
unit to help cover its full costs, but it results in a higher price that the receiving business unit may not want to pay. The full cost is calculated by
adding the variable cost per unit to the fixed cost per unit.

Rationale
 fixed cost pricing.
Fixed cost pricing is not one of the methods for determining transfer prices. The full cost pricing method includes variable costs and fixed costs per
unit in determining the transfer price. The variable cost pricing method includes variable costs per unit in determining the transfer price. There is
not, however, a pricing method that only includes fixed costs per unit in determining the transfer price.

Rationale
 market-based pricing.
This answer is incorrect. Full market-based pricing is a method for determining transfer prices. If there is an outside market for the product or
service, then most organizations will set the transfer price on the market price that the receiving business unit would normally pay. The receiving
unit's market price creates a competitive pressure (and opportunity) for the supplying business unit to reduce costs while improving the quality and
timeliness of the product or service in order to compete effectively with the outside market for the transaction. This incentive aligns well with the
organization's overall goals. If the supplying business unit is selling to an outside market, that market price is relevant only if the supplying business
unit is running out of production capacity.
Question 52
1.C.2.l
tran.pri.tb.039_0120
LOS: 1.C.2.l
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
Which of the following statements concerning using transfer prices in multinational companies is correct?
If an internal supplier operates in a country with a higher corporate tax rate than an internal buyer, it is in the organization’s best interest that the
transfer price be relatively high.

The corporate tax rate for an internal supplier and internal buyer should not impact the preferred transfer price used for the transaction.
Correct

If an internal supplier operates in a country with a higher corporate tax rate than an internal buyer, it is in the organization’s best interest that the
transfer price be relatively low.
Your Answer

If an internal supplier operates in a country with a lower corporate tax rate than an internal buyer, it is in the organization’s best interest that the
transfer price be relatively low.

Rationale
 If an internal supplier operates in a country with a higher corporate tax rate than an internal buyer, it is in the organization’s best
interest that the transfer price be relatively high.
This answer is incorrect. If the transfer price is relatively high in this scenario, taxable income for the supplier in a high-tax environment will be
relatively high. This is not in the best interests of the organization.

Rationale
 The corporate tax rate for an internal supplier and internal buyer should not impact the preferred transfer price used for the
transaction.
This answer is incorrect. Transfer prices can be used to “shift” taxable income between subsidiaries in different countries. As a result, different
corporate tax rates in different countries can have an impact on the preferred transfer price used for a transaction.

Rationale
 If an internal supplier operates in a country with a higher corporate tax rate than an internal buyer, it is in the organization’s best
interest that the transfer price be relatively low.
Transfer prices can be used to “shift” taxable income between subsidiaries in different countries. If an internal supplier has a higher corporate tax
rate than an internal buyer, the company is better off if the supplier has relatively low taxable income and the buyer has relatively high taxable
income. One way this can be achieved is with a relatively low transfer price.

Rationale
 If an internal supplier operates in a country with a lower corporate tax rate than an internal buyer, it is in the organization’s best
interest that the transfer price be relatively low.
This answer is incorrect. If the transfer price is relatively low in this scenario, taxable income for the supplier in a low-tax environment will be
relatively low. This is not in the best interests of the organization.
Question 53
1.C.2.l
tran.pri.tb.041_0120
LOS: 1.C.2.l
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
Which of the following statements best describes the impact that changing exchange rates have on a manager’s performance evaluation in multinational
companies?
Since managers do not control exchange rates, they should not be held accountable for the impact of changing exchange rates on performance
measures.

If currency management is handled centrally within an organization, individual managers should be held accountable for the impact of changing
exchange rates on performance measures.

Individual managers should not be held accountable for the impact of changing exchange rates on performance measures because this is a financial
issue, not an operational issue.
Correct

If currency management is decentralized within an organization, individual managers should be held accountable for the impact of changing
exchange rates on performance measures.

Rationale
 Since managers do not control exchange rates, they should not be held accountable for the impact of changing exchange rates on
performance measures.
This answer is incorrect. While managers do not control exchange rates, they may have the authority to take steps to mitigate the impact of
changing exchange rates on performance measures.

Rationale
 If currency management is handled centrally within an organization, individual managers should be held accountable for the impact of
changing exchange rates on performance measures.
This answer is incorrect. If currency management is handled centrally within an organization, individual managers have relatively little control or
influence over changing exchange rates. This means that managers should not be held accountable for the impact of changing exchange rates on
performance measures.

Rationale
 Individual managers should not be held accountable for the impact of changing exchange rates on performance measures because this
is a financial issue, not an operational issue.
This answer is incorrect. Managers should be held accountable for the financial and operational issues they have control or influence over.

Rationale
 If currency management is decentralized within an organization, individual managers should be held accountable for the impact of
changing exchange rates on performance measures.
Managers should be held accountable for factors they have control or influence over. If currency management is decentralized within an
organization, individual managers have the authority to take steps to minimize the impact of changing exchange rates on performance measures
(for example, by employing hedging strategies). If this is the case, they should be held accountable for the effectiveness of that hedging strategy.
Question 54
1.C.2.k
tran.pri.tb.037_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: hard
Bloom Code: 5

The widgets division of Gadgets Inc., manufactures widgets and sells them to customers for $36 each. The division is currently operating at full capacity,
and its cost breakdown for each widget is as follows:

Direct materials cost $9

Variable labor cost $6
Variable overhead cost $5
Fixed overhead cost $2

Gadgets’ CEO wants the widgets division to sell 25,000 widgets to another division within the company. The widgets division could cut its variable
overhead by 60% by selling internally. If the two divisions ultimately agree to a transfer price of $30 per unit, the widgets division will make

Correct

$75,000 less than it would have made if it had agreed to its minimum acceptable transfer price.

$75,000 more than it would have made if it had agreed to its minimum acceptable transfer price.
Your Answer

$25,000 more than it would have made if it had agreed to its minimum acceptable transfer price.

$25,000 less than it would have made if it had agreed to its minimum acceptable transfer price.

Rationale
 $75,000 less than it would have made if it had agreed to its minimum acceptable transfer price.
When a provider does not have excess capacity available, the lost contribution margin from selling internally must be added to the incremental
costs to compensate for the opportunity cost of selling internally when calculating the minimum acceptable transfer price. Any cost savings from
selling internally reduces the minimum acceptable transfer price. Since it is at full capacity, the widgets division will lose $16 in contribution margin
if it sells internally ($36 − variable costs of $20). It will incur $17 in variable costs to fulfill the internal order ($9 + $6 + $2) since 60% of variable
overhead can be avoided by selling internally. This results in a minimum acceptable transfer price of $33 per unit ($16 + $17). If the transfer price is
$30, the widgets division will make $3 less per unit, or a total of $75,000 less than if the minimum acceptable transfer price was used.

Rationale
 $75,000 more than it would have made if it had agreed to its minimum acceptable transfer price.
This answer is incorrect. Since it is at full capacity, the widgets division will lose $16 in contribution margin if it sells internally ($36 − variable costs
of $20). It will incur $17 in variable costs to fulfill the internal order ($9 + $6 + $2 [$5 × (1.0 – 0.6)]) since 60% of variable overhead can be avoided by
selling internally. This results in a minimum acceptable transfer price of $33 per unit ($16 + $17). If the transfer price is $30, the widgets division will
make $3 less per unit, not $3 more per unit, than if the minimum acceptable transfer price was used.

Rationale
 $25,000 more than it would have made if it had agreed to its minimum acceptable transfer price.
This answer is incorrect. Since it is at full capacity, the widgets division will lose $16 in contribution margin if it sells internally ($36 − variable costs
of $20). It will incur $17 in variable costs to fulfill the internal order ($9 + $6 + $2 [$5 × (1.0 – 0.6)]) since 60% of variable overhead can be avoided by
selling internally. If the $2 per unit of fixed cost is incorrectly subtracted from this, the incremental cost would be calculated as $15 per unit,
resulting in a minimum acceptable transfer price of $31 per unit ($16 + $15). This would result in an additional profit of $12 per unit, not $12 less
profit per unit. In addition, the fixed costs represent costs not incurred, which is different from costs being reduced. If the transfer price is $30, the
widgets division will make $1 less per unit, not $1 more per unit, than if the minimum acceptable transfer price was used. In addition, the fixed costs
represent costs not incurred, which is different from costs being reduced.

Rationale
 $25,000 less than it would have made if it had agreed to its minimum acceptable transfer price.
This answer is incorrect. Since it is at full capacity, the widgets division will lose $16 in contribution margin if it sells internally ($36 − variable costs
of $20). It will incur $17 in variable costs to fulfill the internal order ($9 + $6 + $2 [$5 × (1.0 – 0.6)]) since 60% of variable overhead can be avoided by
selling internally. If the $2 per unit of fixed cost is incorrectly subtracted from this, the incremental cost would be calculated as $15 per unit,
resulting in a minimum acceptable transfer price of $31 per unit ($16 + $15). If the transfer price is $30, the widgets division will make $1 less per
unit than if the minimum acceptable transfer price was used. However, the fixed costs represent costs not incurred, which is different from costs
being reduced.
Question 55
1.C.2.l
1C3-LS51
LOS: 1.C.2.l
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
All of the following methods are helpful in measuring international business performance except:
total quality management.

balanced scorecard.
Correct

time series analysis.

Your Answer

activity-based costing.

Rationale
 total quality management.
This answer is incorrect. Total quality management would be helpful in measuring international business performance.

Rationale
 balanced scorecard.
This answer is incorrect. Balanced scorecard would be helpful in measuring international business performance.

Rationale
 time series analysis.
Measuring international business performance relies on the same principles as measuring domestic business performance. Time series analysis
relies on historical information, but cannot be relied on to predict present and future performance. Balanced scorecard, activity-based costing, and
total quality management are the three most widely used methods of measuring business performance.

Rationale
 activity-based costing.
This answer is incorrect. Activity-based costing would be helpful in measuring international business performance.
Question 56
1.C.2.i
tran.pri.tb.005_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2
Which of the following is an advantage of using the negotiated price model for determining transfer prices?
It allows for business units to retain the autonomy to make transfers as they see fit.
Correct

It can be used when no external market price exists for the product or service.

Tax authorities consider it to be the most objective way to determine transfer prices.
Your Answer

A company can use this method to encourage internal transfers when the seller has excess capacity.

Rationale
 It allows for business units to retain the autonomy to make transfers as they see fit.
This answer is incorrect. The market price model allows business units to retain the autonomy to make transfers as they see fit, not the negotiated
price model. Business units under the negotiated price model may lose some amount of autonomy as they are “forced” into an internal transfer
under negotiated transfer prices because although they have some influence over the price, they do not have influence over the decision
concerning whether the transfer should occur.

Rationale
 It can be used when no external market price exists for the product or service.
Under the negotiated price model, the internal buyer and seller negotiate a transfer price that satisfies both parties. An advantage of this method is
that it can be used when there is no external market price for the product or service.

Rationale
 Tax authorities consider it to be the most objective way to determine transfer prices.
This answer is incorrect. Tax authorities consider the market price model to be the most objective way to determine transfer prices, not the
negotiated price model.

Rationale
 A company can use this method to encourage internal transfers when the seller has excess capacity.
This answer is incorrect. Encouraging internal transfers when the seller has excess capacity is an advantage of the variable cost model because the
variable cost to produce a product or service is likely to be less than the market price.
Question 57
1.C.2.j
1C2-AT04d
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

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?

$20 is the only acceptable price.

Your Answer

$50 is the only acceptable price.

Correct

Between $20 and $50.

Any amount less than $50.

Rationale
 $20 is the only acceptable price.
This answer is incorrect. $20 is not the only acceptable price.

Rationale
 $50 is the only acceptable price.
This answer is incorrect. $50 is not the only acceptable price.

Rationale
 Between $20 and $50.
The Assembly Division can buy the item from the outside for $50. The $50 would be the ceiling, or maximum transfer price. The Fabricating Division
has excess capacity. It can make a contribution at any transfer price greater than its $20 unit variable costs. The $20, therefore, is the transfer price
floor, or minimum transfer price. The bargaining range would then be between $20 and $50.

Rationale
 Any amount less than $50.
This answer is incorrect. Not every amount less than $50 is in the natural bargaining range for the two divisions.
Question 58
1.C.2.j
tran.pri.tb.013_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
The battery division of Moto Motorcycles manufactures 200,000 motorcycle batteries each year and has enough capacity to manufacture up to 30,000
more. The division’s variable cost per battery is $40, and it sells the finished batteries to customers for $88 each. Moto’s management wants the battery
division to sell 25,000 batteries to the parts division at a transfer price based on the variable cost per battery. Currently, the parts division purchases its
batteries from an outside vendor at a cost of $52 each. Assuming the two divisions proceed with the transfer using this cost-based price, which of the
following statements is accurate?
The transfer will be profitable for the battery division and for Moto as a whole.
Correct

The transfer will be profitable for the parts division and for Moto as a whole.
Your Answer

The transfer will be unprofitable for the parts division and for Moto as a whole.

The transfer will be unprofitable for the battery division and for Moto as a whole.

Rationale
 The transfer will be profitable for the battery division and for Moto as a whole.
This answer is incorrect. The transfer has no impact on the battery division’s profitability since it has excess capacity and can fulfill the internal
order without impacting its business. The parts division will save $12 per unit from the transfer (paying $40 per unit instead of $52 per unit). This
means the transfer will not impact the profitability of the battery division but will be profitable for Moto as a whole.

Rationale
 The transfer will be profitable for the parts division and for Moto as a whole.
The transfer has no impact on the battery division’s profitability since it has excess capacity and can fulfill the internal order without impacting its
business. The parts division will save $12 per unit from the transfer (paying $40 per unit instead of $52 per unit). This is also the benefit for Moto as a
whole since the battery division has no opportunity cost from the transfer. This means the transfer will be profitable for both the parts division and
for Moto as a whole.

Rationale
 The transfer will be unprofitable for the parts division and for Moto as a whole.
This answer is incorrect. The parts division will save $12 per unit from the transfer (paying $40 per unit instead of $52 per unit). This is also the
benefit for Moto as a whole since the battery division has no opportunity cost from the transfer. This means the transfer will be profitable, not
unprofitable, for both the parts division and for Moto as a whole.

Rationale
 The transfer will be unprofitable for the battery division and for Moto as a whole.
This answer is incorrect. The transfer has no impact on the battery division’s profitability since it has excess capacity and can fulfill the internal
order without impacting its business. This means the transfer will not impact the profitability of the battery division and will be profitable for Moto
as a whole.
Question 59
1.C.2.h
1C2-LS18d
LOS: 1.C.2.h
Lesson Reference: Transfer Pricing
Difficulty: easy
Bloom Code: 2

All of the following are correct descriptions of transfer pricing except:

* Source: Retired ICMA CMA Exam Questions.

Correct

it measures exchanges between a company and external customers.

it measures the value of goods or services furnished by a profit center to other responsibility centers within a company.
Your Answer

if no market price exists, the transfer price may be based on cost.

if a market price exists, this price may be used as a transfer price.

Rationale
 it measures exchanges between a company and external customers.
Transfer pricing measures the value of goods or services furnished by a profit center to other responsibility centers within a company. These
transfer prices may be set at a market price, or some other price agreed to between the responsibility center managers.

Rationale
 it measures the value of goods or services furnished by a profit center to other responsibility centers within a company.
This answer is incorrect. “It measures the value of goods or services furnished by a profit center to other responsibility centers within a company” is
a correct description of transfer pricing.

Rationale
 if no market price exists, the transfer price may be based on cost.
This answer is incorrect. “If no market price exists, the transfer price may be based on cost” is a correct description of transfer pricing.

Rationale
 if a market price exists, this price may be used as a transfer price.
This answer is incorrect. “If a market price exists, this price may be used as a transfer price” is a correct description of transfer pricing.
Question 60
1.C.2.i
1C2-LS43
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3

Manhattan Corporation has several divisions that operate as decentralized profit centers. At the present time, the Fabrication Division has excess
capacity of 5,000 units with respect to the UT-371 circuit board, a popular item in many digital applications. Information about the circuit board follows.

Market price $48

Variable selling/distribution costs on external sales 5
Variable manufacturing cost 21
Fixed manufacturing cost 10

Manhattan's Electronic Assembly Division wants to purchase 4,500 circuit boards either internally, or else use a similar board in the marketplace that
sells for $46. The Electronic Assembly Division's management feels that if the first alternative is pursued, a price concession is justified, given that both
divisions are part of the same firm. The best process to determine the price ultimately charged by the Fabrication Division to the Assembly Division for
the circuit board is to:

* Source: Retired ICMA CMA Exam Questions.

establish the price by top management.

establish the price by an arbitration committee.

Correct

establish the price through negotiations between the Fabrication's and Electronic Assembly's Division management.

set the price equal to the price that would be charged if the Fabrication Department had no excess capacity.

Rationale
 establish the price by top management.
This answer is incorrect. The best process to determine the price ultimately charged by the Fabrication Division to the Assembly Division for the
circuit board is not to establish the price by top management.

Rationale
 establish the price by an arbitration committee.
This answer is incorrect. The best process to determine the price ultimately charged by the Fabrication Division to the Assembly Division for the
circuit board is not to establish the price by an arbitration committee.

Rationale
 establish the price through negotiations between the Fabrication's and Electronic Assembly's Division management.
When we deal with transfer pricing, the best process is to establish the price through negotiations between the both responsibility center's
management.

Rationale
 set the price equal to the price that would be charged if the Fabrication Department had no excess capacity.
This answer is incorrect. The best process to determine the price ultimately charged by the Fabrication Division to the Assembly Division for the
circuit board is not to set the price equal to the price that would be charged if the Fabrication Department had no excess capacity.
Question 61
1.C.2.j
tran.pri.tb.017_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

The media division of Dakota Biological Supply Company produces media for growing fungi, which can either be sold to the fungal division for growing
cultures or sold to outside entities. The cost sheet for pre-poured plates of potato dextrose agar, which are sold in 10 plate units, is as follows:

Direct material $ 3.75

Direct labor $ 6.50
Variable overhead $ 1.25
Fixed overhead $ 3.50
Selling price per 10 plates $25.00

The fungal division needs 10,000 plates of potato dextrose agar annually. Currently, the fungal division purchases them from Arizona Lab Supplies for
$25.00 for a unit of 10 plates because the media division has no excess capacity. However, recently the media division has lost a major customer and now
has the capacity to provide the plates. What would be the minimum transfer price per sleeve of 10 plates?

Correct

$11.50 per unit

$25.00 per unit

Your Answer

$10.00 per unit

$15.00 per unit

Rationale
 $11.50 per unit
The key to this situation is that there is excess capacity available in the media division. This means the media division will not incur an opportunity
cost by selling to the fungal division. In this situation, the minimum transfer price is the incremental costs of fulfilling the order. Variable
manufacturing costs are included in this figure while fixed manufacturing costs are not. Total variable manufacturing costs are $11.50 per sleeve
($3.75 + $6.50 + $1.25). This represents the minimum transfer price.

Rationale
 $25.00 per unit
This answer is incorrect. In this situation, the minimum transfer price is the incremental costs of fulfilling the order. Variable manufacturing costs
are included in this figure while fixed manufacturing costs are not. Total variable manufacturing costs are $11.50 per sleeve ($3.75 + $6.50 + $1.25). If
the media division did not have excess capacity available, it would need to add $13.50 to this to compensate for the lost contribution margin from
selling externally ($25.00 − $11.50). This would give a minimum transfer price of $25.00 per sleeve. However, there is excess capacity available.

Rationale
 $10.00 per unit
This answer is incorrect. The key to this situation is that there is excess capacity available in the media division. This means the media division will
not incur an opportunity cost by selling to the fungal division. In this situation, the minimum transfer price is the incremental costs of fulfilling the
order. The total cost per sleeve is $15.00 per unit. At a selling price of $25.00 per sleeve the profit is $10.00 per sleeve. However, this is not the same
as the minimum transfer price.

Rationale
 $15.00 per unit
This answer is incorrect. In this situation, the minimum transfer price is the incremental costs of fulfilling the order. Total variable manufacturing
costs are $11.50 per sleeve ($3.75 + $6.50 + $1.25). If the fixed costs are included, then the cost is $15.00 per sleeve. However, fixed costs should not
be included as these costs will be the same whether the transfer is completed or not. This means it is not an incremental cost of fulfilling the order.
Question 62
1.C.2.j
tran.pri.tb.018_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
Dripolator sells premium-roasted coffee beans. In addition to the roasting division, the company has a cupcake division that sells cupcakes and
beverages in retail outlets. The roasting division sells coffee beans at an average price of $5.75 per pound to external customers. Variable product costs
for a pound of roasted beans total $4.45 and variable selling and administrative costs are $0.80 per pound. Dripolator’s transfer price policy is to transfer
at a market-based price. Determine the transfer price.
$4.95 per pound

$4.45 per pound

Correct

$5.75 per pound

Your Answer

$5.25 per pound

Rationale
 $4.95 per pound
This answer is incorrect. The transfer price would be $4.95 per pound if the transfer price was set by deducting the variable selling and
administrative costs from the market price, but Dripolator’s transfer price policy is to transfer products at a market-based price.

Rationale
 $4.45 per pound
This answer is incorrect. The transfer price would be $4.45 per pound if the transfer price was based on variable production costs, but Dripolator’s
transfer price policy is to transfer products at a market-based price.

Rationale
 $5.75 per pound
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. Since Dripolator’s policy is to use market prices as the transfer price, the transfer price will be the market price of $5.75 per pound.

Rationale
 $5.25 per pound
This answer is incorrect. The transfer price would be $5.25 per pound if the transfer price was based on total variable costs, but Dripolator’s transfer
price policy is to transfer products at a market-based price.
Question 63
1.C.2.i
tran.pri.tb.004_0120
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4
Each of the following options represents an advantage of using the market price model for determining transfer prices, except:
Correct

A company can use this method to encourage internal transfers when the seller has excess capacity available.

It allows for business units to retain the autonomy to make transfers as they see fit.

It forces internal suppliers to be competitive with external suppliers.

Your Answer

Tax authorities consider it to be the most objective way to determine transfer prices.

Rationale
 A company can use this method to encourage internal transfers when the seller has excess capacity available.
If a company wants to encourage internal transfers when the seller has excess capacity available, it should set transfer prices with the variable cost
model instead of the market price model. Using the variable cost model reduces costs for the entire organization, encourages buyers to use an
internal supplier over an external supplier, and provides a way for the seller to utilize existing capacity.

Rationale
 It allows for business units to retain the autonomy to make transfers as they see fit.
This answer is incorrect. The market price model allows business units to retain autonomy as the transfer price is objectively set and buyers and
sellers are free to transact.

Rationale
 It forces internal suppliers to be competitive with external suppliers.
This answer is incorrect. The market price model forces internal suppliers to be competitive with external suppliers. If they are not competitive with
external suppliers, internal buyers will purchase from external suppliers at the lower market price rather than from internal suppliers.

Rationale
 Tax authorities consider it to be the most objective way to determine transfer prices.
This answer is incorrect. Tax authorities do consider the market price model to be the most objective way to determine transfer prices which means
they are more likely to accept market prices for transfer prices rather than prices determined under other methods.
Question 64
1.C.2.j
tran.pri.tb.023_0120
LOS: 1.C.2.j
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 4

The widgets division of Sprockets Inc., manufactures widgets and sells them to customers for $23 each. The cost breakdown for each widget is as follows:

Direct materials cost $5

Variable labor cost $4
Variable overhead cost $3
Fixed overhead cost $2

Sprockets’ CEO wants the widgets division to sell 15,000 widgets to another division within the company. If the widgets division sold internally, it could
cut its variable overhead by 60%. Assuming the widgets division is operating at full capacity, what would be the minimum transfer price per unit?

$19.20
Correct

$21.20

$10.20

$15.80

Rationale
 $19.20
This answer is incorrect. The transfer price would be $19.20 per unit if the minimum acceptable transfer price was calculated by subtracting the
fixed overhead cost and the variable overhead costs that the company would avoid by selling internally from the price that the widgets division
charges external customers ($23 − $2 – (3 × 60%)). This is not the correct calculation.

Rationale
 $21.20
When one part of an organization transfers a product or service to another part of the organization, the “price” used to value the transfer is called a
transfer price. For a seller operating at full capacity, the minimum acceptable transfer price is the sum of the variable costs incurred to fulfill the
order and the contribution margin lost from selling internally. The widgets division will incur net variable costs per unit of $10.20 if it sells internally
because the variable overhead will be reduced by 60% ($5 + $4 + $3.00 × (1 − 60%)) and it will give up $11 in contribution margin per unit ($23 −
$12); therefore, the minimum acceptable transfer price is $21.20 per unit ($10.20 + $11).

Rationale
 $10.20
This answer is incorrect. The transfer price would be $10.20 per unit if the minimum acceptable transfer price was calculated as the sum of the total
variable costs incurred to fulfill the order ($5 + $4 +$3 × (1 − 60%)). This is not the correct way to calculate the minimum transfer price because the
widgets division is operating at full capacity.

Rationale
 $15.80
This answer is incorrect. The transfer price would be $15.80 per unit if the total variable costs to produce the order was reduced by 60% ($23 – ($5 +
$4 + $3) × (1 − 60%)). Only the variable overhead would be reduced by 60% if the widgets division sold widgets internally.
Question 65
1.C.2.k
tran.pri.tb.026_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3
The Orange division’s unit sales price is $50, its unit variable cost is $30, and the fixed cost per unit is $16. Orange has enough capacity to produce 10,000
units and it is currently selling 8,000 units externally. If the Orange division sells 2,000 units to the Colter division, what is the opportunity cost per unit of
selling the product internally to the Orange division?
Correct

$0

$50

$4
Your Answer

$20

Rationale
 $0
An opportunity cost occurs for an internal seller when it must give up sales to external customers in order to fulfill an internal order. The
opportunity cost equals the contribution margin that could have been received from the external sale of the product. Since the Orange division has
excess capacity, it does not give up external sales to sell 2,000 units to the Colter division. This means the opportunity cost of selling to the Colter
division is $0 per unit.

Rationale
 $50
This answer is incorrect. An opportunity cost occurs for an internal seller when it must give up sales to external customers in order to fulfill an
internal order. The unit sales price of $50 does not equal the opportunity cost for the Orange division.

Rationale
 $4
This answer is incorrect. An opportunity cost occurs for an internal seller when it must give up sales to external customers in order to fulfill an
internal order. The Orange division’s net profit per unit sold externally equals $4 ($50 − $30 − $16), but this is not the same as the opportunity cost
from selling internally.

Rationale
 $20
This answer is incorrect. An opportunity cost occurs for an internal seller when it must give up sales to external customers in order to fulfill an
internal order. The Orange division’s opportunity cost of selling to the Colter division would be $20 per unit if it did not have excess capacity
available to fulfill the order because the contribution margin that could have been received from the external sale of the product equals $20 ($50 −
$30). However, the Orange division has access capacity.
Question 66
1.C.2.i
1C2-LS20
LOS: 1.C.2.i
Lesson Reference: Transfer Pricing
Difficulty: medium
Bloom Code: 3

Happy Time Industries uses segment reporting for all of its decentralized divisions. It has several products that are transferred from one division to other
divisions. Happy Time wants to motivate the manager of the selling division to produce efficiently. Assuming the following methods are available, the
optimal transfer pricing method should be a:

*Source: Retired ICMA CMA Exam Questions.

cost-based transfer price that uses budgeted amounts.

variable cost-based transfer price that uses actual amounts.

Correct

market-based transfer price.

cost-based transfer price that uses actual amounts.

Rationale
 cost-based transfer price that uses budgeted amounts.
This answer is incorrect. If Happy Time wants to motivate the manager of the selling division to produce efficiently, the optimal transfer pricing
method should not be a cost-based transfer price that uses budgeted amounts.

Rationale
 variable cost-based transfer price that uses actual amounts.
This answer is incorrect. If Happy Time wants to motivate the manager of the selling division to produce efficiently, the optimal transfer pricing
method should not be a variable cost-based transfer price that uses actual amounts.

Rationale
 market-based transfer price.
Correct! In this problem, given that Happy Time Industries has “decentralized divisions,” the optimal transfer pricing method to use is a market-
based transfer price.

Rationale
 cost-based transfer price that uses actual amounts.
This answer is incorrect. If Happy Time wants to motivate the manager of the selling division to produce efficiently, the optimal transfer pricing
method should not be a cost-based transfer price that uses actual amounts.
Question 67
1.C.2.k
tran.pri.tb.028_0120
LOS: 1.C.2.k
Lesson Reference: Transfer Pricing
Difficulty: hard
Bloom Code: 5
The brake division of Liberty Bicycles can manufacture 57,500 sets of brakes each year at capacity and the division currently produces 50,000 sets. The
division’s variable cost per brake set is $13.40, its fixed cost per set is $2.50, and it sells the finished sets to customers for $21.50 each. Liberty’s CEO wants
the brake division to sell 10,000 brake sets to the firm’s bike division at a transfer price based on the variable cost per set. Currently, the bike division
buys its brake sets from another vendor for $18.75 each. Assuming the two divisions proceed with the transfer using this cost-based price, what will
happen to Liberty’s bottom line?
It will increase by $39,500.
Correct

It will increase by $33,250.

Your Answer

It will decrease by $7,250.

It will increase by $13,000.

Rationale
 It will increase by $39,500.
This answer is incorrect. When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs
of fulfilling the order, but when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the
incremental costs to compensate for the opportunity cost of selling the products externally. Liberty Bicycles will not see a total increase of $39,500
as a result of this transfer.

Rationale
 It will increase by $33,250.
When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs of fulfilling the order, but
when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the incremental costs to
compensate for the opportunity cost of selling externally. The brake division has the capacity to produce 7,500 of the 10,000 needed brakes which
will save Liberty $5.35 per brake because it can purchase them for $13.40 per brake instead of $18.75 per brake for a total savings of $40,125. To
produce the remaining 2,500 units, the brake division will have to give up sales of 2,500 units. The net opportunity cost of selling 2,500 units
internally instead of externally is equal to the lost contribution margin minus the cost savings from selling internally. The lost contribution margin
equals $8.10 per unit ($21.50 − $13.40) and the cost savings equals $5.35 per unit ($18.75 − $13.40); therefore, the net opportunity cost equals
$6,875 (2,500 units × ($8.10 − $5.35)). The net result of this transfer to Liberty Bicycles is a savings of $33,250 ($40,125 − $6,875).

Rationale
 It will decrease by $7,250.
This answer is incorrect. When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs
of fulfilling the order, but when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the
incremental costs to compensate for the opportunity cost of selling the products externally. Liberty Bicycles will not see a total loss of $7,250 as a
result of the transfer.

Rationale
 It will increase by $13,000.
This answer is incorrect. When a provider has excess capacity to produce more units, the minimum transfer price is equal to the incremental costs
of fulfilling the order, but when a provider does not have excess capacity, the lost contribution margin from selling internally must be added to the
incremental costs to compensate for the opportunity cost of selling the products externally. Liberty Bicycles will not see a total increase of $13,000
as a result of the transfer.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.3.b
1C3-LS34
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3
A product profitability analysis includes in its analysis all of the following except:
Correct

per-unit fixed costs untraceable to the product line.

per-unit variable costs.

Your Answer

how the product line affects company strategy.

the opportunity cost of all lost sales for the product line.

Rationale
 per-unit fixed costs untraceable to the product line.
The per-unit fixed costs that would not disappear if the product line were discontinued are removed from the product profitability analysis.

Rationale
 per-unit variable costs.
This answer is incorrect. A product profitability analysis includes per-unit variable costs in its analysis.

Rationale
 how the product line affects company strategy.
This answer is incorrect. A product profitability analysis includes how the product line affects company strategy in its analysis.

Rationale
 the opportunity cost of all lost sales for the product line.
This answer is incorrect. A product profitability analysis includes the opportunity cost of all lost sales for the product line in its analysis.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.3.a
evalpr.cp.tb.001_0120
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 4
Each of the following statements concerning performance evaluation measures are correct, except:
Performance evaluation measures should directly relate to an organization’s goals and objectives.

Managers need to receive performance evaluation measures in a timely fashion.

Correct

Organizations in the same industry tend to use the same performance evaluation measures.

Organizations need performance evaluation measures to compare actual performance to expected performance.

Rationale
 Performance evaluation measures should directly relate to an organization’s goals and objectives.
This answer is incorrect. If performance evaluation measures are not directly related to goals and objectives, then they are not useful for evaluating
performance.

Rationale
 Managers need to receive performance evaluation measures in a timely fashion.
This answer is incorrect. If managers do not receive performance evaluation measures in a timely fashion, the measures will not be useful for
making necessary adjustments.

Rationale
 Organizations in the same industry tend to use the same performance evaluation measures.
Performance evaluation measures should be consistent with an organization’s goals and objectives. If an organization competes by having low
prices, its performance evaluation measures should focus on keeping costs low in order to deliver low prices. If another organization in the same
industry competes by having innovative products, having performance evaluation measures focusing on keeping costs low are not likely to be
useful. Organizations in the same industry do not always tend to use the same performance evaluation measures.

Rationale
 Organizations need performance evaluation measures to compare actual performance to expected performance.
This answer is incorrect. It is useful for organizations to see if they achieved their goals and performance evaluation measures are needed to do this.
Question 3
1.C.3.a
1D5-LS12
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3
Logical actions to determine best-in-class performance during a benchmarking study include:
determination of the desired state and identification of benchmarking partners.

identification of desired workflow process changes and collection of industry data.

Your Answer

review of core competencies and identification of desired workflow process changes.

Correct

agreement on a data-gathering method, identification of organizations to benchmark, and collection of data.

Rationale
 determination of the desired state and identification of benchmarking partners.
This answer is incorrect. Logical actions to determine best-in-class performance during a benchmarking study does not include determination of
the desired state and identification of benchmarking partners.

Rationale
 identification of desired workflow process changes and collection of industry data.
This answer is incorrect. Logical actions to determine best-in-class performance during a benchmarking study does not include identification of
desired workflow process changes and collection of industry data.

Rationale
 review of core competencies and identification of desired workflow process changes.
This answer is incorrect. Logical actions to determine best-in-class performance during a benchmarking study does not include review of core
competencies and identification of desired workflow process changes.

Rationale
 agreement on a data-gathering method, identification of organizations to benchmark, and collection of data.
Through benchmarking, a firm identifies best levels and conducts a benchmarking study to help define how those levels can be adopted to create
improved performance. Agreement on a data-gathering method, identification of organizations to benchmark, and collection of data are the logical
activities when attempting to identify best-in-class performance.
Question 4
1.C.3.c
evalpr.cp.tb.013_0120
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

The BNF Company has the following information for the current year:

Business Unit X Business Unit Y

Revenue $10,000,000 $20,000,000
Variable expenses $7,000,000 $11,000,000

In addition, BNF incurred $7,100,000 in fixed costs. Of this amount, $1,600,000 was directly traceable to Business Unit X, $3,500,000 was directly traceable
to Business Unit Y, and the remaining $2,000,000 was allocated equally between the two business units.

Based on this information, what is Business Unit X’s relevant contribution to BNF’s profitability?

$400,000
Correct

$1,400,000
Your Answer

$3,000,000

$5,500,000

Rationale
 $400,000
This answer is incorrect. A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Business Unit X’s operating income is $400,000 ($10,000,000 − $7,000,000 −
$1,600,000 − ($2,000,000 ÷ 2)). However, this is not the correct measure of a business unit’s relevant contribution to company profitability.

Rationale
 $1,400,000
A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution
margin less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company
would avoid (save) if it discontinued the business unit. In this problem, Business Unit X’s contribution margin equals $3,000,000 ($10,000,000 −
$7,000,000) and $1,600,000 of the total fixed costs are directly traceable to Business Unit X. As a result, Business Unit X’s relevant contribution is
$1,400,000 ($3,000,000 − $1,600,000).

Rationale
 $3,000,000
This answer is incorrect. A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Business Unit X’s contribution margin is $3,000,000 ($10,000,000 − $7,000,000).
However, this is not the correct measure of a business unit’s relevant contribution to company profitability.

Rationale
 $5,500,000
This answer is incorrect. A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Business Unit Y’s relevant contribution to BNF’s profitability is $5,500,000
($20,000,000 − $11,000,000 − $3,500,000). However, this question asks about Business Unit X’s relevant contribution.
Question 5
1.C.3.d
evalpr.cp.tb.017_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4

The DAN Company has the following information for the current year:

Product CTN Product DTG

Revenue $2,000,000 $2,500,000
Variable expenses $1,200,000 $1,500,000
Contribution margin $800,000 $1,000,000
Fixed expenses $550,000 $850,000
Operating income $250,000 $150,000

Further analysis indicates that of the fixed expenses listed here, common fixed costs of $300,000 were allocated to CTN and $450,000 were allocated to
DTG. Based on this information, what would be the impact on DAN’s operating income if it dropped CTN?

Correct

Operating income would decrease by $550,000.

Operating income would decrease by $250,000.

Your Answer

Operating income would decrease by $800,000.

Operating income would decrease by $600,000.

Rationale
 Operating income would decrease by $550,000.
A product’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it discontinued the product. In this problem, Product CTN’s relevant contribution is $550,000 ($800,000 − ($550,000 − $300,000)). As a
result, DAN’s operating income would decrease by $550,000 if it dropped Product CTN.

Rationale
 Operating income would decrease by $250,000.
This answer is incorrect. Because DAN would not avoid all the costs associated with Product CTN if it is dropped, DAN’s operating income would not
decrease by CTN’s operating income of $250,000 if the product is dropped.

Rationale
 Operating income would decrease by $800,000.
This answer is incorrect. DAN’s operating income would not decrease by Product CTN’s contribution margin of $800,000 if it dropped CTN since this
does not take into consideration the fixed costs that would be avoided.

Rationale
 Operating income would decrease by $600,000.
This answer is incorrect. A product’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as
the contribution margin less the traceable fixed costs. DAN’s operating income would decrease by $600,000 if it dropped Product DTG because
DTG’s controllable margin equals $600,000 ($1,000,000 − ($850,000 − $450,000)). However, this question asks about the impact that dropping
Product CTN would have on DAN’s operating income.
Question 6
1.C.3.c
evalpr.cp.tb.012_0120
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

The CAF Company has the following information for the current year:

Business Unit 1 Business Unit 2

Revenue $6,500,000 $10,000,000
Variable expenses $3,400,000 $5,400,000

In addition, CAF incurred $5,900,000 in fixed costs. Of this amount, $1,900,000 was directly traceable to Business Unit 1, $2,600,000 was directly traceable
to Business Unit 2, and the remaining $1,400,000 was allocated equally between the two business units.

Based on this information, what is Business Unit 1’s relevant contribution to CAF’s profitability?

$500,000

$3,100,000
Correct

$1,200,000

$2,000,000

Rationale
 $500,000
This answer is incorrect. A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Business Unit 1’s operating income is $200,000 ($6,500,000 − $3,400,000 −
$1,900,000 − ($1,400,000 ÷ 2)). This is not the correct measure of a business unit’s relevant contribution to company profitability.

Rationale
 $3,100,000
This answer is incorrect. A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Business Unit 1’s contribution margin is $3,100,000 ($6,500,000 − $3,400,000). This
is not the correct measure of a business unit’s relevant contribution to company profitability.

Rationale
 $1,200,000
A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution
margin less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company
would avoid (save) if it discontinued the business unit. In this problem, Business Unit 1’s contribution margin equals $3,100,000 ($6,500,000 −
$3,400,000) and $1,900,000 of the total fixed costs are directly traceable to Business Unit 1. As a result, Business Unit 1’s relevant contribution is
$1,200,000 ($3,100,000 − $1,900,000).

Rationale
 $2,000,000
This answer is incorrect. A business unit’s relevant contribution to company profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Business Unit 2’s relevant contribution to CAF’s profitability is $2,000,000
($10,000,000 − $5,400,000 − $2,600,000). However, the question asks about Business Unit 1’s relevant contribution.
Question 7
1.C.3.a
evalpr.cp.tb.002_0120
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 1
Which of the following is an example of receiving timely performance evaluation measures?
Your Answer

A production manager receives a report detailing production problems after 100% of a newly purchased material is used.
Correct

A production manager receives a report detailing production problems after 10% of a newly purchased material is used.

A production manager receives a report detailing production problems that could occur if a new material is used.

A production manager receives a report detailing production problems that occurred when a competitor used a new material.

Rationale
 A production manager receives a report detailing production problems after 100% of a newly purchased material is used.
This answer is incorrect. Receiving information after all the newly purchased material is used leaves no time to take corrective action to address the
production problems.

Rationale
 A production manager receives a report detailing production problems after 10% of a newly purchased material is used.
If managers do not receive performance evaluation measures in a timely fashion, the measures will not be useful for making necessary
adjustments. Receiving information about production problems after 10% of a newly purchased material is used is an example of a timely
evaluation measure as there is plenty of time for managers to take corrective action to address the production problems.

Rationale
 A production manager receives a report detailing production problems that could occur if a new material is used.
This answer is incorrect. Information about problems that could occur is not a performance evaluation measure.

Rationale
 A production manager receives a report detailing production problems that occurred when a competitor used a new material.
This answer is incorrect. Information about problems that occurred at a competitor is not a performance evaluation measure.
Question 8
1.C.3.a
1D5-LS14
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 1
Noncompetitive firms providing information to other companies about the processes they excel in is an example of:
reengineering.

value chain analysis.

Correct

benchmarking.
Your Answer

process analysis.

Rationale
 reengineering.
This answer is incorrect. Noncompetitive firms providing information to other companies about the processes they excel in is not an example of
reengineering.

Rationale
 value chain analysis.
This answer is incorrect. Noncompetitive firms providing information to other companies about the processes they excel in is not an example of
value chain analysis.

Rationale
 benchmarking.
By definition, benchmarking is used to describe the continuous systematic process of measuring products, services, and practices against the best
levels of performance. Benchmarking may capture "best-in-class" information or involve comparisons to external benchmarks of industry leaders
or measures from other organizations (outside an industry) that have similar processes.

Rationale
 process analysis.
This answer is incorrect. Noncompetitive firms providing information to other companies about the processes they excel in is not an example of
process analysis.
Question 9
1.C.3.d
evalpr.cp.tb.019_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4

The AML Company has the following information for the current year:

Customer 678 Customer 567

Revenue $1,800,000 $3,000,000
Variable expenses $1,200,000 $1,600,000
Contribution margin $600,000 $1,400,000
Fixed expenses $1,000,000 $1,150,000
Operating income ($400,000) $250,000

Further analysis indicates that of the fixed expenses listed here, common fixed costs of $300,000 were allocated to each product. Based on this
information, what would be the impact on AML’s operating income if it dropped Customer 678?

Your Answer

Operating income would increase by $400,000.

Operating income would decrease by $600,000.

Correct

Operating income would increase by $100,000.

Operating income would decrease by $550,000.

Rationale
 Operating income would increase by $400,000.
This answer is incorrect. Because AML would not avoid all the costs associated with Customer 678 if it is dropped, AML’s operating income would
not increase by 678’s operating loss of $400,000 if the customer is dropped.

Rationale
 Operating income would decrease by $600,000.
This answer is incorrect. AML’s operating income would not decrease by Customer 678’s contribution margin of $600,000 if it dropped 678 since this
does not take into consideration the fixed costs that would be avoided.

Rationale
 Operating income would increase by $100,000.
A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it dropped the customer. In this problem, Customer 678’s relevant contribution is a loss of $100,000 ($600,000 − ($1,000,000 −
$300,000)). As a result, AML’s operating income would increase by $100,000 if it dropped Customer 678.

Rationale
 Operating income would decrease by $550,000.
This answer is incorrect. A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined
as the contribution margin less the traceable fixed costs. AML’s operating income would decrease by $550,000 if it dropped Customer 567 because
567’s controllable margin equals $550,000 ($1,400,000 − ($1,150,000 − $300,000)). However, this question asks about the impact that dropping
Customer 678 would have on AML’s operating income.
Question 10
1.C.3.a
aq.evalpr.cp.009_0820
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3
All of the following are important principles in planning, controlling, and evaluating performance evaluation measures that are directly related to
strategic and operational goals and objectives except:
Correct

As long as it is in place, the amount of the incentive connected to a performance measure is not important.

The right performance measures must be incentivized so employees will be working to accomplish the true strategic and operational goals of the
company.
Your Answer

Strategy is constantly evolving and, therefore, performance measures in the organization need to constantly evolve as well if they are to be clearly
tied to strategic outcomes.

The responsibility and decision rights to accomplish the performance measure must be assigned.

Rationale
 As long as it is in place, the amount of the incentive connected to a performance measure is not important.
Getting the incentives to function well is a challenging aspect of balancing performance measurement processes. Too much incentive on any one
measure can result in hyperfocus, even potentially fraudulent behavior, in one area of the organization's strategy. And of course, not enough
incentive leaves other aspects of the strategy underachieved.

Rationale
 The right performance measures must be incentivized so employees will be working to accomplish the true strategic and operational
goals of the company.
This is an important principle in planning, controlling, and evaluating performance evaluation measures. Hence, this answer is incorrect.
Compensation and incentives need to be clearly tied to achieving performance measures; otherwise, employees will never be energized to
accomplish work that is strategically critical to the organization.

Rationale
 Strategy is constantly evolving and, therefore, performance measures in the organization need to constantly evolve as well if they are
to be clearly tied to strategic outcomes.
This is an important principle in planning, controlling, and evaluating performance evaluation measures. Hence, this answer is incorrect.
Performance measures must be designed to represent the strategic objectives of the organization. Strategy is constantly evolving and, therefore,
performance measures in the organization need to constantly evolve as well if they are to be clearly tied to strategic outcomes.

Rationale
 The responsibility and decision rights to accomplish the performance measure must be assigned.
This is an important principle in planning, controlling, and evaluating performance evaluation measures. Hence, this answer is incorrect.
Frustration is the natural result of not delegating the proper authority to get the assigned job done. The complication in this principle is based in
the reality of complex bureaucracy in large organizations. Strategic goals require multiple people and processes. It's difficult to identify and
incentivize strategically-aligned performance measures that don't require the efforts of multiple teams. In that interrelated structure, it's difficult to
identify which individuals are solely responsible for what aspects of each performance target.
Question 11
1.C.3.a
aq.evalpr.cp.002_0820
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 2
Customer relationship management (CRM) costs include all of the following except:
Ordering processes and change orders
Correct

Security and supervision in the production warehouse

Your Answer

Discounting, private labeling, and special packaging

Warehousing, showrooms, and online shopping

Rationale
 Ordering processes and change orders
Ordering processes and change orders are actually CRM-type costs.

Rationale
 Security and supervision in the production warehouse
Security and supervision in the production warehouse are manufacturing overhead costs that are not involved in customer relationship
management. CRM costs are “downstream” from the production process and include all aspects or processes involved in supporting the customers’
buying and product use experience.

Rationale
 Discounting, private labeling, and special packaging
Discounting, private labeling, and special packaging are actually CRM-type costs.

Rationale
 Warehousing, showrooms, and online shopping
Warehousing, showrooms, and online shopping are actually CRM-type costs.
Question 12
1.C.3.a
1D5-LS10
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 1
Analyzing how an industry partner has been successful with an innovative employee recognition program typifies a step in:
kaizen.
Correct

benchmarking.

process reengineering.
Your Answer

value chain analysis.

Rationale
 kaizen.
This answer is incorrect. Analyzing how an industry partner has been successful with an innovative employee recognition program does not typify a
step in kaizen.

Rationale
 benchmarking.
Identifying innovative ideas and concepts or program characteristics of another business' efforts typifies benchmarking. Metric for best levels in
benchmarking may be financial or nonfinancial measures.

Rationale
 process reengineering.
This answer is incorrect. Analyzing how an industry partner has been successful with an innovative employee recognition program does not typify a
step in process reengineering.

Rationale
 value chain analysis.
This answer is incorrect. Analyzing how an industry partner has been successful with an innovative employee recognition program does not typify a
step in value chain analysis.
Question 13
1.C.3.d
cma11.p1.t1.me.0053_0820
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: hard
Bloom Code: 6

A company has divided its customers into two groups. Group 1 consists of 20% of the company's most loyal and reliable customers. Group 2 consists of
80% of the company's customers who are either small customers or larger customers who order small quantities to test the product before placing larger
orders. The most recent results are shown below.

Group 1 Group 2
Sales $7,500,000 $2,000,000
Sales discounts 375,000 0
Cost of sales 5,250,000 1,400,000
Order processing 40,000 150,000
Delivery 120,000 500,000
Income (loss) $1,715,000 $(50,000)

The best way for the company to improve profitability is to

*Source: Retired ICMA CMA Exam Questions.

Correct

charge a separate fee for the delivery of small quantities.

discontinue sales to Group 2 customers.

eliminate discounts for Group 1 customers.

raise the selling price of the product.

Rationale
 charge a separate fee for the delivery of small quantities.
Charging a separate free for the delivery of small quantities would be the most effective way for the company to improve profitability. This decision
would affect only Group 2 customers, not Group 1 customers, who currently are the most profitable.

Rationale
 discontinue sales to Group 2 customers.
This answer is incorrect. Discontinuing sales to Group 2 customers would not be advisable, as Group 2 consists of the majority of the company's
customers, who could become more profitable and loyal customers.

Rationale
 eliminate discounts for Group 1 customers.
This answer is incorrect. Eliminating discounts for Group 1 customers would not be the best way for the company to improve profitability, as Group
1 customers are the most profitable and loyal. Reducing incentives to this group would hurt profits.

Rationale
 raise the selling price of the product.
This answer is incorrect. Raising the selling price would not improve profitability. It would hurt sales to Group 1 customers, who are the most
profitable.
Question 14
1.C.3.b
1C3-AT17
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3
Generally, the most appropriate basis on which to evaluate the performance of a division manager is the division's:
net revenue less variable division costs.
Correct

net revenue less controllable division costs.

Your Answer

net income less the division's fixed costs.

contribution margin.

Rationale
 net revenue less variable division costs.
This answer is incorrect. Generally, the most appropriate basis on which to evaluate the performance of a division manager is not the division's net
revenue less variable division costs.

Rationale
 net revenue less controllable division costs.
Responsibility accounting involves holding managers responsible for only those things under their discretion and control, such as net revenue and
controllable division costs.

Rationale
 net income less the division's fixed costs.
This answer is incorrect. Generally, the most appropriate basis on which to evaluate the performance of a division manager is not the division's net
income less the division's fixed costs.

Rationale
 contribution margin.
This answer is incorrect. Generally, the most appropriate basis on which to evaluate the performance of a division manager is not the division's
contribution margin.
Question 15
1.C.3.b
evalpr.cp.tb.007_0120
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Each of the following statements represents a goal of customer profitability analysis, except:
Determining the profitability of individual customers.

Determining the cost of providing goods and services to customers.

Your Answer

Determining the profitability of customer segments.

Correct

Determining the best customer management software to purchase.

Rationale
 Determining the profitability of individual customers.
This answer is incorrect. Customer profitability analysis does involve determining the profitability of individual customers.

Rationale
 Determining the cost of providing goods and services to customers.
This answer is incorrect. Customer profitability analysis involves determining the profitability of individual customers or customer segments. In
order to determine that, it is necessary to determine the cost of providing goods and services to customers.

Rationale
 Determining the profitability of customer segments.
This answer is incorrect. Customer profitability analysis does involve determining the profitability of individual customers or customer segments.

Rationale
 Determining the best customer management software to purchase.
While customer management software may be used as part of the customer profitability analysis process, determining the best customer
management software to purchase is not a goal of customer profitability analysis.
Question 16
1.C.3.b
evalpr.cp.tb.004_0120
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Each of the following statements concerning a product’s profitability and viability analysis are true, except:
Variable costs are always relevant costs.

Fixed costs that are traceable to the product are relevant costs.
Correct

Common costs allocated to the product are relevant costs.

Your Answer

The impact on sales of other products should be considered in this analysis.

Rationale
 Variable costs are always relevant costs.
This answer is incorrect. Variable costs are always relevant costs since they will be avoided (saved) if the product is discontinued.

Rationale
 Fixed costs that are traceable to the product are relevant costs.
This answer is incorrect. A fixed cost traceable to a product is a relevant cost since it will be avoided (saved) if the product is discontinued.

Rationale
 Common costs allocated to the product are relevant costs.
When analyzing a product’s profitability and viability, costs that will be avoided (saved) if the product is discontinued are relevant and costs that
will not be avoided are not relevant to the analysis. Common costs that are allocated to a product are not relevant because they will not be avoided
if the product is discontinued and the remaining products will absorb those costs.

Rationale
 The impact on sales of other products should be considered in this analysis.
This answer is incorrect. Dropping a product could decrease sales of complementary products or increase sales of substitute products which means
the impact on sales of other products should be considered in a product profitability analysis.
Question 17
1.C.3.c
aq.evalpr.cp.006_1807
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4

A company is calculating the profitability of two customers and has provided the following information.

Relevant Information
Customer A Customer B
Revenues $20,000 $25,000
Direct product costs (DM and DL) $15,000 $20,000
Sales representatives 30 hours 50 hours
Production line supervisor 40 hours 50 hours
Delivery costs $2,000 $3,000

Sales representatives are paid $22 per hour

The production line supervisor is paid $18 per hour
Employee benefits and human resource services amount to 40% of hourly wages

Based on the information provided, what customer is reducing overall profit for the company?

Customer A
Correct

Customer B

Both Customer A & B

Neither

Rationale
 Customer A
This answer is incorrect. After considering all applicable costs, Customer A is not reducing overall profit.

Rationale
 Customer B

See the profitability report for the calculation of customer profitability.

Computation of sales representative costs, including benefits and HR services:

Customer A: 30 hours × $22 × 140% = $924

Customer B: 50 hours × $22 × 140% = $1,540

Computation of production line supervisor costs, including benefits and HR services:

Customer A: 40 hours × $18 × 140% = $1,008

Customer B: 50 hours × $18 × 140% = $1,260

Profitability Report
Customer A Customer B
Revenues $20,000 $25,000
Direct product costs (DM and DL) (15,000) (20,000)
Sales representatives (924) (1,540)
Production line supervisor (1,008) (1,260)
Delivery costs (2,000) (3,000)
Customer Profitability $1,068 ($800)

Based on the above profitability calculation, Customer B is reducing overall profit for the company.

Rationale
 Both Customer A & B
This answer is incorrect. After considering all applicable costs, one of the customers is increasing overall profit for the company.
Rationale
 Neither
This answer is incorrect. After considering all applicable costs, one of the customers is unprofitable.
Question 18
1.C.3.b
1C3-LS02d
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 2
The two key components of a customer profitability analysis are:
Correct

revenue analysis and cost analysis.

cost activities and cost drivers.

unit level costs and batch-level costs.

Your Answer

total sales and net sales.

Rationale
 revenue analysis and cost analysis.
By definition, a customer profitability analysis traces and reports customer revenues and costs; it enables a firm to determine the profitability (or
unprofitability) of specific customers and provides data needed to improve profits. The two key components of a customer profitability analysis are
revenue analysis and cost analysis.

Rationale
 cost activities and cost drivers.
This answer is incorrect. The two key components of a customer profitability analysis are not cost activities and cost drivers.

Rationale
 unit level costs and batch-level costs.
This answer is incorrect. The two key components of a customer profitability analysis are not unit level costs and batch-level costs.

Rationale
 total sales and net sales.
This answer is incorrect. The two key components of a customer profitability analysis are not total sales and net sales.
Question 19
1.C.3.d
evalpr.cp.tb.014_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Each of the following statements illustrates a correct use of customer profitability information, except:
Deciding whether to drop a customer.

Deciding how much to charge for services such as customized delivery.

Your Answer

Deciding which types of customers to target to improve profitability.

Correct

Deciding how to allocate customer service costs to individual customers.

Rationale
 Deciding whether to drop a customer.
This answer is incorrect. Deciding whether to drop a customer involves customer profitability information as the decision is at least partially based
on the customer’s profitability.

Rationale
 Deciding how much to charge for services such as customized delivery.
This answer is incorrect. Deciding how much to charge for services such as customized delivery involves customer profitability information as a
good customer profitability system provides estimates of how much the organization pays to provide these services.

Rationale
 Deciding which types of customers to target to improve profitability.
This answer is incorrect. Deciding which types of customers to target to improve profitability involves customer profitability information as a good
customer profitability system provides information on the profitability of different customer types.

Rationale
 Deciding how to allocate customer service costs to individual customers.
Customer profitability analysis involves determining the profitability of individual customers or customer segments and determining the cost of
providing goods and services to customers. Allocating customer service costs to individual customers is one component of determining customer
profitability, not a use of customer profitability information.
Question 20
1.C.3.c
evalpr.cp.tb.009_0120
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

The KOP Company has the following information for the current year:

Product LMK Product HGY

Revenue $4,000,000 $4,500,000
Variable expenses $1,600,000 $1,900,000

In addition, KOP incurred $3,750,000 in fixed costs. Of this amount, $1,000,000 was to advertise LMK, $1,500,000 was to advertise HGY, $200,000 was the
salary for LMK’s product line manager, $250,000 was the salary for HGY’s product line manager, and the remaining $800,000 was allocated equally
between the two products.

Based on this information, what is LMK’s relevant contribution to KOP’s profitability?

Correct

$1,200,000
Your Answer

$800,000

$2,400,000

$850,000

Rationale
 $1,200,000
A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is defined as the contribution
margin less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company
would avoid (save) if it discontinued the product. In this problem, the advertising expense for each product and the salary for each product’s
manager are traceable fixed expenses. Product LMK’s contribution margin is $2,400,000 ($4,000,000 − $1,600,000). As a result, LMK’s relevant
contribution equals $1,200,000 ($2,400,000 − $1,000,000 − $200,000).

Rationale
 $800,000
This answer is incorrect. A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin. LMK’s operating
income is $800,000 ($4,000,000 − $1,600,000 − $1,000,000 − $200,000 − ($800,000 ÷ 2)). However, this is not the correct measure of the product’s
relevant contribution to company profitability.

Rationale
 $2,400,000
This answer is incorrect. A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin. LMK’s
contribution margin equals $2,400,000 ($4,000,000 − $1,600,000). However, this is not the correct measure of a product’s relevant contribution to
company profitability.

Rationale
 $850,000
This answer is incorrect. A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is defined
as the contribution margin less the traceable fixed costs. HGY’s relevant contribution to KOP’s profitability is $850,000 ($4,500,000 − $1,900,000 −
$1,500,000 − $250,000). However, this question asks about Product LMK’s relevant contribution.
Question 21
1.C.3.d
evalpr.cp.tb.021_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
A company determines that one of its product lines is currently unprofitable before common costs are allocated to any of the product lines. Each of the
following actions is likely to improve the company’s profitability, except:
Increasing marketing costs to improve the product’s image in the marketplace.
Correct

Changing how it allocates common costs to products.

Your Answer

Dropping the product line.

Outsourcing the production of a component at a lower cost than the internal supplier provides it for.

Rationale
 Increasing marketing costs to improve the product’s image in the marketplace.
This answer is incorrect. Increasing marketing costs to improve a product’s image in the marketplace could improve profitability if the increase in
sales outweighs the increase in marketing costs.

Rationale
 Changing how it allocates common costs to products.
There are a number of steps a company can take to improve profitability when a product line is unprofitable, but changing how a company
allocates common costs to products is not one of them. This action does not change the total costs because costs are only “moved” from one
product to another. In addition, this product is unprofitable before even considering common costs.

Rationale
 Dropping the product line.
This answer is incorrect. Dropping the product line is likely to improve profitability since the product is unprofitable when only its avoidable costs
are included.

Rationale
 Outsourcing the production of a component at a lower cost than the internal supplier provides it for.
This answer is incorrect. Outsourcing the production of a component at a lower cost than the internal supplier provides it for is likely to improve
profitability since the total costs are likely to decrease.
Question 22
1.C.3.d
evalpr.cp.tb.018_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4

The LKO Company has the following information for the current year:

Customer YYY Customer ZZZ

Revenue $3,000,000 $4,000,000
Variable expenses $1,800,000 $1,500,000
Contribution margin $1,200,000 $2,500,000
Fixed expenses $1,400,000 $1,800,000
Operating income ($200,000) $700,000

Further analysis indicates that of the fixed expenses listed here, common fixed costs of $600,000 were allocated to each product. Based on this
information, what would be the impact on LKO’s operating income if it dropped Customer YYY?

Operating income would increase by $200,000.

Your Answer

Operating income would decrease by $1,200,000.

Correct

Operating income would decrease by $400,000.

Operating income would decrease by $1,300,000.

Rationale
 Operating income would increase by $200,000.
This answer is incorrect. Because LKO would not avoid all the costs associated with Customer YYY if it is dropped, LKO’s operating income would
not increase by YYY’s operating loss of $200,000 if the customer is dropped.

Rationale
 Operating income would decrease by $1,200,000.
This answer is incorrect. LKO’s operating income would not decrease by Customer YYY’s contribution margin of $1,200,000 if it dropped YYY since
this does not take into consideration the fixed costs that would be avoided.

Rationale
 Operating income would decrease by $400,000.
A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it dropped the customer. In this problem, Customer YYY’s relevant contribution is $400,000 ($1,200,000 − ($1,400,000 − $600,000)). As
a result, LKO’s operating income would decrease by $400,000 if it dropped Customer YYY.

Rationale
 Operating income would decrease by $1,300,000.
This answer is incorrect. A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined
as the contribution margin less the traceable fixed costs. LKO’s operating income would decrease by $1,300,000 if it dropped Customer ZZZ
because ZZZ’s controllable margin equals $1,300,000 ($2,500,000 − ($1,800,000 − $600,000)). However, this question asks about the impact that
dropping Customer YYY would have on LKO’s operating income.
Question 23
1.C.3.c
evalpr.cp.tb.010_0120
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

The TYU Company has the following information for the current year:

Customer 123 Customer 456

Revenue $2,000,000 $2,500,000
Variable expenses $800,000 $1,100,000
Units sold 20,000 5,000
Orders placed 20 100

TYU’s activity-based costing system determined that each unit sold results in overhead costs of $20 per unit and each order placed results in overhead
costs of $2,000 per order. TYU allocates an additional $1,000,000 in common overhead cost equally between the two customers.

Based on this information, what is Customer 123’s relevant contribution to TYU’s profitability?

Correct

$760,000

$260,000

$1,200,000

$1,100,000

Rationale
 $760,000
A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it stopped providing services to the customer. In this problem, Customer 123’s contribution margin equals $1,200,000 ($2,000,000 −
$800,000) and the traceable fixed costs are comprised of $400,000 in unit-related overhead costs ($20 × 20,000 units sold) and $40,000 in order-
related overhead costs ($2,000 × 20 orders placed). As a result, Customer 123’s relevant contribution is $760,000 ($1,200,000 − $400,000 − $40,000).

Rationale
 $260,000
This answer is incorrect. A customer’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Customer 123’s operating income is $260,000 ($2,000,000 − $800,000 − ($20 ×
20,000 units sold) − ($2,000 × 20 orders placed) − ($1,000,000 ÷ 2)). However, this is not the correct measure of a customer’s relevant contribution to
company profitability.

Rationale
 $1,200,000
This answer is incorrect. A customer’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Customer 123’s contribution margin is $1,200,000 ($2,000,000 − $800,000).
However, this is not the correct measure of a customer’s relevant contribution to company profitability.

Rationale
 $1,100,000
This answer is incorrect. A customer’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Customer 456’s relevant contribution to TYU’s profitability is $1,100,000
($2,500,000 − $1,100,000 − ($20 × 5,000 units sold) − ($2,000 × 100 orders placed)). However, this question asks about Customer 123’s relevant
contribution.
Question 24
1.C.3.a
aq.evalpr.cp.011_0820
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 2
Which of the following would improve the performance evaluation process?
Adoption of a nonparticipative approach

Emphasis on trait-type evaluation

Comparison of actual period results to prior period results

Correct

Evaluation based mainly on controllable costs

Rationale
 Adoption of a nonparticipative approach
This answer is incorrect. Adoption of a nonparticipative approach would not improve the performance evaluation process. Participative
approaches improve evaluation processes by involving all employees.

Rationale
 Emphasis on trait-type evaluation
This answer is incorrect. Emphasis on trait-type evaluation would not improve the performance evaluation process.

Rationale
 Comparison of actual period results to prior period results
This answer is incorrect. Comparison of actual period results to prior period results would not improve the performance evaluation process.

Rationale
 Evaluation based mainly on controllable costs
An evaluation of a manager's performance is most accurate when it considers only those factors that she or he could influence. Further, this
approach avoids the frustration that managers experience when evaluated on factors they cannot control.
Question 25
1.C.3.d
1C3-LS35
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
A toy company has four product lines: stuffed animals, with a contribution margin of $200,000, balls, with a contribution margin of $50,000, action
figures, with a contribution margin of $70,000, and plastic horses, with a contribution margin of $130,000. The company has $100,000 in untraceable
fixed costs and $400,000 in fixed costs for advertising that can be traced to each of the four departments (40% to stuffed animals, 10% to balls, 20% to
action figures, and 30% to plastic horses). Which of the following product lines would most likely be discontinued based on a product profitability
analysis?
Balls

Stuffed animals
Correct

Action figures

Plastic horses

Rationale
 Balls
This answer is incorrect. Based on the information provided and the calculation of the product profitability analysis, the balls product line would
not be discontinued.

Rationale
 Stuffed animals
This answer is incorrect. Based on the information provided and the calculation of the product profitability analysis, the stuffed animals product
line would not be discontinued.

Rationale
 Action figures
The product profitability analysis does not include untraceable fixed costs. Contribution after all relevant costs equals $40,000 for stuffed animals
[$200,000 − ($400,000 × 0.4)], $10,000 for balls, −$10,000 for action figures, and $10,000 for plastic horses. Therefore, action figures are the most
likely to be discontinued.

Rationale
 Plastic horses
This answer is incorrect. Based on the information provided and the calculation of the product profitability analysis, the plastic horses product line
would not be discontinued.
Question 26
1.C.3.a
aq.evalpr.cp.003_1807
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 2
Which of the following would improve the performance evaluation process?
Adoption of a nonparticipative approach

Emphasis on trait-type evaluation

Your Answer

Comparison of actual period results to prior period results

Correct

Evaluation based mainly on controllable costs

Rationale
 Adoption of a nonparticipative approach
This answer is incorrect. Adoption of a nonparticipative approach would not improve the performance evaluation process. Participative
approaches improve evaluation processes by involving all employees.

Rationale
 Emphasis on trait-type evaluation
This answer is incorrect. Emphasis on trait-type evaluation would not improve the performance evaluation process.

Rationale
 Comparison of actual period results to prior period results
This answer is incorrect. Comparison of actual period results to prior period results would not improve the performance evaluation process.

Rationale
 Evaluation based mainly on controllable costs
An evaluation of a manager's performance is most accurate when it considers only those factors that she or he could influence. Further, this
approach avoids the frustration that managers experience when evaluated on factors they cannot control.
Question 27
1.C.3.a
aq.evalpr.cp.010_0820
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 2
Which of the following describes the danger of measurement surrogation?
Correct

Managers focus too much on a particular measure and start making decisions strictly to move up that measure.

Employees choose surrogate measures instead of the performance measures that management put in place.

Employees do not focus on a particular measure enough, and their decisions neglect moving up that measure.

Managers focus too much on a particular strategic objective and start making decisions strictly to accomplish that objective.

Rationale
 Managers focus too much on a particular measure and start making decisions strictly to move up that measure.
Measures function as imperfect surrogates (or representatives) for the actual strategic objective in the organization. The measurement for
operating profits on the income statement represents profitability as a strategic goal for the organization, but operating profits in any one
operating period is not the actual strategic objective. If managers focus too much on this particular measure, they start making decisions strictly to
move up that measure, regardless of possible negative effects on the long-term profitability of the organization, which is truly the strategic
objective. This mistake is called measurement surrogation. Too much focus on reducing reported costs and increasing reported revenues can lead
to a loss of focus on sustainable cost drivers and quality revenue drivers.

Rationale
 Employees choose surrogate measures instead of the performance measures that management put in place.
This answer is incorrect. Employees choosing surrogate measures instead of the performance measures that management put in place does not
describe the danger of measurement surrogation.

Rationale
 Employees do not focus on a particular measure enough, and their decisions neglect moving up that measure.
This answer is incorrect. Measurement surrogation is not when employees do not focus on a particular measure enough, but rather when they focus
on it too much.

Rationale
 Managers focus too much on a particular strategic objective and start making decisions strictly to accomplish that objective.
This answer is incorrect. Measurement surrogation is not when managers focus too much on a particular strategic objective, but when they focus
too much on the measure promoting the objective.
Question 28
1.C.3.a
1D5-LS24
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

All of the following are examples of benchmarking standards except:

* Source: Retired ICMA CMA Exam Questions.

the best performance of the unit in comparable past periods.

a comparison with a similar unit within the same company.

Correct

the performance of the unit during the previous year.

Your Answer

the best performance of a competitor with a similar operation.

Rationale
 the best performance of the unit in comparable past periods.
This answer is incorrect. The best performance of the unit in comparable past periods is an example of a benchmarking standard.

Rationale
 a comparison with a similar unit within the same company.
This answer is incorrect. A comparison with a similar unit within the same company is an example of a benchmarking standard.

Rationale
 the performance of the unit during the previous year.
Benchmarking standards include the best performance of the unit in comparable past periods, a comparison with a similar unit within the same
company, and the best performance of a competitor with a similar operation.

Rationale
 the best performance of a competitor with a similar operation.
This answer is incorrect. The best performance of a competitor with a similar operation is an example of a benchmarking standard.
Question 29
1.C.3.a
1D5-AT06
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 1
A technique for improving performance of activities and processes that searches for best practices is called:
value-added reporting.

trend reporting.
Correct

benchmarking.

Kaizen costing.

Rationale
 value-added reporting.
This answer is incorrect. A technique for improving performance of activities and processes that searches for best practices is not called value-
added reporting.

Rationale
 trend reporting.
This answer is incorrect. A technique for improving performance of activities and processes that searches for best practices is not called trend
reporting.

Rationale
 benchmarking.
Benchmarking involves comparing or contrasting your organization's processes with the best practices for those processes. Best practice is either
“best in class” or “best in industry.” Benchmarking can be used in conjunction with process reengineering or with Total Quality Management and
continuous improvement.

Rationale
 Kaizen costing.
This answer is incorrect. A technique for improving performance of activities and processes that searches for best practices is not called Kaizen
costing.
Question 30
1.C.3.d
evalpr.cp.tb.020_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4

The CPC Company has the following information for the current year:

Customer 234 Customer 890

Revenue $6,000,000 $9,000,000
Variable expenses $3,600,000 $3,000,000
Contribution margin $2,400,000 $6,000,000
Fixed expenses $3,000,000 $4,200,000
Operating income ($600,000) $1,800,000

Further analysis indicates that of the fixed expenses listed here, common fixed costs of $1,000,000 were allocated to each product. Based on this
information, what would be the impact on CPC’s operating income if it dropped Customer 890?

Operating income would decrease by $1,800,000.

Operating income would decrease by $6,000,000.

Operating income would decrease by $400,000.

Correct

Operating income would decrease by $2,800,000.

Rationale
 Operating income would decrease by $1,800,000.
This answer is incorrect. Because CPC would not avoid all the costs associated with Customer 890 if it is dropped, CPC’s operating income will not
decrease by 890’s operating income of $1,800,000 if the customer is dropped.

Rationale
 Operating income would decrease by $6,000,000.
This answer is incorrect. CPC’s operating income would not decrease by Customer 890’s contribution margin of $6,000,000 if it dropped 890 since
this does not take into consideration the fixed costs that would be avoided.

Rationale
 Operating income would decrease by $400,000.
This answer is incorrect. A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined
as the contribution margin less the traceable fixed costs. CPC’s operating income would decrease by $400,000 if it dropped Customer 234 because
234’s controllable margin equals $400,000 ($2,400,000 − ($3,000,000 − $1,000,000)). However, this question asks about the impact that dropping
Customer 890 would have on CPC’s operating income.

Rationale
 Operating income would decrease by $2,800,000.
A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it dropped the customer. In this problem, Customer 890’s relevant contribution is $2,800,000 ($6,000,000 − ($4,200,000 − $1,000,000)).
As a result, CPC’s operating income would decrease by $2,800,000 if it dropped Customer 890.
Question 31
1.C.3.d
evalpr.cp.tb.015_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4

The JJF Company has the following information for the current year:

Product DSA Product EWQ

Revenue $1,000,000 $2,000,000
Variable expenses $400,000 $600,000
Contribution margin $600,000 $1,400,000
Fixed expenses $625,000 $1,300,000
Operating income ($25,000) $100,000

Further analysis indicates that of the fixed expenses listed here, common fixed costs of $300,000 were allocated to DSA and $600,000 were allocated to
EWQ. Based on this information, what would be the impact on JJF’s operating income if it dropped Product DSA?

Operating income would increase by $25,000.

Operating income would decrease by $600,000.

Your Answer

Operating income would decrease by $700,000.

Correct

Operating income would decrease by $275,000.

Rationale
 Operating income would increase by $25,000.
This answer is incorrect. Because JJF would not avoid all the costs associated with Product DSA if it is dropped, JJF’s operating income would not
increase by DSA’s operating loss of $25,000 if the product is dropped.

Rationale
 Operating income would decrease by $600,000.
This answer is incorrect. JJF’s operating income would not decrease by Product DSA’s contribution margin of $600,000 if it dropped DSA since this
does not take into consideration the fixed costs that would be avoided.

Rationale
 Operating income would decrease by $700,000.
This answer is incorrect. A product’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as
the contribution margin less the traceable fixed costs. JJF’s operating income would decrease by $700,000 if it dropped Product EWQ because
EWQ’s controllable margin equals $700,000 ($1,400,000 − ($1,300,000 − $600,000)). However, this question asks about the impact that dropping
Product DSA would have on JJF’s operating income.

Rationale
 Operating income would decrease by $275,000.
A product’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it discontinued the product. In this problem, Product DSA’s relevant contribution is $275,000 ($600,000 − ($625,000 − $300,000)). As a
result, JJF’s operating income would decrease by $275,000 if it dropped Product DSA.
Question 32
1.C.3.a
1C3-AT25
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3
All of the following statements pertaining to performance measurement and behavior are correct except:
the use of residual income to measure divisional performance can cause goal congruence problems for corporations with divisions that have unequal
operating asset bases.

an organization using measures such as growth in market share, increases in productivity, and throughput time, in addition to various financial ratios,
is relying on a more balanced approach to performance evaluation.

a lack of commitment on the part of top management can turn budgets into ritualistic exercises without significance.
Correct

the development of information technology in the 1990s can permit organizations to do away with feedback in the design of management control
systems.

Rationale
 the use of residual income to measure divisional performance can cause goal congruence problems for corporations with divisions that
have unequal operating asset bases.
This answer is incorrect. “The use of residual income to measure divisional performance can cause goal congruence problems for corporations with
divisions that have unequal operating asset bases” is a correct statement pertaining to performance measurement and behavior.

Rationale
 an organization using measures such as growth in market share, increases in productivity, and throughput time, in addition to various
financial ratios, is relying on a more balanced approach to performance evaluation.
This answer is incorrect. “An organization using measures such as growth in market share, increases in productivity, and throughput time, in
addition to various financial ratios, is relying on a more balanced approach to performance evaluation” is a correct statement pertaining to
performance measurement and behavior.

Rationale
 a lack of commitment on the part of top management can turn budgets into ritualistic exercises without significance.
This answer is incorrect. “A lack of commitment on the part of top management can turn budgets into ritualistic exercises without significance” is a
correct statement pertaining to performance measurement and behavior.

Rationale
 the development of information technology in the 1990s can permit organizations to do away with feedback in the design of
management control systems.
Any performance measurement system, manual or computerized, requires a feedback (or control) mechanism in order to be effective. The control
mechanism compares actual results to planned results (or budgeted results) and “feeds” it back to those involved in improving processes.
Question 33
1.C.3.b
1C3-LS32
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3
Why is revenue and cost analysis important in assessing the profitability or unprofitability of a customer?
Low profits make it difficult to endure the competition.
Your Answer

High prices and margins lessen price elasticity.

Distribution channel costs fluctuate.

Correct

Net proceeds from customers can vary.

Rationale
 Low profits make it difficult to endure the competition.
This answer is incorrect. Low profits making it difficult to endure the competition is not the reason why revenue and cost analysis is important in
assessing the profitability or unprofitability of a customer.

Rationale
 High prices and margins lessen price elasticity.
This answer is incorrect. High prices and margins lessening price elasticity is not the reason why revenue and cost analysis is important in assessing
the profitability or unprofitability of a customer.

Rationale
 Distribution channel costs fluctuate.
This answer is incorrect. Distribution channel costs fluctuating is not the reason why revenue and cost analysis is important in assessing the
profitability or unprofitability of a customer.

Rationale
 Net proceeds from customers can vary.
Different customers may generate approximately the same amount of total sales. But not all sales revenues are equal. Net proceeds from
customers can vary based on factors such as sales discounts, payment and delivery terms, and sales returns and allowances.
Question 34
1.C.3.c
aq.evalpr.cp.007_1807
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4

Special Staplers, Inc. (SSI), a manufacturer and wholesaler of staplers, is analyzing the profitability of two of the company's customers. One customer, a
regional accounting firm, places small infrequent orders. The other customer, a discount retailer, places large orders. The sales manager is concerned
that providing services for the regional accounting firm is costing more than the contribution margin from its business. The accountant has gathered the
following relevant information for the past year. All employees are guaranteed a 40-hour work week. Sales representatives are paid $25 per hour, and the
production line supervisor is paid $20 per hour. Employee benefits and human resource services amount to approximately 60% of hourly wages. The
discount retailer picks up large orders of staplers each month. Deliveries to different offices of the regional accounting firm must be made shortly after
the orders are placed.

Relevant Information
Discount Retailer Regional Accounting Firm
Revenues $100,000 $30,000
Direct product costs (DM and DL) $80,000 $24,000
Sales representatives 20 hours 50 hours
Production line supervisor 40 hours 20 hours
Delivery costs $4,000 $3,500

Compute the profitability for each of these two customers.

Your Answer

Discount Retailer: ($140); Regional Accounting Firm: $13,920

Discount Retailer: $16,000; Regional Accounting Firm: $2,500

Correct

Discount Retailer: $13,920; Regional Accounting Firm: ($140)

Discount Retailer: $17,920; Regional Accounting Firm: $3,360

Rationale
 Discount Retailer: ($140); Regional Accounting Firm: $13,920
This answer is incorrect. This answer confused the discount retailer for the regional accounting firm.

Rationale
 Discount Retailer: $16,000; Regional Accounting Firm: $2,500
This answer is incorrect. This answer did not include the sales representative and production line supervisor costs in the calculation of customer
profitability.

Rationale
 Discount Retailer: $13,920; Regional Accounting Firm: ($140)

See the profitability report for the calculation of customer profitability.

Computation of sales representative costs, including benefits and HR services:

Discount Retailer: 20 hours × $25 × 160% = $800

Regional Accounting Firm: 50 hours × $25 × 160% = $2,000

Computation of production line supervisor costs, including benefits and HR services:

Discount Retailer: 40 hours × $20 × 160% = $1,280

Regional Accounting Firm: 20 hours × $20 × 160% = $640

Profitability Report
Discount Retailer Regional Accounting Firm
Revenues $100,000 $30,000
Direct product costs (DM and DL) (80,000) (24,000)
Sales representatives (800) (2,000)
Production line supervisor (1,280) (640)
Delivery costs (4,000) (3,500)
 Profitability Report
Discount Retailer Regional Accounting Firm
Customer Profitability $13,920 ($140)

Rationale
 Discount Retailer: $17,920; Regional Accounting Firm: $3,360
This answer is incorrect. This answer did not include the delivery costs in the calculation of customer profitability.
Question 35
1.C.3.d
evalpr.cp.tb.016_0120
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

The AEH Company has the following information for the current year:

Product DER Product FRT

Revenue $1,500,000 $2,000,000
Variable expenses $900,000 $1,700,000
Contribution margin $600,000 $300,000
Fixed expenses $450,000 $800,000
Operating income $150,000 ($500,000)

Further analysis indicates that of the fixed expenses listed here, common fixed costs of $200,000 were allocated to DER and $450,000 were allocated to
FRT. Based on this information, what would be the impact on AEH’s operating income if it dropped FRT?

Operating income would increase by $500,000.

Correct

Operating income would increase by $50,000.

Your Answer

Operating income would decrease by $300,000.

Operating income would decrease by $350,000.

Rationale
 Operating income would increase by $500,000.
This answer is incorrect. Because JJF would not avoid all the costs associated with Product FRT if it is dropped, AEH’s operating income would not
increase by FRT’s operating loss of $500,000 if the product is dropped.

Rationale
 Operating income would increase by $50,000.
A product’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it discontinued the product. In this problem, Product FRT’s relevant contribution is a loss of $50,000 ($300,000 − ($800,000 −
$450,000)). As a result, AEH’s operating income would increase by $50,000 if it dropped Product FRT.

Rationale
 Operating income would decrease by $300,000.
This answer is incorrect. AEH’s operating income would not decrease by Product FRT’s contribution margin of $300,000 if it dropped FRT since this
does not take into consideration the fixed costs that would be avoided.

Rationale
 Operating income would decrease by $350,000.
This answer is incorrect. A product’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as
the contribution margin less the traceable fixed costs. AEH’s operating income would decrease by $350,000 if it dropped Product DER because
DER’s controllable margin equals $350,000 ($600,000 − ($450,000 − $200,000)). However, this question asks about the impact that dropping Product
FRT would have on AEH’s operating income.
Question 36
1.C.3.b
evalpr.cp.tb.005_0120
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Each of the following statements are examples of using a qualitative factor to justify keeping an unprofitable product line, except:
“Dropping the product will make it impossible to offer a complete line of products and services that our customers have come to expect from us.”
Your Answer

“Dropping the product will mean that we will have to purchase the product from an outside vendor at a higher cost because it is a component of our
best-selling product.”

“Dropping this product may damage employee morale as a number of people will likely lose their jobs.”
Correct

“Dropping this product will free up marketing dollars that could be used to promote other products.”

Rationale
 “Dropping the product will make it impossible to offer a complete line of products and services that our customers have come to expect
from us.”
This answer is incorrect. Keeping a seemingly unprofitable product line because customers have come to expect you to offer a complete line of
products and services illustrates using a qualitative factor to justify keeping a product line.

Rationale
 “Dropping the product will mean that we will have to purchase the product from an outside vendor at a higher cost because it is a
component of our best-selling product.”
This answer is incorrect. Keeping a seemingly unprofitable product line because the product is a component of another product illustrates using a
qualitative factor to justify keeping a product line. Therefore, this is an incorrect answer.

Rationale
 “Dropping this product may damage employee morale as a number of people will likely lose their jobs.”
This answer is incorrect. Keeping a seemingly unprofitable product line because lay-offs will damage employee morale illustrates using a
qualitative factor to justify keeping a product line.

Rationale
 “Dropping this product will free up marketing dollars that could be used to promote other products.”
Although freeing up resources for other products is a qualitative factor to consider, in this instance the qualitative factor supports dropping the
product, not keeping it.
Question 37
1.C.3.a
aq.evalpr.cp.001_0820
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

Once profits are accurately computed on business segments such as product lines or customer groups, the strategic business unit (SBU) can then move
aggressively to drop unprofitable segments.

Is this statement True or False, and why?

True. Unless managers are committed to immediately make the “tough decision” to drop unprofitable segments, then there is no value in accurate
profit measurement.
Your Answer

True. Unprofitable products or customers are not going to “volunteer” to step away from the organization. Hence, these segments need to be
dropped by management.

False. It’s not possible to get a reasonably accurate measure of the profitability of business segments. Therefore, managers should be hesitant to drop
what appear to be unprofitable segments.
Correct

False. With a complete and accurate measure of profitability across all business segments, managers can then engage in strategic management
across a portfolio of currently profitable and unprofitable segments.

Rationale
 True. Unless managers are committed to immediately make the “tough decision” to drop unprofitable segments, then there is no value
in accurate profit measurement.
This answer is incorrect. Sometimes there are strategic reasons to maintain an unprofitable business segment.

Rationale
 True. Unprofitable products or customers are not going to “volunteer” to step away from the organization. Hence, these segments need
to be dropped by management.
This answer is incorrect. Sometimes there are strategic reasons to maintain an unprofitable business segment.

Rationale
 False. It’s not possible to get a reasonably accurate measure of the profitability of business segments. Therefore, managers should be
hesitant to drop what appear to be unprofitable segments.
This answer is incorrect. Accurately tracking all direct costs to a business segment is an important challenge, and many organizations are
committed to getting this measurement done accurately.

Rationale
 False. With a complete and accurate measure of profitability across all business segments, managers can then engage in strategic
management across a portfolio of currently profitable and unprofitable segments.
The competitive reality for most organizations is the need to manage a mix of products and services that form a strategic portfolio. Remember that
the BCG Matrix describes four types of business or product lines: cash cows, rising stars, question marks, and dogs. Unprofitable business segments
can be described as either question marks or dogs. SBUs should continue to support unprofitable question marks to determine if they can become
rising star products. Dog segments likely need to be pruned from the business portfolio. However, sometimes there are strategic reasons to
maintain an unprofitable business segment.
Question 38
1.C.3.b
evalpr.cp.tb.006_0120
LOS: 1.C.3.b
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Which of the following does not illustrate using a qualitative factor to justify keeping an unprofitable business unit?
“Dropping this business unit will make it impossible to offer a complete line of products and services that our customers have come to expect from
us.”
Correct

“Dropping this business unit will not impact other parts of the business since this business unit sells different products and services.”

“Dropping this business unit may damage employee morale as a number of people will likely lose their jobs.”
Your Answer

“Dropping this business unit may make customers, suppliers, and competitors believe that we are in a weakened position and further damage the
business.”

Rationale
 “Dropping this business unit will make it impossible to offer a complete line of products and services that our customers have come to
expect from us.”
This answer is incorrect. Keeping a seemingly unprofitable business unit because customers have come to expect you to offer a complete line of
products and services illustrates using a qualitative factor to justify keeping a business unit.

Rationale
 “Dropping this business unit will not impact other parts of the business since this business unit sells different products and services.”
While the impact on other business units is a qualitative factor to consider, in this instance the qualitative factor supports dropping the business
unit, not keeping it.

Rationale
 “Dropping this business unit may damage employee morale as a number of people will likely lose their jobs.”
This answer is incorrect. Keeping a seemingly unprofitable business unit because lay-offs will damage employee morale illustrates using a
qualitative factor to justify keeping a business unit.

Rationale
 “Dropping this business unit may make customers, suppliers, and competitors believe that we are in a weakened position and further
damage the business.”
This answer is incorrect. Keeping a seemingly unprofitable business unit because dropping it may hurt the company’s reputation with customers,
suppliers, and competitors illustrates using a qualitative factor to justify keeping a business unit.
Question 39
1.C.3.a
1C3-LS55
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Paul Cooper, shipping manager for DFG Distributors, is responsible for managing the staff and all related transportation equipment to fill orders for
bakery products from local retailers and deliver the products to those retailers. Which one of the following groups of three performance measures most
likely would result in the highest level of goal congruence?
Labor cost per order; transportation cost per order; number of orders completed per day.

Customer satisfaction; elapsed time to complete an order; percentage of orders filled accurately.
Correct

The percentage of orders filled on time; the percentage of orders filled accurately; average cost to fill and deliver an order.

Orders completed per employee per day; employee injuries per hour worked; number of vehicle accidents per year.

Rationale
 Labor cost per order; transportation cost per order; number of orders completed per day.
This answer is incorrect. The performance measures labor cost per order, transportation cost per order, and number of orders completed per day,
when grouped together, would not result in the highest level of goal congruence.

Rationale
 Customer satisfaction; elapsed time to complete an order; percentage of orders filled accurately.
This answer is incorrect. The performance measures customer satisfaction, elapsed time to complete an order, and percentage of orders filled
accurately, when grouped together, would not result in the highest level of goal congruence.

Rationale
 The percentage of orders filled on time; the percentage of orders filled accurately; average cost to fill and deliver an order.
Goal congruence requires members of an organization or division to work together towards a common goal. Of these four question choices, the
percentage of orders filled on time; the percentage of orders filled accurately; and average cost to fill and deliver an order are all goals that would
result in the highest level of goal congruence.

Rationale
 Orders completed per employee per day; employee injuries per hour worked; number of vehicle accidents per year.
This answer is incorrect. The performance measures orders completed per employee per day, employee injuries per hour worked, and number of
vehicle accidents per year, when grouped together, would not result in the highest level of goal congruence.
Question 40
1.C.3.c
evalpr.cp.tb.008_0120
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

The ABC Company has the following information for the current year:

Product XYZ Product DFG

Revenue $4,200,000 $1,800,000
Variable expenses $1,400,000 $450,000

In addition, ABC incurred $1,800,000 in fixed costs. Of this amount, $600,000 was to advertise XYZ, $450,000 was to advertise DFG, $150,000 was the salary
for XYZ’s product line manager, $100,000 was the salary for DFG’s product line manager, and the remaining $500,000 was allocated equally between the
two products.

Based on this information, what is XYZ’s relevant contribution to ABC’s profitability?

Correct

$2,050,000
Your Answer

$1,800,000

$2,800,000

$800,000

Rationale
 $2,050,000
A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is defined as the contribution
margin less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company
would avoid (save) if it discontinued the product. In this problem, the advertising expense for each product and the salary for each product’s
manager are traceable fixed expenses. Product XYZ’s contribution margin is $2,800,000 ($4,200,000 − $1,400,000). As a result, XYZ’s relevant
contribution equals $2,050,000 ($2,800,000 − $600,000 − $150,000).

Rationale
 $1,800,000
This answer is incorrect. A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin. XYZ’s operating
income is $1,800,000 ($4,200,000 − $1,400,000 − $600,000 − $150,000 − ($500,000 ÷ 2)). However, this is not the correct measure of the product’s
relevant contribution to company profitability.

Rationale
 $2,800,000
This answer is incorrect. A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin. XYZ’s
contribution margin equals $2,800,000 ($4,200,000 − $1,400,000). However, this is not the correct measure of the product’s relevant contribution to
company profitability.

Rationale
 $800,000
This answer is incorrect. A product’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is defined
as the contribution margin less the traceable fixed costs. DFG’s relevant contribution to ABC’s profitability is $800,000 ($1,800,000 − $450,000 −
$450,000 − $100,000). However, this question asks about Product XYZ’s relevant contribution.
Question 41
1.C.3.a
1C3-LS48
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: easy
Bloom Code: 2
A company sets goals for improving quality levels and also links these goals to reducing cycle time. However, these initiatives soon become stagnant and
seem to be an end in themselves. Which of the following is this process missing?
Correct

Outcome measures

Critical success factors

Motivating factors
Your Answer

Performance drivers

Rationale
 Outcome measures
Without an outcome measure (a specific financial measure), an initiative such as total quality management can become an end in itself.

Rationale
 Critical success factors
This answer is incorrect. If a company sets goals, but the goals soon become stagnant and seem to be an end in themselves, the process is not
missing critical success factors.

Rationale
 Motivating factors
This answer is incorrect. If a company sets goals, but the goals soon become stagnant and seem to be an end in themselves, the process is not
missing motivating factors.

Rationale
 Performance drivers
This answer is incorrect. If a company sets goals, but the goals soon become stagnant and seem to be an end in themselves, the process is not
missing performance drivers.
Question 42
1.C.3.a
evalpr.cp.tb.003_0120
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Each of the following is an example of one performance measure “driving” another performance measure, except:
Set-up hours and set-up costs.
Correct

Units produced and fixed factory overhead costs.

The number of units inspected and inspection costs.

Your Answer

Units sold and sales commission costs.

Rationale
 Set-up hours and set-up costs.
This answer is incorrect. More set-up hours are likely to result in more set-up costs which means that set-up hours are a driver of set-up costs.

Rationale
 Units produced and fixed factory overhead costs.
A performance driver is a factor that “causes” performance to occur. Two examples of performance drivers are cost drivers and revenue drivers. By
including cost drivers with a measure of the cost itself, a manager can better understand why the cost occurred. In this example, units produced is
not a driver of fixed factory overhead costs because producing more units does not lead to more fixed factory overhead costs.

Rationale
 The number of units inspected and inspection costs.
This answer is incorrect. Inspecting more units is likely to result in more inspection costs which means that the number of units inspected is a driver
of inspection costs.

Rationale
 Units sold and sales commission costs.
This answer is incorrect. Selling more units is likely to result in more sales commission costs which means that the number of units sold is a driver of
sales commission costs.
Question 43
1.C.3.d
1C3-CQ12
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: hard
Bloom Code: 5

Performance results for four geographic divisions of a manufacturing company are as follows:

Division Target Return on Investment Actual Return on Investment Return on Sales

A 18% 18.1% 8%
B 16 20.0 8
C 14 15.8 6
D 12 11.0 9

The division with the best performance is:

Division C
Correct

Division B
Your Answer

Division A

Division D

Rationale
 Division C
This answer is incorrect. Based on the calculation of percent of ROI achieved, Division C is not the division with the best performance.

Rationale
 Division B

Division B exceeded its target return on investment (ROI) by 25%, which is calculated as:

Percent of ROI achieved = (Actual ROI − Target ROI) ÷ (Target ROI) Percent of ROI achieved = (20 − 16) ÷ (16) = 25%

Divisions A and C exceeded their targets by much less. Division D's actual ROI was lower than its target ROI.

Rationale
 Division A
This answer is incorrect. Based on the calculation of percent of ROI achieved, Division A is not the division with the best performance.

Rationale
 Division D
This answer is incorrect. Based on the calculation of percent of ROI achieved, Division D is not the division with the best performance.
Question 44
1.C.3.a
1D5-LS01
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Which of the following would be the best choice for Timely, Inc., a producer of surface-mount chips (SMC), when it wants to benchmark average call
waiting time in its customer service?
A minimum call waiting time set by a consultant that tracked "best" call waiting times at Timely, Inc.
Correct

The average call waiting time of a competing manufacturer that is a customer service leader.
Your Answer

The average call waiting time for the SMC industry overall.

Internal benchmarks created by reducing current average call waiting time at Timely, Inc.

Rationale
 A minimum call waiting time set by a consultant that tracked "best" call waiting times at Timely, Inc.
This answer is incorrect. A minimum call waiting time set by a consultant that tracked "best" call waiting times at Timely, Inc. is not the best choice
to benchmark average call waiting time in its customer service.

Rationale
 The average call waiting time of a competing manufacturer that is a customer service leader.
Benchmarks should be for related industries (manufacturers) but should also focus on the best levels for the item being benchmarked instead of
simply on a competitor or historical company results.

Rationale
 The average call waiting time for the SMC industry overall.
This answer is incorrect. The average call waiting time for the SMC industry overall is not the best choice to benchmark average call waiting time in
its customer service.

Rationale
 Internal benchmarks created by reducing current average call waiting time at Timely, Inc.
This answer is incorrect. Internal benchmarks created by reducing current average call waiting time at Timely, Inc. is not the best choice to
benchmark average call waiting time in its customer service.
Question 45
1.C.3.d
1C3-LS37
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3
A customer profitability analysis shows that a customer costs more to maintain than the profits gained during his or her first year as a customer. Which of
the following is a valid financial measure of whether or not to retain the customer?
Customer satisfaction costs

Customer retention measures

Correct

Lifetime profitability
Your Answer

Customer acquisition costs

Rationale
 Customer satisfaction costs
This answer is incorrect. Customer satisfaction costs is not a valid financial measure of whether or not to retain a customer.

Rationale
 Customer retention measures
This answer is incorrect. Customer retention measures is not a valid financial measure of whether or not to retain a customer.

Rationale
 Lifetime profitability
While the other options are nonfinancial measures, lifetime profitability is a financial measure that will determine if this customer will be profitable
in the long run.

Rationale
 Customer acquisition costs
This answer is incorrect. Customer acquisition costs is not a valid financial measure of whether or not to retain a customer.
Question 46
1.C.3.a
1C3-LS58
LOS: 1.C.3.a
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 4
Albert Hathaway recently joined Brannen University as the chief information officer of the University Computing Services Department. His assigned task
is to help reduce the recurrent problem of cost overruns due to uncontrolled computer usage by the user community, while at the same time not
curtailing the use of information technology for research and teaching. To ensure goal congruence, which one of the following algorithms should be used
to allocate the cost of the University Computing Services Department to other departments within the university?
Actual rate times actual hours of computer usage

Budgeted rate times budgeted hours of computer usage

Correct

Budgeted rate times actual hours of computer usage

Your Answer

Actual rate times budgeted hours of computer usage

Rationale
 Actual rate times actual hours of computer usage
This answer is incorrect. To ensure goal congruence, the algorithm actual rate times actual hours of computer usage should not be used to allocate
the cost of the University Computing Services Department to other departments within the university.

Rationale
 Budgeted rate times budgeted hours of computer usage
This answer is incorrect. To ensure goal congruence, the algorithm budgeted rate times budgeted hours of computer usage should not be used to
allocate the cost of the University Computing Services Department to other departments within the university.

Rationale
 Budgeted rate times actual hours of computer usage
Allocating costs requires taking a budgeted rate of some activity and multiplying it by the actual hours of the particular activity. In this case, the
university CIO would use the algorithm of budgeted rate times actual hours of computer usage to ensure goal congruence.

Rationale
 Actual rate times budgeted hours of computer usage
This answer is incorrect. To ensure goal congruence, the algorithm actual rate times budgeted hours of computer usage should not be used to
allocate the cost of the University Computing Services Department to other departments within the university.
Question 47
1.C.3.d
aq.evalpr.cp.008_1807
LOS: 1.C.3.d
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: hard
Bloom Code: 5

Special Staplers, Inc. (SSI), a manufacturer and wholesaler of staplers, is analyzing the profitability of two of the company's customers. One customer, a
regional accounting firm, places small infrequent orders. The other customer, a discount retailer, places large orders. The sales manager is concerned
that providing services for the regional accounting firm is costing more than the contribution margin from its business. The accountant has gathered the
following relevant information for the past year. All employees are guaranteed a 40-hour work week. Sales representatives are paid $25 per hour, and the
production line supervisor is paid $20 per hour. Employee benefits and human resource services amount to approximately 60% of hourly wages. The
discount retailer picks up large orders of staplers each month. Deliveries to different offices of the regional accounting firm must be made shortly after
the orders are placed.

Relevant Information
Discount Retailer Regional Accounting Firm
Revenues $100,000 $30,000
Direct product costs (DM and DL) $80,000 $24,000
Sales representatives 20 hours 50 hours
Production line supervisor 40 hours 20 hours
Delivery costs $4,000 $3,500

Can anything be done to improve the customer profitability of the regional accounting firm customer?

There is no reason to improve the customer profitability of the regional accounting firm customer.
Your Answer

SSI should request that the regional accounting firm buy more staplers.
Correct

SSI should request that the regional accounting firm pay for the additional customer service costs such as sales representative time.

Nothing can be done. The customer should be dropped.

Rationale
 There is no reason to improve the customer profitability of the regional accounting firm customer.
This answer is incorrect. After considering all applicable costs, the regional accounting firm is not a profitable customer. SSI should negotiate with
the customer to come up with a more profitable arrangement, or perhaps consider dropping the customer if there isn't another strategic reason to
keep the relationship.

Rationale
 SSI should request that the regional accounting firm buy more staplers.
This answer is incorrect. While buying more staplers will improve customer profitability, this is probably not feasible to have the customer purchase
unneeded product.

Rationale
 SSI should request that the regional accounting firm pay for the additional customer service costs such as sales representative time.

Based on the calculation below, it may be possible to improve the customer profitability of the regional accounting firm customer. The regional
accounting firm uses more sales representative time than the discount retailer even though it purchases fewer staplers. SSI should negotiate on
that cost item. Perhaps a different sales approach can be used to handle the regional accounting firm's sales support needs. It may even be
possible to discuss a surcharge on sales orders to cover the cost of the sales representative. If no price enhancement can be worked out, SSI needs
to consider dropping the customer unless there's a strategic value in keeping the customer relationship.

Computation of sales representative costs, including benefits and HR services:

Discount Retailer: 20 hours × $25 × 160% = $800

Regional Accounting Firm: 50 hours × $25 × 160% = $2,000

Computation of production line supervisor costs, including benefits and HR services:

Discount Retailer: 40 hours × $20 × 160% = $1,280

Regional Accounting Firm: 20 hours × $20 × 160% = $640

Profitability Report
Discount Retailer Regional Accounting Firm
 Profitability Report
Discount Retailer Regional Accounting Firm
Revenues $100,000 $30,000
Direct product costs (DM and DL) (80,000) (24,000)
Sales representatives (800) (2,000)
Production line supervisor (1,280) (640)
Delivery costs (4,000) (3,500)
Customer Profitability $13,920 ($140)

Rationale
 Nothing can be done. The customer should be dropped.
This answer is incorrect. SSI should explore negotiating with the regional accounting firm to come up with a more profitable arrangement.
Question 48
1.C.3.c
evalpr.cp.tb.011_0120
LOS: 1.C.3.c
Lesson Reference: Evaluating Product and Customer Profitability
Difficulty: medium
Bloom Code: 3

The SMF Company has the following information for the current year:

Customer AAA Customer BBB

Revenue $3,000,000 $4,000,000
Variable expenses $1,800,000 $2,500,000
Units sold 100,000 25,000
Orders placed 100 500

SMF’s activity-based costing system determined that each unit sold results in overhead costs of $4 per unit and each order placed results in overhead
costs of $1,000 per order. SMF allocates an additional $700,000 in common overhead cost equally between the two customers.

Based on this information, what is Customer AAA’s relevant contribution to SMF’s profitability?

$350,000
Correct

$700,000
Your Answer

$1,200,000

$900,000

Rationale
 $350,000
This answer is incorrect. A customer’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Customer AAA’s operating income is $350,000 ($3,000,000 − $1,800,000 − ($4 ×
100,000 units sold) − ($1,000 × 100 orders placed) − ($700,000 ÷ 2)). However, this is not the correct measure of a customer’s relevant contribution to
company profitability.

Rationale
 $700,000
A customer’s relevant contribution to company profitability is sometimes called its controllable margin, which is defined as the contribution margin
less the traceable fixed costs. Traceable fixed costs are included in this calculation because they represent fixed costs that the company would
avoid (save) if it stopped providing services to the customer. In this problem, Customer AAA’s contribution margin equals $1,200,000 ($3,000,000 −
$1,800,000) and the traceable fixed costs are comprised of $400,000 in unit-related overhead costs ($4 × 100,000 units sold) and $100,000 in order-
related overhead costs ($1,000 × 100 orders placed). As a result, Customer AAA’s relevant contribution is $700,000 ($1,200,000 − $400,000 −
$100,000).

Rationale
 $1,200,000
This answer is incorrect. A customer’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Customer AAA’s contribution margin is $1,200,000 ($3,000,000 − $1,800,000).
However, this is not the correct measure of a customer’s relevant contribution to company profitability.

Rationale
 $900,000
This answer is incorrect. A customer’s relevant contribution to a company’s profitability is sometimes called its controllable margin, which is
defined as the contribution margin less the traceable fixed costs. Customer BBB’s relevant contribution to SMF’s profitability is $900,000
($4,000,000 − $2,500,000 − ($4 × 25,000 units sold) − ($1,000 × 500 orders placed)). However, this question asks about Customer AAA’s relevant
contribution.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.3.f
retinv.ri.tb.009_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Which of the following will cause the ROI to increase?
Correct

An increase in sales

An increase in variable costs

Your Answer

An increase in assets

An increase in fixed costs

Rationale
 An increase in sales
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.” ROI
will increase if operating income increases while assets remain the same or if assets decrease while operating income stays the same. An increase in
sales will increase operating income. This, in turn, will increase ROI.

Rationale
 An increase in variable costs
This answer is incorrect. An increase in variable costs will decrease operating income. This, in turn, will decrease, not increase, ROI.

Rationale
 An increase in assets
This answer is incorrect. An increase in assets will decrease, not increase, ROI, due to increasing the denominator of the formula used to calculate
ROI.

Rationale
 An increase in fixed costs
This answer is incorrect. An increase in fixed costs will decrease operating income. This, in turn, will decrease, not increase, ROI.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.3.i
retinv.ri.tb.034_0120
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning the return on investment (ROI) and residual income measures is correct?
Correct

Both the ROI and residual income methods are appropriate to use in evaluating investment centers.

ROI is an appropriate measure to use when evaluating investment centers, but residual income is not.
Your Answer

Residual income is an appropriate measure to use when evaluating investment centers, but ROI is not.

Neither the ROI nor residual income methods are appropriate to use when evaluating investment centers.

Rationale
 Both the ROI and residual income methods are appropriate to use in evaluating investment centers.
Investment center managers are responsible for the center’s income and assets. Because the return on investment (ROI) and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Both measures are appropriate
to use when evaluating investment centers.

Rationale
 ROI is an appropriate measure to use when evaluating investment centers, but residual income is not.
This answer is incorrect. Performance measures used to evaluate investment centers should consider income and assets since investment center
managers are responsible for both. The ROI and residual income measures both consider income and assets in their calculations.

Rationale
 Residual income is an appropriate measure to use when evaluating investment centers, but ROI is not.
This answer is incorrect. Performance measures used to evaluate investment centers should consider income and assets since investment center
managers are responsible for both. The ROI and residual income measures both consider income and assets in their calculations.

Rationale
 Neither the ROI nor residual income methods are appropriate to use when evaluating investment centers.
This answer is incorrect. Performance measures used to evaluate investment centers should consider income and assets since investment center
managers are responsible for both. The ROI and residual income measures both consider income and assets in their calculations.
Question 3
1.C.3.f
1C3-AT30
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
All of the following are correct statements pertaining to the return on investment (ROI) as a performance measurement except:
the use of ROI can lead managers to emphasize the ROI of their division over the profitability of the parent organization.
Your Answer

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.
Correct

ROI relies on financial measures that are capable of being independently verified while other forms of performance measures are subject to
manipulation.

the use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash flow models.

Rationale
 the use of ROI can lead managers to emphasize the ROI of their division over the profitability of the parent organization.
This answer is incorrect. “The use of ROI can lead managers to emphasize the ROI of their division over the profitability of the parent organization”
is a correct statement pertaining to the return on investment (ROI) as a performance measurement.

Rationale
 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.
This answer is incorrect. “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” is a correct statement pertaining to the return on investment (ROI) as a performance
measurement.

Rationale
 ROI relies on financial measures that are capable of being independently verified while other forms of performance measures are
subject to manipulation.
All performance measures, including ROI, are subject to manipulation.

Rationale
 the use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash flow models.
This answer is incorrect. “The use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash
flow models” is a correct statement pertaining to the return on investment (ROI) as a performance measurement.
Question 4
1.C.3.f
retinv.ri.tb.018_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
Hughes Printing and Publishing has sales of $1,350,000. Its variable costs are $597,000, fixed costs are $318,000, and total assets are $3,000,000. Hughes
found a new paper supplier that charged 0.5 cents less per 100 sheets of paper, effectively reducing its variable costs by 7%. Based on this, Hughes’
change in ROI would be a:
1.4% decrease.
Correct

1.4% increase.

2.1% increase.

1.1% increase.

Rationale
 1.4% decrease.
This answer is incorrect. The current operating income is $435,000 ($1,350,000 − $597,000 − $318,000). Combined with assets of $3,000,000 the
current ROI is 14.5% ($435,000 ÷ $3,000,000). If variable costs increase 7%, they will be $638,790. This will make operating income $393,210
($1,350,000 − $638,790 − $318,000). The new ROI will then be 13.1% ($393,210 ÷ $3,000,000). This represents a decrease in ROI of 1.4% (14.5% −
13.1%). However, variable costs decrease by 7%, not increase by 7%.

Rationale
 1.4% increase.
Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the items an investment center
manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷ Assets.” The current
operating income is $435,000 ($1,350,000 − $597,000 − $318,000). Combined with assets of $3,000,000 the current ROI is 14.5% ($435,000 ÷
$3,000,000). If variable costs decrease 7%, they will be $555,210. This will make operating income $476,790 ($1,350,000 − $555,210 − $318,000). The
new ROI will then be 15.9% ($476,790 ÷ $3,000,000). This represents an increase in ROI of 1.4% (15.9% − 14.5%).

Rationale
 2.1% increase.
This answer is incorrect. The current operating income is $435,000 ($1,350,000 − $597,000 − $318,000). Combined with assets of $3,000,000 the
current ROI is 14.5% ($435,000 ÷ $3,000,000). If variable costs decrease 7%, they will be $555,210. If fixed costs also decrease 7%, they will be
$295,740. This will make operating income $499,050 ($1,350,000 − $555,210 − $295,740). The new ROI will then be 16.6% ($499,050 ÷ $3,000,000).
This represents an increase in ROI of 2.1% (16.6% − 14.5%). However, the fixed costs do not change.

Rationale
 1.1% increase.
This answer is incorrect. The current operating income is $435,000 ($1,350,000 − $597,000 − $318,000). Combined with assets of $3,000,000 the
current ROI is 14.5% ($435,000 ÷ $3,000,000). If assets decrease 7%, they will be $2,790,000. Assuming no change in income, the new ROI will be
15.6% ($435,000 ÷ $2,790,000). This represents an increase in ROI of 1.1% (15.6% − 14.5%). However, the assets do not change, and the variable
costs decrease.
Question 5
1.C.3.f
1C3-LS61
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
Oakmont Company has two divisions, Household Appliances and Construction Equipment. The manager of the Household Appliances Division is
evaluated on the basis of return on investment (ROI). The manager of the Construction Equipment Division is evaluated on the basis of residual income.
The cost of capital has been 12% and the ROI has been 16% for the two divisions. Each manager is currently considering a project with a 14% rate of
return. According to the current evaluation system for managers, which manager(s) would have incentive to undertake the project?
Neither manager would have incentive to undertake the project.

Both managers would have incentive to undertake the project.

Correct

The manager of the Construction Equipment Division would have incentive to undertake the project while the manager of the Household Appliances
Division would not have incentive to undertake the project.

The manager of the Household Appliances Division would have incentive to undertake the project while the manager of the Construction Equipment
Division would not have incentive to undertake the project.

Rationale
 Neither manager would have incentive to undertake the project.
This answer is incorrect. One of the managers would have incentive to undertake the project.

Rationale
 Both managers would have incentive to undertake the project.
This answer is incorrect. Only one of the managers would have incentive to undertake the project.

Rationale
 The manager of the Construction Equipment Division would have incentive to undertake the project while the manager of the
Household Appliances Division would not have incentive to undertake the project.
Given the cost of capital and ROI for the two divisions, the project would offer the most incentive for the Construction Equipment Division.

Rationale
 The manager of the Household Appliances Division would have incentive to undertake the project while the manager of the
Construction Equipment Division would not have incentive to undertake the project.
This answer is incorrect. The manager of the Household Appliances Division would not have incentive to undertake the project, while the manager
of the Construction Equipment Division would.
Question 6
1.C.3.i
1C3-LS59
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
For several years, Northern Division of Marino Company has maintained a positive residual income (RI). Northern is currently considering investing in a
new project that will lower the division's overall return on investment (ROI) but increase its RI. What is the relationship between the expected rate of
return on the new project, the firm's cost of capital, and the division's current ROI?
The expected rate of return on the new project is higher than the division's current ROI but lower than the firm's cost of capital.
Correct

The expected rate of return on the new project is higher than the firm's cost of capital but lower than the division's current ROI.
Your Answer

The division's current ROI is higher than the expected rate of return on the new project but lower than the firm's cost of capital.

The firm's cost of capital is higher than the expected rate of return on the new project but lower than the division's current ROI.

Rationale
 The expected rate of return on the new project is higher than the division's current ROI but lower than the firm's cost of capital.
This answer is incorrect. “The expected rate of return on the new project is higher than the division's current ROI but lower than the firm's cost of
capital” does not explain the relationship between the expected rate of return on the new project, the firm's cost of capital, and the division's
current ROI.

Rationale
 The expected rate of return on the new project is higher than the firm's cost of capital but lower than the division's current ROI.
Theoretically, to accept any new project, the expected rate of return on the new project should be higher than the firm's cost of capital, meaning
the company is making a profit from the new project. However, it can be lower than the division's current ROI so long as the return remains positive.

Rationale
 The division's current ROI is higher than the expected rate of return on the new project but lower than the firm's cost of capital.
This answer is incorrect. “The division's current ROI is higher than the expected rate of return on the new project but lower than the firm's cost of
capital” does not explain the relationship between the expected rate of return on the new project, the firm's cost of capital, and the division's
current ROI.

Rationale
 The firm's cost of capital is higher than the expected rate of return on the new project but lower than the division's current ROI.
This answer is incorrect. “The firm's cost of capital is higher than the expected rate of return on the new project but lower than the division's current
ROI” does not explain the relationship between the expected rate of return on the new project, the firm's cost of capital, and the division's current
ROI.
Question 7
1.C.3.g
retinv.ri.tb.022_0120
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
A division has sales of $5,000,000, variable costs of $2,400,000, fixed costs of $2,000,000, and assets of $4,000,000. If the company’s minimum required
rate of return is 11% and the company’s current ROI is 14%, what is the division’s residual income?
Correct

$160,000

$40,000

$50,000
Your Answer

$600,000

Rationale
 $160,000
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets and it is calculated as “Business Unit Income − (Business Unit Assets ×
Required Rate of Return).” The division has an operating income of $600,000 ($5,000,000 − $2,400,000 − $2,000,000); therefore, the division’s
residual income equals $160,000 ($600,000 − ($4,000,000 × 11%).

Rationale
 $40,000
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the company’s return on investment.

Rationale
 $50,000
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the unit’s revenue.

Rationale
 $600,000
This answer is incorrect. The division’s operating income is $600,000 ($5,000,000 − $2,400,000 − $2,000,000). Operating income is not the same as
residual income.
Question 8
1.C.3.f
retinv.ri.tb.013_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4

Bennett Incorporated’s investment center reported the following values in 20X7:

Budget Actual
Sales $1,780,000 $1,640,000
Variable costs
Cost of goods sold 1,024,000 1,012,000
Selling and admin. 75,000 76,000
Fixed costs
Cost of goods sold 120,000 118,000
Selling and admin. 23,000 23,000
Other fixed costs 59,000 59,000

Assuming assets were as budgeted, how would you rate the investment center manager’s performance in 20X7?

Correct

Poor, because the ROI was substantially less than budgeted

Average, because fixed costs were slightly lower than budgeted

Fair, because the contribution margin was lower than budgeted

Excellent, because the variable cost of goods sold was lower than budgeted

Rationale
 Poor, because the ROI was substantially less than budgeted
Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the items an investment center
manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷ Assets.” Bennett’s budgeted
operating income was $479,000 ($1,780,000 − $1,024,000 − $75,000 − $120,000 − $23,000 − $59,000) and its actual operating income was $352,000
($1,640,000 − $1,012,000 − $76,000 − $118,000 − $23,000 − $59,000). Since assets were as budgeted, actual ROI was substantially less than budgeted
ROI. This makes it likely that the investment center manager’s performance would be rated as poor.

Rationale
 Average, because fixed costs were slightly lower than budgeted
This answer is incorrect. Fixed costs were slightly lower than budgeted ($200,000 versus $202,000). However, investment center managers should
be evaluated on more than fixed costs since they are responsible for revenue, controllable expenses, and the assets used in the center. This makes
it not likely that the investment center manager’s performance would be rated as average based solely on the fixed costs being slightly lower than
budgeted.

Rationale
 Fair, because the contribution margin was lower than budgeted
This answer is incorrect. The contribution margin was lower than budgeted ($552,000 versus $681,000). However, investment center managers are
evaluated on more than contribution margin since they are responsible for revenue, all controllable expenses, and the assets used in the center.
This makes it not likely that the investment center manager’s performance would be rated as fair based solely on the contribution margin being
lower than budgeted.

Rationale
 Excellent, because the variable cost of goods sold was lower than budgeted
This answer is incorrect. Variable cost of goods sold were lower than budgeted. However, investment center managers should be evaluated on
more than a single expense item since they are responsible for revenue, controllable expenses, and the assets used in the center. In addition,
variable cost of goods sold as a percentage of revenue (62%) was actually higher than budgeted (58%). This makes it not likely that the investment
center manager’s performance would be rated as excellent based solely on the variable cost of goods sold expense being lower than budgeted.
Question 9
1.C.3.e
aq.retinv.ri.003_0820
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 5

Performance data for three divisions at Cupco, Inc. are presented below.

Division A B C
Sales $1,500,000 $750,000 ?
Operating income 200,000 75,000 ?
Investment (assets) 500,000 ? 2,500,000
Profit margin (return on sales) ? ? 0.5%
Asset turnover ? ? 1.5
Return on investment ? 10% ?

What is the asset turnover for Division B and what is the operating income for Division C, respectively?

Division B Asset Turnover: 10; Division C Operating Income: $18,750

Correct

Division B Asset Turnover: 1; Division C Operating Income: $18,750

Your Answer

Division B Asset Turnover: 1; Division C Operating Income: $12,500

Division B Asset Turnover: 10; Division C Operating Income: $12,500

Rationale
 Division B Asset Turnover: 10; Division C Operating Income: $18,750
This answer incorrectly calculated Division B's asset turnover by dividing sales by operating income instead of using operating income to calculate
assets. However, this answer correctly calculated Division C operating income.

Rationale
 Division B Asset Turnover: 1; Division C Operating Income: $18,750

Division B Asset Turnover is calculated as follows:

Start with the ROI formula to solve for assets:

ROI = Income ÷ Assets

10% = $75,000 ÷ X

X = $75,000 ÷ 10%

Assets = $750,000

Then calculate asset turnover:

Asset turnover = Sales ÷ Assets

$750,000 ÷ $750,000 = 1

Division C Operating Income is calculated as follows:

Start by calculating ROI:

ROI = Profit Margin × Asset Turnover

0.5% × 1.5 = 0.75%

Use the ROI formula to solve for operating income:

ROI = Income ÷ Assets

0.75% = X ÷ $2,500,000

X = 0.75% × $2,500,000

Income = $18,750
Rationale
 Division B Asset Turnover: 1; Division C Operating Income: $12,500
This answer correctly calculated Division B's asset turnover. However, this answer incorrectly calculated Division C operating income by using profit
margin instead of ROI.

Rationale
 Division B Asset Turnover: 10; Division C Operating Income: $12,500
This answer incorrectly calculated Division B's asset turnover by dividing sales by operating income instead of using operating income to calculate
assets. Additionally, this answer incorrectly calculated Division C operating income by using profit margin instead of ROI.
Question 10
1.C.3.h
retinv.ri.tb.030_0120
LOS: 1.C.3.h
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 2
Which of the following will cause a business unit’s residual income to increase?
Correct

A decrease in the minimum required rate of return on the unit’s assets

An increase in the unit’s asset base

Your Answer

An increase in the unit’s fixed costs

A decrease in the unit’s sales

Rationale
 A decrease in the minimum required rate of return on the unit’s assets
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets, and it is calculated as “Business Unit Income − (Business Unit Assets ×
Required Rate of Return).” Since a decrease in the minimum required rate of return on the unit’s assets decreases the minimum required return on
those assets, the decrease in the minimum required rate of return also increases the unit’s residual income.

Rationale
 An increase in the unit’s asset base
This answer is incorrect. An increase in the unit’s asset base will cause the business unit’s residual income to decrease because the minimum
required return on the unit’s assets is subtracted to determine residual income.

Rationale
 An increase in the unit’s fixed costs
This answer is incorrect. An increase in the unit’s fixed costs will cause the business unit’s residual income to decrease because this decreases the
unit’s operating income.

Rationale
 A decrease in the unit’s sales
This answer is incorrect. A decrease in the unit’s sales will cause the business unit’s residual income to decrease because this decreases the unit’s
operating income.
Question 11
1.C.3.g
cma11.p1.t1.me.0064_0820
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3

The following information is available for Halle Department Stores:

Average operating assets $600,000

Operating income 60,000
Contribution margin 150,000
Minimum rate of return 8%

How much is Halle's residual income?

Your Answer

$102,000

$540,000
Correct

$12,000

$48,000

Rationale
 $102,000
This answer is incorrect. A company's residual income is not based on its contribution margin.

Rationale
 $540,000
This answer is incorrect. Residual income is not calculated as average operating assets less operating income.

Rationale
 $12,000
Residual income is calculated as operating income less an asset charge equal to average operating assets times the required rate of return. Halle's
residual income is $60,000 – ($600,000 × .08) = $12,000.

Rationale
 $48,000
This answer is incorrect. Halle's asset charge is $48,000.
Question 12
1.C.3.g
aq.retinv.ri.005_0820
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3

Frigid Fridges Co. (FFC) is a refrigerator manufacturer and wholesaler. For the month of July, FFC had the following operating statistics:

Sales $600,000
Operating Income 40,000
Net Profit 10,000
Total Assets 700,000
Shareholders’ Equity 300,000
Cost of Capital 5%

Based on the above information, what is FFC's residual income (RI)?

Correct

$5,000

($25,000)
Your Answer

$25,000

$10,000

Rationale
 $5,000
The formula for RI = Division's Income − (Total Assets × Cost of Capital). The investment base is defined by the Total Assets figure provided. FFC's
required income on this investment is $35,000, which is computed by taking $700,000 total assets × 5% cost of capital. Operating income is $40,000,
representing the return on investment. Therefore, $40,000 Operating Income − $35,000 Required Income = $5,000 RI.

Rationale
 ($25,000)
This answer is incorrect. This answer subtracted the product of total assets multiplied by cost of capital from net profit, instead of operating
income.

Rationale
 $25,000
This answer is incorrect. This answer subtracted the product of shareholders' equity, instead of total assets, multiplied by cost of capital from
operating income.

Rationale
 $10,000
This answer is incorrect. This answer subtracted the product of sales, instead of total assets, multiplied by cost of capital from operating income.
Question 13
1.C.3.e
cma11.p1.t1.me.0058_0820
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 4

A company's management is planning on making an investment of $800,000 to launch a new product. In the first year, the new product is expected to
generate sales of $200,000 and a contribution margin of $175,000. Incremental fixed costs are $50,000. The company's expected return on investment
(ROI) in the first year is closest to

*Source: Retired ICMA CMA Exam Questions.

6%.
Correct

16%.
Your Answer

22%.

25%.

Rationale
 6%.
This answer is incorrect. ROI is not calculated as “fixed expenses ÷ investment.”

Rationale
 16%.

ROI is calculated by dividing income by investment. This product would have an income of $125,000 with an investment of $800,000, which is
closest to 16%. See calculations below

Sales $200,000
Variable expenses 25,000
Contribution margin 175,000
Fixed costs 50,000
Operating income $125,000

Income ÷ Investment = $125,000 ÷ $800,000 = 0.15625

Rationale
 22%.
This answer is incorrect. Incremental fixed costs need to be subtracted when calculating income for ROI.

Rationale
 25%.
This answer is incorrect. The capital turnover of this investment is 25% (sales ÷ investment).
Question 14
1.C.3.f
retinv.ri.tb.014_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 5
King Karaoke makes karaoke machines for personal and commercial use. The production manager wants to replace an old assembly machine with a
newer model. He believes the new model will allow them to reduce fixed and variable costs by 8%. The new machine has a value of $130,000 and the old
machine is valued at $35,000. Current sales are $600,000 with a contribution margin of 59% and fixed costs of $98,000. Total assets before the purchase
of the new machine are $4,000,000. Should the company upgrade its assembly machine? Why or why not?
No, because the ROI decreases by 0.15%
Correct

Yes, because the ROI increases by 0.52%

Yes, because fixed and variable costs are decreased

Your Answer

No, total assets are increased

Rationale
 No, because the ROI decreases by 0.15%
This answer is incorrect. Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the
items an investment center manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷
Assets.” The current contribution margin is $354,000 (59% × $600,000). This results in operating income of $256,000 ($354,000 − $98,000). Combined
with assets of $4,000,000 the current ROI is 6.4% ($256,000 ÷ $4,000,000). If the new machine is purchased, total assets will increase by $95,000
($130,000 – $35,000) to $4,095,000. If the decrease in fixed and variable costs are ignored, the new ROI will be calculated as 6.25% ($256,000 ÷
$4,095,000). This is a decrease of 0.15%, meaning the machine should not be purchased. However, the decrease in costs needs to be included in the
analysis.

Rationale
 Yes, because the ROI increases by 0.52%
Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the items an investment center
manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷ Assets.” The current
contribution margin is $354,000 (59% × $600,000). This results in operating income of $256,000 ($354,000 − $98,000). Combined with assets of
$4,000,000 the current ROI is 6.4% ($256,000 ÷ $4,000,000). If the new machine is purchased, variable costs will decrease from $246,000 ($600,000 –
$354,000) to $226,320 ($246,000 × [1 – .08]) and fixed costs will decrease from $98,000 to $90,160 ($98,000 × [1 – .08]). This results in new operating
income of $283,520 ($600,000 – $226,320 – $90,160). Total assets will increase by $95,000 ($130,000 – $35,000) to $4,095,000 if the new machine is
purchased. This results in a new ROI of 6.92% ($283,520 ÷ $4,095,000). Since ROI would increase 0.52%, the machine should be purchased.

Rationale
 Yes, because fixed and variable costs are decreased
This answer is incorrect. If the new machine is purchased, variable costs will decrease from $246,000 ($600,000 – [59% × $600,000]) to $226,320
($246,000 × [1 – .08]) and fixed costs will decrease from $98,000 to $90,160 ($98,000 × [1 – .08]). However, a decrease in cost does not automatically
mean the machine should be purchased since an investment center manager is responsible for operating income and assets used. The decrease in
cost (and subsequent increase in operating income) needs to be compared with the increase in assets to assess the impact on ROI in order to make
a decision concerning purchasing the machine.

Rationale
 No, total assets are increased
This answer is incorrect. If the new machine is purchased, total assets will increase by $95,000 ($130,000 – $35,000) to $4,095,000. However, an
increase in assets does not automatically mean the machine should not be purchased since an investment center manager is responsible for
operating income and assets used. The increase in assets needs to be compared with the increase in operating income to assess the impact on ROI
in order to make a decision concerning purchasing the machine.
Question 15
1.C.3.k
retinv.ri.tb.043_0120
LOS: 1.C.3.k
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
The OPL Company has two investment centers. Investment Center X uses accounting methods that tend to increase the value of its assets while
Investment Center Y uses accounting methods that tend to decrease the value of its assets. How will the account methods decisions affect the current
evaluation of these investment centers?
Investment Center X will appear more profitable than Investment Center Y.
Correct

Investment Center Y will appear more profitable than Investment Center X.

This will not affect the evaluation of the centers.

It is not possible to conclude anything about the evaluation of these centers.

Rationale
 Investment Center X will appear more profitable than Investment Center Y.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income
measures both increase (decrease) when asset valuations decrease (increase).

Rationale
 Investment Center Y will appear more profitable than Investment Center X.
Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income measures effectively take
income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income measures both decrease as
asset valuations increase because the denominator for ROI is higher and the minimum required return for residual income is higher with higher
asset valuations. This means that when all other factors are equal, Investment Center Y will appear more profitable than Investment Center X due to
the accounting method decisions at each center.

Rationale
 This will not affect the evaluation of the centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Both of these measures are
affected by the company’s asset valuations, so the accounting methods choices that are made will affect the evaluation of the centers.

Rationale
 It is not possible to conclude anything about the evaluation of these centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Both of these measures are
impacted by the company’s asset valuations, which means it is possible to conclude that the accounting methods decisions will impact the
evaluation of these centers.
Question 16
1.C.3.e
retinv.ri.tb.001_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
What is the return on investment (ROI) if sales are $2,000,000, variable costs are $1,700,000, fixed costs are $100,000, and the investment center assets
are $1,000,000?
30%

2.0
Correct

20%

10%

Rationale
 30%
This answer is incorrect. If contribution margin of $300,000 ($2,000,000 − $1,700,000) is used as the numerator, ROI would be 30% ($300,000 ÷
$1,000,000). However, this is not the correct formula.

Rationale
 2.0
This answer is incorrect. The asset turnover is 2.0 ($2,000,000 ÷ $1,000,000). However, the question asks for the ROI, not asset turnover.

Rationale
 20%
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.” With
operating income of $200,000 ($2,000,000 − $1,700,000 − $100,000), ROI is 20% ($200,000 ÷ $1,000,000).

Rationale
 10%
This answer is incorrect. The operating income as a percentage of sales is 10% ($200,000 ÷ $2,000,000). However, the question asks for the ROI, not
operating income as a percentage of sales.
Question 17
1.C.3.j
retinv.ri.tb.039_0120
LOS: 1.C.3.j
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
Which of the following statements correctly describes the correlation between an investment center’s choice of accounting methods and its performance
evaluation?
Correct

Investment centers that use accounting methods that tend to increase income and decrease assets will look better than investment centers that use
accounting methods that tend to decrease income and increase assets.

Investment centers that use accounting methods that tend to decrease income and increase assets will look better than investment centers that use
accounting methods that tend to increase income and decrease assets.

Investment centers that use accounting methods that tend to increase income and assets will look better than investment centers that use
accounting methods that tend to decrease income and assets.

Investment centers that use accounting methods that tend to decrease income and assets will look better than investment centers that use
accounting methods that tend to increase income and assets.

Rationale
 Investment centers that use accounting methods that tend to increase income and decrease assets will look better than investment
centers that use accounting methods that tend to decrease income and increase assets.
Investment center managers are responsible for the center’s income and assets. Because the return on investment (ROI) and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income
measures both increase when income increases and when assets decrease. Investment centers that use accounting methods that tend to increase
income and decrease assets will look better than investment centers that use accounting methods that tend to decrease income and increase
assets.

Rationale
 Investment centers that use accounting methods that tend to decrease income and increase assets will look better than investment
centers that use accounting methods that tend to increase income and decrease assets.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. A decrease in income and an
increase in assets decrease both the ROI and residual income measures.

Rationale
 Investment centers that use accounting methods that tend to increase income and assets will look better than investment centers that
use accounting methods that tend to decrease income and assets.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Although an increase in
income increases the ROI and residual income measures, an increase in assets decreases both measures.

Rationale
 Investment centers that use accounting methods that tend to decrease income and assets will look better than investment centers that
use accounting methods that tend to increase income and assets.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Although a decrease in assets
increases the ROI and residual income measures, a decrease in income decreases both measures.
Question 18
1.C.3.f
retinv.ri.tb.017_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
Ortiz Sandwiches has sales of $58,000. Its variable costs are $32,000, fixed costs are $17,000, and total assets are $75,000. If the sandwich shop would
increase its sales by 10% with a constant contribution margin, how would this affect its ROI?
Correct

Increase it by 3.47%

Decrease it by 3.47%

Increase it by 1.2%
Your Answer

Decrease it by 1.2%

Rationale
 Increase it by 3.47%
Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the items an investment center
manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷ Assets.” The current
operating income is $9,000 ($58,000 − $32,000 − $17,000). Combined with assets of $75,000 the current ROI is 12% ($9,000 ÷ $75,000). The current
contribution margin is $26,000 ($58,000 − $32,000). If this increases 10%, it will grow to $28,600, making operating income $11,600 ($28,600 −
$17,000). The new ROI will then be 15.47% ($11,600 ÷ $75,000). This represents an increase in ROI of 3.47% (15.47% − 12%).

Rationale
 Decrease it by 3.47%
This answer is incorrect. The current operating income is $9,000 ($58,000 − $32,000 − $17,000). Combined with assets of $75,000 the current ROI is
12% ($9,000 ÷ $75,000). The current contribution margin is $26,000 ($58,000 − $32,000). If this increases 10%, it will grow to $28,600, making
operating income $11,600 ($28,600 − $17,000). The new ROI will then be 15.47% ($11,600 ÷ $75,000). This represents an increase in ROI of 3.47%, not
a decrease (15.47% − 12%).

Rationale
 Increase it by 1.2%
This answer is incorrect. The current operating income is $9,000 ($58,000 − $32,000 − $17,000). Combined with assets of $75,000 the current ROI is
12% ($9,000 ÷ $75,000). If operating income is assumed to increase by 10%, it will be $9,900. The new ROI will then be 13.2% ($9,900 ÷ $75,000). This
is an increase of 1.2% (13.2% − 12%). However, when sales increase by 10%, fixed costs stay the same. This means the contribution margin, not
operating income, increases 10%.

Rationale
 Decrease it by 1.2%
This answer is incorrect. The current operating income is $9,000 ($58,000 − $32,000 − $17,000). Combined with assets of $75,000 the current ROI is
12% ($9,000 ÷ $75,000). If operating income is assumed to increase by 10%, it will be $9,900. The new ROI will then be 13.2% ($9,900 ÷ $75,000).
However, this is an increase, not decrease, of 1.2% (13.2% − 12%). In addition, when sales increase by 10%, fixed costs stay the same. This means
the contribution margin, not operating income, increases 10%.
Question 19
1.C.3.e
aq.retinv.ri.001_0820
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Which of the following is the correct equation for ROI?
Income ÷ Equity = Return on equity (ROE). Alternatively, Income ÷ (Total assets – Total debt) = Return on equity (ROE)

Income ÷ (Long-term debt + Equity) = Return on capital employed (ROCE). Alternatively, Income ÷ (Total assets – Short-term debt) = Return on capital
employed (ROCE)
Your Answer

Income ÷ Total assets = Return on assets (ROA)

Correct

All the equations listed are correct.

Rationale
 Income ÷ Equity = Return on equity (ROE). Alternatively, Income ÷ (Total assets – Total debt) = Return on equity (ROE)
This is not the only correct equation for ROI. The ROE calculation, a version of ROI, is focused on the fact that the true investors in the organization
are the shareholders who have provided equity and expect a return on their equity investment. If the ROI formula is focused on measuring the
ability of management to capture value after paying all obligations in order to provide that value to shareholders, then the formula is computed as
follows: Income ÷ Equity = Return on equity (ROE) or Income ÷ (Total assets – Total debt) = Return on equity (ROE).

Rationale
 Income ÷ (Long-term debt + Equity) = Return on capital employed (ROCE). Alternatively, Income ÷ (Total assets – Short-term debt) =
Return on capital employed (ROCE)
This is not the only correct equation for ROI. Based on an assumption that generally only long-term debt and equity require a return on the money
employed (i.e., short-term operating liabilities usually don't carry explicit interest rates), the ROI formula can be focused on creating value to cover
the costs of the long-term capital employed by the business, and is computed as follows: Income ÷ (Long-term debt + Equity) = Return on capital
employed (ROCE) or Income ÷ (Total assets – Short-term debt) = Return on capital employed (ROCE).

Rationale
 Income ÷ Total assets = Return on assets (ROA)
This is not the only correct equation for ROI. Typically, total assets are used in the ROI calculation. If the strategic issue is to manage total assets in
order to create value that achieves a particular goal, then return on total assets is the right formulation. On this basis, the ROI formula is computed
as follows: Income ÷ Total assets = Return on assets (ROA).

Rationale
 All the equations listed are correct.
The most common performance measure for an organization or strategic business unit (SBU) is return on investment or ROI. This measure has been
around for a long time, and there are a number of specific versions of this measure. The basic ROI computation as suggested by its name is as
follows: Income ÷ Investment = Return on Investment (ROI). However, there are many variations of this calculation, and all of the equations listed in
this question are different versions of ROI focusing on different investment bases.
Question 20
1.C.3.h
aq.retinv.ri.007_1807
LOS: 1.C.3.h
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
After investing in a new project, Kenneth Company discovered that its overall residual income (RI) decreased. Which one of the following must be true
about the new project?
The return on investment (ROI) of the new project must have been greater than the firm's cost of capital.
Your Answer

The return on investment (ROI) of the new project must have been equal to the firm's cost of capital.
Correct

The return on investment (ROI) of the new project must have been less than the firm's cost of capital.

There is no connection between ROI and RI.

Rationale
 The return on investment (ROI) of the new project must have been greater than the firm's cost of capital.
This answer is incorrect. If the ROI of the new project was greater than the firm's cost of capital, the company's overall residual income would have
increased.

Rationale
 The return on investment (ROI) of the new project must have been equal to the firm's cost of capital.
This answer is incorrect. If the ROI of the new project was equal to the firm's cost of capital, the company's overall residual income would have
stayed the same.

Rationale
 The return on investment (ROI) of the new project must have been less than the firm's cost of capital.
If the ROI on a project is less than the firm's cost of capital, the firm's overall residual income will decrease because required income will increase
more than current income in the RI formula: Current income – Required income = Residual income.

Rationale
 There is no connection between ROI and RI.
This answer is incorrect. There is a connection between ROI and RI. For example, if the ROI on an investment is greater than the cost of capital of a
firm, the overall residual income of the firm will increase. This is because the required income (Assets × Cost of Capital) will increase more than
current income.
Question 21
1.C.3.i
retinv.ri.tb.033_0120
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Which of the following statements concerning the return on investment (ROI) and residual income measures is correct?
Correct

Evaluating a manager’s performance using the ROI measure can sometimes result in managers rejecting projects that are in the company’s best
interests.
Your Answer

Evaluating a manager’s performance using the residual income measure can sometimes result in managers rejecting projects that are in the
company’s best interests.

Evaluating a manager’s performance using either the ROI and the residual income measure can sometimes result in managers rejecting projects that
are in the company’s best interests.

Evaluating a manager’s performance using either the ROI or the residual income measure will not result in managers rejecting projects that are in the
company’s best interests.

Rationale
 Evaluating a manager’s performance using the ROI measure can sometimes result in managers rejecting projects that are in the
company’s best interests.
Using the return on investment measure to evaluate managers can result in managers rejecting projects that are in the company’s best interests.
This can occur because a project with an ROI above the company’s minimum required rate of return is in the company’s best interests, but if the
project’s ROI is below the division’s current ROI, the manager may reject the project since it will reduce the division’s ROI.

Rationale
 Evaluating a manager’s performance using the residual income measure can sometimes result in managers rejecting projects that are in
the company’s best interests.
This answer is incorrect. Managers will always accept projects with a positive residual income which is in the company’s best interests.

Rationale
 Evaluating a manager’s performance using either the ROI and the residual income measure can sometimes result in managers rejecting
projects that are in the company’s best interests.
This answer is incorrect. Only evaluating a manager’s performance under one of these measures sometimes results in managers rejecting projects
that are in the company’s best interests.

Rationale
 Evaluating a manager’s performance using either the ROI or the residual income measure will not result in managers rejecting projects
that are in the company’s best interests.
This answer is incorrect. Only evaluating a manager’s performance under one of these measures will not result in managers sometimes rejecting
projects that are in the company’s best interests.
Question 22
1.C.3.g
retinv.ri.tb.025_0120
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
A division has sales of $10,000,000, variable costs of $4,500,000, fixed costs of $3,500,000, and assets of $12,000,000. If the company’s minimum required
rate of return is 14% and the company’s current ROI is 18%, what is the division’s residual income?
Correct

$320,000

($160,000)

$600,000
Your Answer

$1,680,000

Rationale
 $320,000
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets and it is calculated as “Business Unit Income − (Business Unit Assets ×
Required Rate of Return).” The division has an operating income of $2,000,000 ($10,000,000 − $4,500,000 − $3,500,000); therefore, the division’s
residual income equals $320,000 ($2,000,000 − ($12,000,000 × 14%)).

Rationale
 ($160,000)
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the company’s return on investment.

Rationale
 $600,000
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the unit’s revenue.

Rationale
 $1,680,000
This answer is incorrect. The division’s minimum required return on the unit’s assets equals $1,680,000 ($12,000,000 × 14%). The minimum required
return on the unit’s assets is not the same as the division’s residual income.
Question 23
1.C.3.j
aq.retinv.ri.009_0820
LOS: 1.C.3.j
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Do revenue and expense recognition policies affect the measurement of income and reduce comparability of return on investment (ROI) and residual
income (RI) among business units?
Correct

Yes. Different recognition policies affect the amount of income used in the calculation of ROI and RI.

Not enough information. It depends on what type of ROI and RI calculation are being performed.
Your Answer

No. Revenue and expense items do not affect the calculation of ROI and RI.

No. Different recognition policies do not affect the amount of income used in the calculation of ROI and RI.

Rationale
 Yes. Different recognition policies affect the amount of income used in the calculation of ROI and RI.
Accounting policies occasionally shift within organizations and across economic zones. When this happens, ROI and residual income measures are
affected by modifications in revenue and expense recognition policies, as well as asset measurement policies. The result is performance measures
that change due to accounting policy rather than due to actual performance.

Rationale
 Not enough information. It depends on what type of ROI and RI calculation are being performed.
This answer is incorrect. All the different versions of the ROI calculation include reported income and assets. The RI calculation is based on income
and assets as well.

Rationale
 No. Revenue and expense items do not affect the calculation of ROI and RI.
This answer is incorrect. Revenue and expense items do affect the calculation of ROI and RI.

Rationale
 No. Different recognition policies do not affect the amount of income used in the calculation of ROI and RI.
This answer is incorrect. Different recognition policies affect the measurement of income used in the calculation of ROI and RI.
Question 24
1.C.3.g
retinv.ri.tb.027_0120
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 1
Which of the following correctly defines residual income?
A measure of how much a business unit’s revenue exceeds its operating expenses

A measure of how much a business unit’s revenue exceeds its variable expenses
Your Answer

A measure of how much a business unit’s revenue exceeds the minimum required rate of return on the unit’s assets
Correct

A measure of how much a business unit’s operating income exceeds the minimum required return on the unit’s assets

Rationale
 A measure of how much a business unit’s revenue exceeds its operating expenses
This answer is incorrect. This defines operating income, which is different from residual income.

Rationale
 A measure of how much a business unit’s revenue exceeds its variable expenses
This answer is incorrect. This defines contribution margin, which is different from residual income.

Rationale
 A measure of how much a business unit’s revenue exceeds the minimum required rate of return on the unit’s assets
This answer is incorrect. This omits operating expenses.

Rationale
 A measure of how much a business unit’s operating income exceeds the minimum required return on the unit’s assets
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets.
Question 25
1.C.3.e
retinv.ri.tb.007_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3

The Pacific division of Canterbury Co. has a current return on investment of 12% and the company has established a 10% minimum rate of return for the
division. The division manager has two investment projects available, for which the following estimates have been made:

Project A: Annual operating income = $62,000, operating assets = $580,000

Project B: Annual operating income = $82,500, operating assets = $840,000

Which project(s), if any, should be funded?

Correct

Project A only

Both projects

Project B only

Neither project

Rationale
 Project A only
Return on investment is a performance metric commonly used to evaluate investment centers as it incorporates all the items that an investment
center manager is responsible for (revenues, controllable expenses, and center assets). This metric is calculated as “Operating Income ÷ Operating
Assets.” The ROI for Project A is 10.7% ($62,000 ÷ $580,000) and the ROI for Project B is 9.8% ($82,500 ÷ $840,000). Since Project A’s ROI is above the
10% minimum return, it should be funded, but Project B should not be funded because it has an ROI below the 10% minimum return.

Rationale
 Both projects
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Operating Assets.” Only projects with an ROI above
the minimum return of 10% should be funded. Both of the available projects do not have an ROI above the minimum return of 10%.

Rationale
 Project B only
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Operating Assets.” Project B does not have an ROI
above the minimum return of 10%.

Rationale
 Neither project
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Operating Assets.” Only projects with an ROI above
the minimum return of 10% should be funded. One or both of the proposed projects have an ROI above the minimum return of 10%.
Question 26
1.C.3.f
retinv.ri.tb.021_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 5

The southeast division of a distribution company is planning on purchasing a new delivery truck for $18,500. The current truck has a book value of $5,000
and will be sold immediately. The new truck is expected to increase operating income by $6,000. Additional information is as follows:

Current operating assets $800,000

Current operating income $82,500
Minimum rate of return 10%
Profit margin 15%

Based on the expected change in the return on investment metric, should the truck be purchased?

No, because the return on investment decreases from 10.3% to 10.0%

Your Answer

No, because the return on investment decreases from 10.9% to 10.3%

Yes, because the return on investment increases from 10.3% to 10.7%

Correct

Yes, because the return on investment increases from 10.3% to 10.9%

Rationale
 No, because the return on investment decreases from 10.3% to 10.0%
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Assets.” The new ROI will not be 10.0%.

Rationale
 No, because the return on investment decreases from 10.9% to 10.3%
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Assets.” The current ROI is not 10.9% and the new
ROI will not be 10.3%.

Rationale
 Yes, because the return on investment increases from 10.3% to 10.7%
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Assets.” The new ROI will not be 10.7%.

Rationale
 Yes, because the return on investment increases from 10.3% to 10.9%
Return on investment is a performance metric commonly used to evaluate investment centers as it incorporates all the items that an investment
center manager is responsible for (revenues, controllable expenses, and center assets). This metric is calculated as “Operating Income ÷ Assets.”
The current ROI is 10.3% ($82,500 ÷ $800,000). If the new truck is purchased, ROI will increase to 10.9% ($88,500 ÷ $813,500). Because the truck will
increase ROI, the manager would choose to purchase it.
Question 27
1.C.3.e
2C3-CQ09
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4

Fennel Products is using cost-based pricing to determine the selling price for its new product based on the following information.

Annual volume 25,000 units

Fixed costs $700,000 per year
Variable costs $200 per unit
Plant investment $3,000,000
Working capital $1,000,000
Effective tax rate 40%

The target price that Fennel needs to set for the new product to achieve a 15% after-tax return on investment (ROI) would be:

Your Answer

$228.

$258.
Correct

$268.

$238.

Rationale
 $228.
This answer is incorrect. This answer did not consider the plant investment or the working capital as a part of the initial investment.

Rationale
 $258.
This answer is incorrect. This answer did not consider working capital as a part of the initial investment.

Rationale
 $268.

The target price (p) is computed by using the following formula:

(Total sales − Total variable costs − Total fixed costs)(1 − tax rate) = (Target ROI)(investment)

Total sales = (volume)(target price) = (25,000)(p)

Total variable costs = (volume)(variable cost per unit) = (25,000)($200) = $5,000,000

Total fixed costs = $700,000

Investment includes both plant and working capital = $3,000,000 + $1,000,000 = $4,000,000

(25,000p − $5,000,000 − $700,000)(1 − 0.4) = (0.15)($4,000,000)

(25,000p − $5,700,000)(0.6) = $600,000

15,000p − $3,420,000 = $600,000

15,000p = $4,020,000

p = $268.

Rationale
 $238.
This answer is incorrect. This answer did not consider plant investment as a part of the initial investment.
Question 28
1.C.3.e
retinv.ri.tb.008_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3

The Atlantic division of Monterosa, Inc., has a current return on investment of 9% and the company has established an 8% minimum rate of return for the
division. The division manager has two investment projects available, for which the following estimates have been made:

Project A: Annual operating income = $49,600, operating assets = $464,000

Project B: Annual operating income = $66,000, operating assets = $672,000

Which project(s), if any, should be funded?

Project A only

Project B only
Correct

Both projects

Neither project

Rationale
 Project A only
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Operating Assets.” Project A has an ROI of 10.7%
($49,600 ÷ $464,000) which is above the minimum return of 8% so it should be funded; however, Project A is not the only project that should be
funded.

Rationale
 Project B only
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Operating Assets.” Project B has an ROI of 9.8%
($66,000 ÷ $672,000) which is above the minimum return of 8% so it should be funded; however, Project B is not the only project that should be
funded.

Rationale
 Both projects
A return on investment is a performance metric commonly used to evaluate investment centers as it incorporates all the items that an investment
center manager is responsible for (revenues, controllable expenses, and center assets). This metric is calculated as “Operating Income ÷ Assets.”
The ROI for Project A is 10.7% ($49,600 ÷ $464,000) and the ROI for Project B is 9.8% ($66,000 ÷ $672,000). Since both of these projects have an ROI
above the 8% minimum return, they should both be funded.

Rationale
 Neither project
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Operating Assets.” Only projects with an ROI above
the minimum return of 8% should be funded. One or both of the proposed projects have an ROI above the minimum return of 8%.
Question 29
1.C.3.e
retinv.ri.tb.004_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
Last quarter, Richardson Automotive had sales of $124,000, operating income of $35,000, and assets of $157,000. What is Richardson’s return on
investment?
4.49%
Correct

22.3%

79.0%

28.2%

Rationale
 4.49%
This answer is incorrect. In this case assets divided by operating income is 4.49 ($157,000 ÷ $35,000). However, the question asks for ROI, not assets
divided by operating income.

Rationale
 22.3%
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.” With
operating income of $35,000 and assets of $157,000, ROI is 22.3% ($35,000 ÷ $157,000).

Rationale
 79.0%
This answer is incorrect. In this case asset turnover is 79.0% ($124,000 ÷ $157,000). However, the question asks for ROI, not asset turnover.

Rationale
 28.2%
This answer is incorrect. In this case operating income as a percentage of sales is 28.2% ($35,000 ÷ $124,000). However, the question asks for ROI,
not operating income as a percentage of sales.
Question 30
1.C.3.g
1C3-AT31
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
All of the following items would be incorporated into the calculation of a division's investment base when using the residual income approach for
performance measurement and evaluation except:
division inventories when division management exercises control over the inventory levels.

division accounts receivable when division management exercises control over credit policy and credit terms.
Correct

land being held by the division as a site for a new plant.

Your Answer

fixed assets employed in division operations.

Rationale
 division inventories when division management exercises control over the inventory levels.
This answer is incorrect. Division inventories when division management exercises control over the inventory levels would be incorporated into the
calculation of a division's investment base when using the residual income approach for performance measurement and evaluation.

Rationale
 division accounts receivable when division management exercises control over credit policy and credit terms.
This answer is incorrect. Division accounts receivable when division management exercises control over credit policy and credit terms would be
incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and
evaluation.

Rationale
 land being held by the division as a site for a new plant.
The division's asset base should only include assets employed in the business. Land being held by the division as a site for a new plant is not
currently employed in the business.

Rationale
 fixed assets employed in division operations.
This answer is incorrect. Fixed assets employed in division operations would be incorporated into the calculation of a division's investment base
when using the residual income approach for performance measurement and evaluation.
Question 31
1.C.3.j
retinv.ri.tb.038_0120
LOS: 1.C.3.j
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
The TRE Company has two investment centers. Investment Center A uses the First-In First-Out (FIFO) method for inventory and Investment Center B uses
the Last-In First-Out (LIFO) method for inventory. If inventory prices are increasing, how will this affect the current evaluation of these investment
centers?
Investment Center B will have higher income than Investment Center A.
Correct

Investment Center A will have higher income than Investment Center B.

This will not affect the evaluation of the centers.

Your Answer

It is not possible to conclude anything about the evaluation of these centers.

Rationale
 Investment Center B will have higher income than Investment Center A.
This answer is incorrect. When prices are rising, the FIFO inventory method results in lower cost of goods sold than the LIFO method.

Rationale
 Investment Center A will have higher income than Investment Center B.
When prices are rising, the FIFO inventory method results in lower cost of goods sold than the LIFO method, which means that Investment Center A
will appear more profitable than Investment Center B.

Rationale
 This will not affect the evaluation of the centers.
This answer is incorrect. The choice between using either the FIFO or LIFO method will result in different cost of goods sold figures when prices
change from one period to the next, which means that the choice in method will affect the evaluation of the centers.

Rationale
 It is not possible to conclude anything about the evaluation of these centers.
This answer is incorrect. It is possible to conclude that the increase in inventory prices will impact the evaluation of these centers because they use
a different method for inventory.
Question 32
1.C.3.e
aq.retinv.ri.002_0820
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3

Performance data for three divisions at Cupco, Inc. are presented below.

Division A B C
Sales $1,500,000 $750,000 ?
Operating income 200,000 75,000 ?
Investment (assets) 500,000 ? 2,500,000
Profit margin (return on sales) ? ? 0.5%
Asset turnover ? ? 1.5
Return on investment ? 10% ?

What is the traditional return on investment for Division A?

Correct

40%

33.3%
Your Answer

13.33%

300%

Rationale
 40%
The traditional return on investment (ROI) is calculated as follows: ROI = Income ÷ Assets = $200,000 ÷ $500,000 = 40% or ROI can be calculated as
(operating income ÷ sales) × (sales ÷ investment) = ($200,000 ÷ $1,500,000) × ($1,500,000 ÷ $500,000) = 40%.

Rationale
 33.3%
This answer is incorrect. This answer represents investment divided by sales, which does not represent ROI for Division A.

Rationale
 13.33%
This answer is incorrect. This answer represents operating income divided by sales, which does not represent ROI for Division A.

Rationale
 300%
This answer is incorrect. This answer represents sales divided by investment, which does not represent ROI for Division A.
Question 33
1.C.3.i
1C3-AT34
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4

Edith Carolina, president of the Deed Corporation, requires a minimum return on investment (ROI) 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 ROI of 14% for his division for the past three 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 an
ROI of 12%.

If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum required rate of return, what will be
the preference for taking on the proposed cosmetics line by Edith Carolina and Michael Sanders?

Correct

Carolina: accept; Sanders: accept.

Carolina: accept; Sanders: reject.

Your Answer

Carolina: reject; Sanders: accept.

Carolina: reject; Sanders: reject.

Rationale
 Carolina: accept; Sanders: accept.
Both Carolina and Sanders would accept the new line of cosmetics. The 12% ROI for the line is higher than the minimum corporate ROI of 8%, which
is used as the imputed interest charge in the residual income model.

Rationale
 Carolina: accept; Sanders: reject.
This answer is incorrect. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum
required rate of return, Carolina will accept. However, Sanders will not reject.

Rationale
 Carolina: reject; Sanders: accept.
This answer is incorrect. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum
required rate of return, Carolina will not reject. However, Sanders will accept.

Rationale
 Carolina: reject; Sanders: reject.
This answer is incorrect. If the Deed Corporation evaluates managerial performance using residual income based on the corporate minimum
required rate of return, Carolina will not reject. Additionally, Sanders will not reject.
Question 34
1.C.3.e
retinv.ri.tb.002_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 1
When using the return on investment (ROI) formula:
sales are divided by investment center assets.

net income is divided by sales.

sales are divided by net income.

Correct

operating income is divided by investment center assets.

Rationale
 sales are divided by investment center assets.
This answer is incorrect. Sales divided by investment center assets is asset turnover, not return on investment.

Rationale
 net income is divided by sales.
This answer is incorrect. Net income divided by sales is return on sales, not return on investment.

Rationale
 sales are divided by net income.
This answer is incorrect. Sales divided by net income is not a performance measure.

Rationale
 operating income is divided by investment center assets.
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.”
Question 35
1.C.3.g
1C3-AT28
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 5

REB Service Co. is a computer service center. For the month of May, REB had the following operating statistics:

Sales $450,000
Operating Income 25,000
Net profit 8,000
Total assets 500,000
Shareholders' equity 200,000
Cost of Capital 6%

REB uses operating income to calculate return on investment and residual income. Based on the above information, which one of the following
statements is correct? REB has a:

Your Answer

residual income (RI) of $13,000.

residual income (RI) of $(22,000).

return on investment (ROI) of 4%.

Correct

residual income (RI) of $(5,000).

Rationale
 residual income (RI) of $13,000.
This answer is incorrect. This answer subtracted the product of shareholders' equity multiplied by cost of capital from operating income.

Rationale
 residual income (RI) of $(22,000).
This answer is incorrect. This answer subtracted the product of total assets multiplied by cost of capital from net profit.

Rationale
 return on investment (ROI) of 4%.
This answer is incorrect. This answer used net income in the calculation of return on investment (ROI) instead of operating income.

Rationale
 residual income (RI) of $(5,000).

RI is the excess of the actual ROI in dollars over a targeted amount equal to an imputed interest charge on invested capital. The rate used is
ordinarily the weighted-average cost of capital. Some entities measure managerial performance in terms of the amount of RI rather than the
percentage ROI.

The formula for RI = Division's Income − (Total assets × cost of capital). Let's assume that the investment base is defined by Total Assets figure
provided. REB's targeted amount of investment is $30,000, which is computed by taking $500,000 total assets × 6% cost of capital. Given operating
income of $25,000, we assume that to be the return on investment. Therefore, using the residual income formula, we take the $25,000 Operating
Income − $30,000 Investment, and come up with a RI of ($5,000).
Question 36
1.C.3.g
cma11.p1.t1.me.0047_0820
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 4

Business unit A has a return on investment of 10%, with a net profit for the year of $40,000. The opportunity cost for the business unit investments has
been calculated at 8%. The company plans to purchase a new machine worth $100,000 and expects the net profit to rise by an additional $15,000. The
new purchase decision will increase the return on investment

*Source: Retired ICMA CMA Exam Questions.

by 1% and increase the residual income by $8,000.

Your Answer

by 1% and increase the residual income by $15,000.

Correct

to 11% and increase the residual income by $7,000.

to 11% and increase the residual income by $15,000.

Rationale
 by 1% and increase the residual income by $8,000.
This answer is incorrect. An increase in ROI from 10% to 11% is a 10% increase (1 percentage point increase from 10%), not a 1% increase. The
original residual income is $8,000, but the increase is not $8,000.

Rationale
 by 1% and increase the residual income by $15,000.
This answer is incorrect. An increase in ROI from 10% to 11% is a 10% increase (1 percentage point increase from 10%), not a 1% increase. The new
residual income is $15,000, but the increase is not $15,000.

Rationale
 to 11% and increase the residual income by $7,000.
Return on investment (ROI) = Income Investment

First we must solve for the original investment:

$40,000
ROI = = 10%
Investment

$40,000
= $400,000 original investment
10%

$40,000 + $15,000
Next we must determine the new ROI = = 11%.
$400,000 + $100,000

Finally we must calculate the residual income:

Residual income = Profit – (invested capital × required rate of return or opportunity cost)

Original residual income = $40,000 − ($400,000 × 8%) = $8,000

New residual income = $55,000 − ($500,000 × 8%) = $15,000

Therefore, the increase in residual income is $7,000.

Rationale
 to 11% and increase the residual income by $15,000.
This answer is incorrect. The new residual income is $15,000, but the increase is not $15,000.
Question 37
1.C.3.e
retinv.ri.tb.005_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
Petersburg Manufacturing’s investment center records sales of $6,000,000, variable costs of $3,800,000, fixed costs of $1,300,000, and an ROI of 9%. What
are Petersburg’s assets?
$24,444,444

$81,000
Correct

$10,000,000
Your Answer

$423,000

Rationale
 $24,444,444
This answer is incorrect. Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating
Income ÷ Assets.” Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” If contribution margin of $2,200,000 is used
instead of operating income, assets are $24,444,444 ($2,200,000 ÷ 9%). However, this is not the correct formula.

Rationale
 $81,000
This answer is incorrect. Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating
Income ÷ Assets.” Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” If the figures are multiplied instead of divided,
assets are $81,000 ($900,000 × 9%). However, this is not the correct formula.

Rationale
 $10,000,000
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.”
Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” With operating income of $900,000 and ROI of 9%, assets are
$10,000,000 ($900,000 ÷ 9%).

Rationale
 $423,000
This answer is incorrect. Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating
Income ÷ Assets.” Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” If only fixed costs are subtracted, then
operating income will be $4,700,000. If this is multiplied by the ROI of 9%, the result is $423,000 ($4,700,000 × 9%). However, this is not the correct
formula.
Question 38
1.C.3.e
retinv.ri.tb.006_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
Hunter Accessories’ investment center records sales of $12,700,000, variable costs of $8,200,000, fixed costs of $2,100,000, and an ROI of 16%. What are
Hunter’s assets?
$28,125,000

$384,000

$1,696,000
Correct

$15,000,000

Rationale
 $28,125,000
This answer is incorrect. Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating
Income ÷ Assets.” Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” If contribution margin of $4,500,000 is used
instead of operating income, assets are $28,125,000 ($4,500,000 ÷ 16%). However, this is not the correct formula.

Rationale
 $384,000
This answer is incorrect. Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating
Income ÷ Assets.” Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” If the figures are multiplied instead of divided,
assets are $384,000 ($2,400,000 × 16%). However, this is not the correct formula.

Rationale
 $1,696,000
This answer is incorrect. Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating
Income ÷ Assets.” Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” If only fixed costs are subtracted then
operating income will be $10,600,000. If this is multiplied by the ROI of 16%, the result is $1,696,000 ($10,600,000 × 16%). However, this is not the
correct formula.

Rationale
 $15,000,000
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.”
Rearranging the figures results in assets being equal to “Operating Income ÷ ROI.” With operating income of $2,400,000 and ROI of 16%, assets are
$15,000,000 ($2,400,000 ÷ 16%).
Question 39
1.C.3.i
1C3-AT04
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
After investing in a new project, Lee Company discovered that its residual income remained unchanged. Which one of the following must be true about
the new project?
The net present value of the new project must have been positive.
Correct

The return on investment (ROI) of the new project must have been equal to the firm's cost of capital.

The net present value of the new project must have been negative.

The return on investment (ROI) of the new project must have been less than the firm's cost of capital.

Rationale
 The net present value of the new project must have been positive.
This answer is incorrect. If Lee Company's residual income remained unchanged after investing in a new project, this does not mean that the net
present value of the new project must have been positive.

Rationale
 The return on investment (ROI) of the new project must have been equal to the firm's cost of capital.
If residual income remains unchanged, then the residual income of the new project must be zero. This can only occur when the ROI of the new
addition is exactly equal to the firm's cost of capital.

Rationale
 The net present value of the new project must have been negative.
This answer is incorrect. If Lee Company's residual income remained unchanged after investing in a new project, this does not mean that the net
present value of the new project must have been negative.

Rationale
 The return on investment (ROI) of the new project must have been less than the firm's cost of capital.
This answer is incorrect. If Lee Company's residual income remained unchanged after investing in a new project, this does not mean that the return
on investment (ROI) of the new project must have been less than the firm's cost of capital.
Question 40
1.C.3.f
retinv.ri.tb.019_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
Washington Fruits has sales of $942,000. Its variable costs are $623,000, fixed costs are $122,000, and total assets are $1,500,000. Washington Fruits found
a new packaging supplier that charged 0.8 cents less per package, effectively reducing its variable costs by 3%. Based on this, Washington Fruits’ change
in ROI would be a:
1.25 % decrease.

1.49% increase.
Correct

1.25% increase.
Your Answer

0.99% increase.

Rationale
 1.25 % decrease.
This answer is incorrect. The current operating income is $197,000 ($942,000 − $623,000 − $122,000). Combined with assets of $1,500,000 the
current ROI is 13.13% ($197,000 ÷ $1,500,000). If variable costs increase 3%, they will be $641,690. This will make operating income $178,310
($942,000 − $641,690 − $122,000). The new ROI will then be 11.88% ($178,310 ÷ $1,500,000). This represents a decrease in ROI of 1.25% (13.13% −
11.88%). However, variable costs decrease by 3%, not increase by 3%.

Rationale
 1.49% increase.
This answer is incorrect. The current operating income is $197,000 ($942,000 − $623,000 − $122,000). Combined with assets of $1,500,000 the
current ROI is 13.13% ($197,000 ÷ $1,500,000). If variable costs decrease 3%, they will be $604,310. If fixed costs also decrease 3%, they will be
$118,340. This will make operating income $219,350 ($942,000 − $604,310 − $118,340). The new ROI will then be 14.62% ($219,350 ÷ $3,000,000).
This represents an increase in ROI of 1.49% (14.62% − 13.13%). However, the fixed costs do not change.

Rationale
 1.25% increase.
Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the items an investment center
manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷ Assets.” The current
operating income is $197,000 ($942,000 − $623,000 − $122,000). Combined with assets of $1,500,000 the current ROI is 13.13% ($197,000 ÷
$1,500,000). If variable costs decrease 3%, they will be $604,310. This will make operating income $215,690 ($942,000 − $604,310 − $122,000). The
new ROI will then be 14.38% ($215,690 ÷ $1,500,000). This represents an increase in ROI of 1.25% (14.38% − 13.13%).

Rationale
 0.99% increase.
This answer is incorrect. The current operating income is $197,000 ($942,000 − $623,000 − $122,000). Combined with assets of $1,500,000 the
current ROI is 13.13% ($197,000 ÷ $1,500,000). If assets decrease 3%, they will be $1,395,000. Assuming no change in income, the new ROI will be
14.12% ($197,000 ÷ $1,395,000). This represents an increase in ROI of 0.99% (14.12% − 13.13%). However, the assets do not change, and the variable
costs decrease.
Question 41
1.C.3.i
aq.retinv.ri.008_1807
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
Car Seats, Corp. (CSC) has two divisions, Infant Seats and Toddler Seats. The manager of the Infant Seats Division is evaluated on the basis of residual
income. The manager of the Toddler Seats Division is evaluated on the basis of return on investment (ROI). The cost of capital has been 9% and the ROI
has been 13% for the two divisions. Each manager is currently considering a project with an 11% rate of return. According to the current evaluation
system for managers, which manager(s) would have incentive to undertake the project?
Your Answer

The manager of the Toddler Seats Division would have incentive to undertake the project while the manager of the Infant Seats Division would not
have incentive to undertake the project.
Correct

The manager of the Infant Seats Division would have incentive to undertake the project while the manager of the Toddler Seats Division would not
have incentive to undertake the project.

Neither manager would have incentive to undertake the project.

Both managers would have incentive to undertake the project.

Rationale
 The manager of the Toddler Seats Division would have incentive to undertake the project while the manager of the Infant Seats Division
would not have incentive to undertake the project.
This answer is incorrect. The manager of the Toddler Seats Division would not have incentive to undertake the project while the manager of the
Infant Seats Division would.

Rationale
 The manager of the Infant Seats Division would have incentive to undertake the project while the manager of the Toddler Seats Division
would not have incentive to undertake the project.
Given the cost of capital and ROI for the two divisions, the project would offer the most incentive for the Infant Seats Division. The Toddler Seats
Division would not be as willing to take on the project because the project ROI will dilute the Toddler Seats Division's current ROI, which their
division's evaluations are based upon.

Rationale
 Neither manager would have incentive to undertake the project.
This answer is incorrect. One of the managers would have incentive to undertake the project.

Rationale
 Both managers would have incentive to undertake the project.
This answer is incorrect. Only one of the managers would have incentive to undertake the project.
Question 42
1.C.3.f
aq.retinv.ri.004_0820
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3

Computer Keyboard Industries (CKI) is a multidivisional firm that evaluates its managers based on the return on investment (ROI) earned by their
divisions. The evaluation and compensation plans use a 16% hurdle rate, and managers receive a bonus of 3% of their base compensation for every one-
percentage point that the division's ROI exceeds 16%.

Lisa Mack, manager of the Wireless Keyboard Division, has made a forecast of the division's operations and finances for next year that indicates the ROI
would be 22%. In addition, her finance team has identified and evaluated four potential investment projects as shown below.

Project Projected ROI

A 24%
B 18%
C 14%
D 21%

Assuming no restrictions on expenditures, what new programs would add value to CKI (the overall multidivisional firm)?

A, B, C, and D

A only
Correct

A, B, and D only

A and D only

Rationale
 A, B, C, and D
This answer is incorrect. Program C will not add value to CKI because Program C has a projected ROI of 14%.

Rationale
 A only
This answer is incorrect. While Program A is the only program with projected ROI above the Wireless Keyboard Division ROI of 22%, meaning that
Lisa Mack would only have incentive to choose this program, other programs can still add value to CKI.

Rationale
 A, B, and D only
CKI would want to invest in any project whose ROI exceeds the corporate target of 16%. Programs A, B, and D all have ROIs that exceed 16%. Lisa
Mack and the Wireless Keyboard Division would have incentive to choose only Program A because it is the only program above the Wireless
Keyboard Division ROI of 22%. This is a downside of evaluating managers and divisions based on ROI.

Rationale
 A and D only
This answer is incorrect. Programs A and D are not the only programs that can add value to CKI.
Question 43
1.C.3.i
1C3-AT10d
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
Residual income is a better measure for performance evaluation of an investment center manager than return on investment (ROI) because:
returns do not increase as assets are depreciated.

only the gross book value of assets needs to be calculated.

Correct

desirable investment decisions will not be neglected by high-return divisions.

Your Answer

the problems associated with measuring the asset base are eliminated.

Rationale
 returns do not increase as assets are depreciated.
This answer is incorrect. Residual income is a better measure for performance evaluation of an investment center manager than return on
investment (ROI), but the reason is not because returns do not increase as assets are depreciated.

Rationale
 only the gross book value of assets needs to be calculated.
This answer is incorrect. Residual income is a better measure for performance evaluation of an investment center manager than return on
investment (ROI), but the reason is not because only the gross book value of assets needs to be calculated.

Rationale
 desirable investment decisions will not be neglected by high-return divisions.

If ROI is used for performance measurement, a division will not invest in any project whose ROI is less than the division's ROI. There are situations
when the project ROI is less than the division's ROI but higher than the corporate ROI. The division would reject such projects if they were using ROI,
and this would be detrimental to the corporation. Residual income removes this problem.

Residual income is calculated as follows:

Residual income = (division's income) − (the corporation's target ROI)(the division's assets)

Using residual income, any division project whose ROI exceeds the corporate target ROI would be acceptable to the division.

Rationale
 the problems associated with measuring the asset base are eliminated.
This answer is incorrect. Residual income is a better measure for performance evaluation of an investment center manager than return on
investment (ROI), but the reason is not because the problems associated with measuring the asset base are eliminated.
Question 44
1.C.3.f
1C3-CQ13
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4

KHD Industries is a multidivisional firm that evaluates its managers based on the return on investment (ROI) earned by their divisions. The evaluation
and compensation plans use a targeted ROI of 15% (equal to the cost of capital) and managers receive a bonus of 5% of basic compensation for every
one-percentage point that the division's ROI exceeds 15%.

David Evans, manager of the Consumer Products Division, has made a forecast of the division's operations and finances for next year that indicates the
ROI would be 24%. In addition, new short-term programs were identified by the Consumer Products Division and evaluated by the finance staff as
follows:

Program Projected ROI

A 13%
B 19%
C 22%
D 31%

Assuming no restrictions on expenditures, what is the optimal mix of new programs that would add value to KHD Industries?

C and D only
Correct

B, C, and D only
Your Answer

A, B, C, and D

D only

Rationale
 C and D only
This answer is incorrect. Programs C and D are not the only programs that can add value to KHD Industries.

Rationale
 B, C, and D only
KHD would want to invest in any project whose ROI exceeds the corporate target of 15%. Programs B, C, and D all have ROIs that exceed 15%.

Rationale
 A, B, C, and D
This answer is incorrect. Program A will not add value to KHD Industries because Program A has a projected ROI of 13%.

Rationale
 D only
This answer is incorrect. While Program D is the only program with projected ROI above the Consumer Products Division ROI of 24%, other
programs can still add value to KHD Industries.
Question 45
1.C.3.f
retinv.ri.tb.010_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
Which of the following investment center managers would most likely be questioned by their superiors for poor performance?
Janice, who had variable costs of $2.8 million rather than the expected $3.1 million
Correct

Nate, who had operating income of $970,000 rather than the expected $1.3 million
Your Answer

Melody, who used the book value to value assets rather than fair value

Paul, who had fixed costs of $218,000 rather than the expected $217,500

Rationale
 Janice, who had variable costs of $2.8 million rather than the expected $3.1 million
This answer is incorrect. Variable costs being lower than expected will result in operating income being higher than expected. If operating income is
higher than expected, then ROI will also be higher than expected. Having an ROI higher than expected will not likely result in Janice being
questioned for poor performance.

Rationale
 Nate, who had operating income of $970,000 rather than the expected $1.3 million
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.” If
operating income is lower than expected, then ROI will also be lower than expected. Having an ROI lower than expected will likely result in Nate
being questioned for poor performance.

Rationale
 Melody, who used the book value to value assets rather than fair value
This answer is incorrect. Using book value rather than fair value to value assets will likely result in a lower value for assets in the denominator of
ROI. A lower denominator will result in a higher ROI. Having an ROI higher than expected will likely result in Melody not being questioned for poor
performance.

Rationale
 Paul, who had fixed costs of $218,000 rather than the expected $217,500
This answer is incorrect. Fixed costs being higher than expected will result in operating income being lower than expected. If operating income is
lower than expected, then ROI will also be lower than expected. Although this is the case here, Paul will not likely be questioned for poor
performance since the difference between actual and expected fixed costs and therefore actual and expected ROI is immaterial.
Question 46
1.C.3.i
retinv.ri.tb.035_0120
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2

Residual income is often preferred over return on investment (ROI) as a performance evaluation measure because:

*Source: Retired ICMA CMA Exam Questions.

The imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI.

Average investment is employed with residual income while year-end investment is employed with ROI.
Correct

Residual income concentrates on maximizing the amount of income rather than a percentage return as with ROI.

Residual income is a measure over time while ROI represents the results for a single time period.

Rationale
 The imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the
calculated ROI.
This answer is incorrect. The imputed interest rate for the residual income method is not more easily derived than the target rate for ROI
calculations.

Rationale
 Average investment is employed with residual income while year-end investment is employed with ROI.
This answer is incorrect. Neither the residual income nor the return on investment measures use average investment in the calculation.

Rationale
 Residual income concentrates on maximizing the amount of income rather than a percentage return as with ROI.
The residual income method is calculated as a dollar amount of income minus the imputed cost of the investment. This method does concentrate
on maximizing the amount of income which is often preferred over concentrating on a percentage return.

Rationale
 Residual income is a measure over time while ROI represents the results for a single time period.
This answer is incorrect. Both the residual income method and the ROI method are versatile and can be used to analyze investments over the short
and the long term.
Question 47
1.C.3.i
retinv.ri.tb.032_0120
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 1
Each of the following statements concerning return on investment (ROI) and residual income is correct, except:
Both measures can be used to evaluate investment centers.
Correct

Both measures use the company’s minimum required rate of return as part of their calculations.
Your Answer

Both measures can be affected by the accounting choices a company makes.

Both measures use operating income and assets.

Rationale
 Both measures can be used to evaluate investment centers.
This answer is incorrect. The return on investment and residual income measures can both be used to evaluate investment centers since they are
based on operating income and assets.

Rationale
 Both measures use the company’s minimum required rate of return as part of their calculations.
The residual income measure uses the company’s minimum required rate of return as part of its calculation, but the return on investment measure
does not.

Rationale
 Both measures can be affected by the accounting choices a company makes.
This answer is incorrect. The return on investment and residual income measures can both be affected by the accounting choices a company makes
since both use GAAP figures in their calculations.

Rationale
 Both measures use operating income and assets.
This answer is incorrect. The return on investment and residual income measures both use operating income and assets as part of their
calculations.
Question 48
1.C.3.e
retinv.ri.tb.003_0120
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
In the last quarter, Perez Manufacturing had sales of $12.3 million, operating income of $3.6 million, and assets of $15 million. What is Perez’s return on
investment?
Correct

24%

29%

4.17%

82%

Rationale
 24%
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.” With
operating income of $3.6 million and assets of $15 million, ROI is 24% ($3.6 ÷ $15).

Rationale
 29%
This answer is incorrect. In this case operating income as a percentage of sales is 29% ($3.6 ÷ $12.3). However, the question asks for ROI, not
operating income as a percentage of sales.

Rationale
 4.17%
This answer is incorrect. In this case assets divided by operating income is 4.17 ($15 ÷ $3.6). However, the question asks for ROI, not assets divided
by operating income.

Rationale
 82%
This answer is incorrect. In this case asset turnover is 82% ($12.3 ÷ $15). However, the question asks for ROI, not asset turnover.
Question 49
1.C.3.g
1C3-LS10d
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
A business is started with an investment of $1,000,000. The investor requires a rate of return of 10%. If the business produced total sales of $1,000,000
and a contribution margin of $500,000 and had $300,000 of fixed costs, what is its residual income (RI)?
Correct

$100,000

$200,000
Your Answer

$900,000

$400,000

Rationale
 $100,000
RI is income less the product of the required rate of return and the investment. Income is sales less contribution margin and less fixed costs or
$200,000. RI = $200,000 − (0.1 × $1,000,000) = $100,000.

Rationale
 $200,000
This answer is incorrect. This answer was calculated by subtracting fixed costs of $300,000 from contribution margin of $500,000. This answer did
not subtract the product of the investment multiplied by the rate of return.

Rationale
 $900,000
This answer is incorrect. This answer was calculated by subtracting the product of the investment multiplied by the rate of return from the sales of
$1,000,000. This answer did not consider the contribution margin or fixed costs.

Rationale
 $400,000
This answer is incorrect. This answer was calculated by subtracting the product of the investment multiplied by the rate of return from the
contribution margin of $500,000. This answer did not subtract fixed costs of $300,000.
Question 50
1.C.3.i
retinv.ri.tb.036_0120
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2

Return on investment focuses on income as a percentage of investment, while residual income focuses on:

*Source: Retired ICMA CMA Exam Questions.

the capital charge.

Correct

operating income less a capital charge.

Your Answer

management decisions.

cost of capital times the amount of investment.

Rationale
 the capital charge.
This answer is incorrect. Residual income does not solely focus on the capital charge.

Rationale
 operating income less a capital charge.
Residual income is the amount of income minus a capital charge which is the imputed cost of the investment.

Rationale
 management decisions.
This answer is incorrect. Residual income does not focus on management decisions.

Rationale
 cost of capital times the amount of investment.
This answer is incorrect. Residual income does not focus on the cost of capital multiplied by the amount of the investment.
Question 51
1.C.3.k
retinv.ri.tb.042_0120
LOS: 1.C.3.k
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
The REW Company has two investment centers that share a set of assets. Investment Center 1 uses the shared assets approximately 75% of the time and
Investment Center 2 uses the shared assets approximately 25% of the time. REW’s controller splits the value of the assets evenly between the two centers
for evaluation purposes. What impact does this decision have on the current evaluation of these investment centers?
Correct

Investment Center 1’s performance will be overstated and Investment Center 2’s performance will be understated.

Investment Center 1’s performance will be understated and Investment Center 2’s performance will be overstated.
Your Answer

This will not affect the evaluation of the centers.

It is not possible to conclude anything about the evaluation of these centers.

Rationale
 Investment Center 1’s performance will be overstated and Investment Center 2’s performance will be understated.
Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income measures effectively take
income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income measures both decrease as
asset valuations increase because the denominator for ROI is higher and the minimum required return for residual income is higher with higher
asset valuations. The decision to split the value of the assets evenly between the two centers will understate Investment Center 1’s asset base and
overstate Investment Center 2’s asset base. This means that Investment Center 1’s performance will be overstated and Investment Center 2’s
performance will be understated.

Rationale
 Investment Center 1’s performance will be understated and Investment Center 2’s performance will be overstated.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Both of these measures
increase (decrease) when asset valuations decrease (increase).

Rationale
 This will not affect the evaluation of the centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Both of these measures are
affected by the company’s asset valuations, so the allocation decision will affect the evaluation of the centers.

Rationale
 It is not possible to conclude anything about the evaluation of these centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Both of these measures are
impacted by the company’s asset valuations which means it is possible to conclude that the allocation decision will impact the evaluation of these
centers.
Question 52
1.C.3.f
retinv.ri.tb.020_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 5

The plastics division of a manufacturing company is planning on purchasing new equipment that costs $55,000 and disposing old equipment with a book
value of $10,000. The new equipment is expected to increase operating income by $10,850, and no other changes in operating assets are expected. The
company provided the following current information:

Current operating assets $500,000

Current operating income $60,000
Minimum rate of return 13%
Profit margin 20%

Based on the original and new return on investment measures, would the manager choose to purchase the new equipment?

No, because the return on investment decreases from 13% to 12%

No, because the return on investment decreases from 15.5% to 16.5%

Correct

Yes, because the return on investment increases from 12% to 13%

Your Answer

Yes, because the return on investment increases from 14.5% to 15.8%

Rationale
 No, because the return on investment decreases from 13% to 12%
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Assets.” The current ROI is not 13% and the new ROI
will not be 12%.

Rationale
 No, because the return on investment decreases from 15.5% to 16.5%
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Assets.” The current ROI is not 15.5% and the new
ROI will not be 16.5%.

Rationale
 Yes, because the return on investment increases from 12% to 13%
Return on investment is a performance metric commonly used to evaluate investment centers as this metric incorporates all the items that an
investment center manager is responsible for (revenues, controllable expenses, and center assets). This metric is calculated as “Operating Income ÷
Assets.” The current ROI is 12% ($60,000 ÷ $500,000). If the new equipment is purchased, ROI will increase to 13% ($70,850 ÷ $545,000). Because the
equipment will increase ROI, the manager would choose to purchase it.

Rationale
 Yes, because the return on investment increases from 14.5% to 15.8%
This answer is incorrect. The return on investment metric is calculated as “Operating Income ÷ Assets.” The current ROI is not 14.5% and the new
ROI will not be 15.8%.
Question 53
1.C.3.k
aq.retinv.ri.010_0820
LOS: 1.C.3.k
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Which of the following affects the measurement of investment and reduces comparability of return on investment (ROI) and residual income (RI)
measures among business units?
Joint asset sharing.

Overall asset measurement.

Inventory measurement policies.

Correct

All the answers listed affect measurement and comparability.

Rationale
 Joint asset sharing.
This answer is incorrect. When assets are jointly shared by different business units it can become difficult to clearly distinguish performance of one
business unit from another. However, this is not the only factor that affects the calculation of ROI and RI.

Rationale
 Overall asset measurement.
This answer is incorrect. When adjustments in overall asset measurement policies are made, ROI and RI measures are affected. However, this is not
the only factor that affects the calculation of ROI and RI.

Rationale
 Inventory measurement policies.
This answer is incorrect. When adjustments in overall inventory measurement policies are made, ROI and RI measures are affected. However, this is
not the only factor that affects the calculation of ROI and RI.

Rationale
 All the answers listed affect measurement and comparability.
Inventory measurement policies, joint asset sharing, and overall asset measurement policies may affect the measurement of investment and
reduce comparability of return on investment (ROI) and residual income (RI) measures among business units.
Question 54
1.C.3.k
retinv.ri.tb.041_0120
LOS: 1.C.3.k
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
The JAF Company has two investment centers. Investment Center 1 uses brand new assets and Investment Center 2 uses assets that were purchased five
or more years earlier. How will this affect the current evaluation of these investment centers?
Investment Center 1 will appear more profitable than Investment Center 2.

This will not affect the evaluation of the centers.

Correct

Investment Center 2 will appear more profitable than Investment Center 1.

It is not possible to conclude anything about the evaluation of these centers.

Rationale
 Investment Center 1 will appear more profitable than Investment Center 2.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income
measures both decrease when asset valuations increase.

Rationale
 This will not affect the evaluation of the centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income
measures are both impacted by the company’s asset valuations, so the asset valuations will affect the evaluation of the centers.

Rationale
 Investment Center 2 will appear more profitable than Investment Center 1.
Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income measures effectively take
income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income measures both decrease
when the assets used have higher valuations because higher asset valuations cause the denominator for ROI to be higher and the minimum
required return for residual income to be higher. With all other factors being equal, Investment Center 2 will appear more profitable than
Investment Center 1.

Rationale
 It is not possible to conclude anything about the evaluation of these centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income
measures are both impacted by asset valuations which means it is possible to conclude that there will be an impact on the evaluation of these
centers.
Question 55
1.C.3.g
aq.retinv.ri.006_1807
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
The Pacific Line in the U&P Railroad operates as a profit center. In the last quarter, the Pacific Line generated $200,000 in operating income on $1,000,000
in total assets. The Pacific Line has $250,000 in current liabilities. Assuming that the U&P required rate of return is 12%, what is the residual income for
the Pacific Line?
$320,000

$200,000

$120,000
Correct

$80,000

Rationale
 $320,000
This answer is incorrect. This answer added the product of assets multiplied by required rate of return to operating income, instead of subtracting
it, which does not represent residual income.

Rationale
 $200,000
This answer is incorrect. This answer represents operating income, which does not represent the residual income for the Pacific Line.

Rationale
 $120,000
This answer is incorrect. This answer represents the product of assets multiplied by required rate of return, which does not represent residual
income.

Rationale
 $80,000
Residual income is calculated as follows:

Residual Income = Actual Income - (Assets × Required Rate of Return)

$200,000 - ($1,000,000 × 12%) = $80,000

Question 56
1.C.3.j
retinv.ri.tb.040_0120
LOS: 1.C.3.j
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
The HJU Company has two investment centers. Investment Center A uses accounting methods that tend to increase current income while Investment
Center B uses accounting methods that tend to decrease current income. How will the accounting methods used affect the current evaluation of these
investment centers?
Investment Center B will appear more profitable than Investment Center A.
Correct

Investment Center A will appear more profitable than Investment Center B.

Your Answer

This will not affect the evaluation of the centers.

It is not possible to conclude anything about the evaluation of these centers.

Rationale
 Investment Center B will appear more profitable than Investment Center A.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. Both the ROI and residual
income measures increase when income increases.

Rationale
 Investment Center A will appear more profitable than Investment Center B.
Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income measures effectively take
income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income measures both increase
when income increases, which means that when all other factors are equal, Investment Center A will appear more profitable than Investment
Center B.

Rationale
 This will not affect the evaluation of the centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income
measures are both impacted by current income, which means the accounting methods choices that a company makes affect the evaluation of the
centers.

Rationale
 It is not possible to conclude anything about the evaluation of these centers.
This answer is incorrect. Investment center managers are responsible for the center’s income and assets. Because the ROI and residual income
measures effectively take income and assets into consideration, they are often used to evaluate investment centers. The ROI and residual income
measures are both impacted by current income, which means it is possible to conclude that the accounting methods choices will impact the
evaluation of these centers.
Question 57
1.C.3.g
retinv.ri.tb.024_0120
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
A division has sales of $8,000,000, variable costs of $3,200,000, fixed costs of $3,600,000, and assets of $10,000,000. If the company’s minimum required
rate of return is 14% and the company’s current ROI is 16%, what is the division’s residual income?
($400,000)

$80,000
Your Answer

$1,200,000
Correct

($200,000)

Rationale
 ($400,000)
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the company’s return on investment.

Rationale
 $80,000
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the unit’s revenue.

Rationale
 $1,200,000
This answer is incorrect. The division’s operating income is $1,200,000 ($8,000,000 − $3,200,000 − $3,600,000). Operating income is not the same as
residual income.

Rationale
 ($200,000)
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets and it is calculated as “Business Unit Income − (Business Unit Assets ×
Required Rate of Return).” The division has an operating income of $1,200,000 ($8,000,000 − $3,200,000 − $3,600,000); therefore, the division’s
residual income equals a loss of $200,000 ($1,200,000 − ($10,000,000 × 14%)).
Question 58
1.C.3.i
retinv.ri.tb.037_0120
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 6

The management team of a company is evaluating the use of either return on investment or residual income as a measure of the performance of the
company’s lines of business. In a presentation about the two measures, which of the following statements is correct?

I. Both measures include key elements such as revenues, costs, and level of investments, which are critical for top management decision-making.
II. Both measures avoid all potential goal-congruency problems within the organization.
III. The only disadvantage of the measures is that they both have a long-term focus, rather than a short-term focus.
IV. Both measures can be manipulated to suit the user’s purposes as the calculation is based on accounting numbers.

*Source: Retired ICMA CMA Exam Questions.

I and II only

II and III only

III and IV only

Correct

I and IV only

Rationale
 I and II only
This answer is incorrect. Return on investment presents goal-congruency problems within an organization as projects that are in the best interest of
the organization may be rejected if the project return is less than the current return on investment. Also, both measures can be manipulated since
they are based on accounting numbers.

Rationale
 II and III only
This answer is incorrect. Return on investment presents goal-congruency problems within an organization as projects that are in the best interest of
the organization may be rejected if the project return is less than the current return on investment. Also, these measures have a short-term focus.

Rationale
 III and IV only
This answer is incorrect. These measures have a short-term focus. Also, both measures are based on revenues, costs, and investments made.

Rationale
 I and IV only
Return on investment and residual income both are based on revenues, costs, and level of investment. Return on investment measures a project’s
return on a percentage basis while residual income measures a project’s return on a dollar basis. That makes these measures useful to top
management for decision-making. However, both measures can be manipulated since they both use accounting numbers that are affected by
accounting choices.
Question 59
1.C.3.f
retinv.ri.tb.015_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: hard
Bloom Code: 5
Peppermint Stockings makes toy- and candy-filled piñatas. The production manager wants to replace an old filling machine with a newer model. He
believes the new model will allow them to reduce fixed and variable costs by 1.5%. The new machine has a value of $110,000 and the old machine is
valued at $25,000. Current sales are $300,000 with a contribution margin of 36% and fixed costs of $31,000. Total assets before purchase of the new
machine are $1,000,000. Should the company upgrade its filling machine? Why or why not?
Yes, because the ROI increases by 0.33%

Yes, because fixed and variable costs are decreased

Correct

No, because the ROI decreases by 0.29%

Your Answer

No, because total assets are increased

Rationale
 Yes, because the ROI increases by 0.33%
This answer is incorrect. The current contribution margin is $108,000 (36% × $300,000). This results in operating income of $77,000 ($108,000 −
$31,000). Combined with assets of $1,000,000 the current ROI is 7.7% ($77,000 ÷ $1,000,000). If the new machine is purchased, variable costs will
decrease from $192,000 ($300,000 – $108,000) to $189,120 ($192,000 × [1 – .015]) and fixed costs will decrease from $31,000 to $30,535 ($31,000 × [1
– .015]). This results in new operating income of $80,345 ($300,000 – $189,120 – $30,535). If the increase in total assets is ignored, the new ROI will
be calculated as 8.03% ($80,345 ÷ $1,000,000). This is an increase of 0.33%, meaning the machine should be purchased. However, the increase in
total assets needs to be included in the analysis.

Rationale
 Yes, because fixed and variable costs are decreased
This answer is incorrect. If the new machine is purchased, variable costs will decrease from $192,000 ($300,000 – $108,000) to $189,120 ($192,000 ×
[1 – .015]) and fixed costs will decrease from $31,000 to $30,535 ($31,000 × [1 – .015]). However, a decrease in cost does not automatically mean the
machine should be purchased since an investment center manager is responsible for operating income and assets used. The decrease in cost (and
subsequent increase in operating income) needs to be compared with the increase in assets to assess the impact on ROI in order to make a decision
concerning purchasing the machine.

Rationale
 No, because the ROI decreases by 0.29%
Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the items an investment center
manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷ Assets.” The current
contribution margin is $108,000 (36% × $300,000). This results in operating income of $77,000 ($108,000 − $31,000). Combined with assets of
$1,000,000 the current ROI is 7.7% ($77,000 ÷ $1,000,000). If the new machine is purchased, variable costs will decrease from $192,000 ($300,000 –
$108,000) to $189,120 ($192,000 × [1 – .015]) and fixed costs will decrease from $31,000 to $30,535 ($31,000 × [1 – .015]). This results in new
operating income of $80,345 ($300,000 – $189,120 – $30,535). Total assets will increase by $85,000 ($110,000 – $25,000) to $1,085,000 if the new
machine is purchased. This results in a new ROI of 7.41% ($80,345 ÷ $1,085,000). Since ROI would decrease 0.29%, the machine should not be
purchased.

Rationale
 No, because total assets are increased
This answer is incorrect. If the new machine is purchased total assets will increase by $85,000 ($110,000 – $25,000) to $1,085,000. However, an
increase in assets does not automatically mean the machine should not be purchased since an investment center manager is responsible for
operating income and assets used. The increase in assets needs to be compared with the increase in operating income to assess the impact on ROI
in order to make a decision concerning purchasing the machine.
Question 60
1.C.3.g
1C3-AT14
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
The imputed interest rate used in the residual income (RI) approach to performance evaluation can best be described as the:
Correct

target return on investment (ROI) set by the company's management.

historical weighted average cost of capital for the company.

Your Answer

average ROIs for the company over the last several years.

marginal after-tax cost of capital on new equity capital.

Rationale
 target return on investment (ROI) set by the company's management.

RI is calculated as:

RI = (division's income) − (the imputed interest charge)(the division's assets)

The imputed interest charge is normally the target ROI set by the company's management or the corporation's cost of capital.

Rationale
 historical weighted average cost of capital for the company.
This answer is incorrect. The imputed interest rate used in the residual income (RI) approach to performance evaluation is not best described as
historical weighted average cost of capital for the company.

Rationale
 average ROIs for the company over the last several years.
This answer is incorrect. The imputed interest rate used in the residual income (RI) approach to performance evaluation is not best described as
average ROIs for the company over the last several years.

Rationale
 marginal after-tax cost of capital on new equity capital.
This answer is incorrect. The imputed interest rate used in the residual income (RI) approach to performance evaluation is not best described as
marginal after-tax cost of capital on new equity capital.
Question 61
1.C.3.g
retinv.ri.tb.026_0120
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
A division has sales of $2,000,000, variable costs of $650,000, fixed costs of $750,000, and assets of $4,000,000. If the company’s minimum required rate of
return is 8% and the company’s current ROI is 12%, what is the division’s residual income?
$120,000
Correct

$280,000

$440,000
Your Answer

$320,000

Rationale
 $120,000
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the company’s return on investment.

Rationale
 $280,000
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets and it is calculated as “Business Unit Income − (Business Unit Assets ×
Required Rate of Return).” The division has an operating income of $600,000 ($2,000,000 − $650,000 − $750,000); therefore, the division’s residual
income equals $280,000 [$600,000 − ($4,000,000 × 8%)].

Rationale
 $440,000
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the unit’s revenue.

Rationale
 $320,000
This answer is incorrect. The division’s minimum required return on the unit’s assets equals $320,000 ($4,000,000 × 8%). Operating income is not the
same as the division’s residual income.
Question 62
1.C.3.h
retinv.ri.tb.031_0120
LOS: 1.C.3.h
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Which of the following correctly describes what it means when a business unit has a negative residual income?
The business unit’s actual operating income is lower than its budgeted operating income.

The business unit’s operating income is higher than the product of its investment base and minimum required rate of return.

The business unit’s operating income is lower than the product of its investment base and current return on investment.
Correct

The business unit’s operating income is lower than the product of its investment base and minimum required rate of return.

Rationale
 The business unit’s actual operating income is lower than its budgeted operating income.
This answer is incorrect. The residual income metric does not involve budgeted operating income.

Rationale
 The business unit’s operating income is higher than the product of its investment base and minimum required rate of return.
This answer is incorrect. When the business unit’s operating income is higher than the product of its investment base and minimum required rate of
return, the residual income will be positive, not negative.

Rationale
 The business unit’s operating income is lower than the product of its investment base and current return on investment.
This answer is incorrect. The residual income metric does not involve a business unit’s current return on investment.

Rationale
 The business unit’s operating income is lower than the product of its investment base and minimum required rate of return.
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets. A negative residual income means that the business unit’s operating
income is lower than the product of its investment base and minimum required rate of return.
Question 63
1.C.3.f
1C3-AT33
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4

Edith Carolina, president of the Deed Corporation, requires a minimum return on investment (ROI) 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 ROI of 14% for his division for the past three years and expects
the division to have the same return in the coming year. Sanders has the opportunity to invest in a new line of cosmetics, which is expected to have a
return on investment of 12%.

If the Deed Corporation evaluates managerial performance using ROI, what will be the preference for taking on the proposed cosmetics line by Edith
Carolina and Michael Sanders?

Carolina: accept; Sanders: accept.

Correct

Carolina: accept; Sanders: reject.

Your Answer

Carolina: reject; Sanders: accept.

Carolina: reject; Sanders: reject.

Rationale
 Carolina: accept; Sanders: accept.
This answer is incorrect. If the Deed Corporation evaluates managerial performance using ROI, Carolina will accept. However, Sanders will not
accept.

Rationale
 Carolina: accept; Sanders: reject.
Carolina would accept the new line of cosmetics, since its ROI of 12% is greater than the minimum corporate ROI of 8%. Sanders would reject the
new line of cosmetics, since its ROI of 12% is less than the division's ROI of 14%.

Rationale
 Carolina: reject; Sanders: accept.
This answer is incorrect. If the Deed Corporation evaluates managerial performance using ROI, Carolina will not reject. Additionally, Sanders will
not accept.

Rationale
 Carolina: reject; Sanders: reject.
This answer is incorrect. If the Deed Corporation evaluates managerial performance using ROI, Carolina will not reject. However, Sanders will reject.
Question 64
1.C.3.g
retinv.ri.tb.023_0120
LOS: 1.C.3.g
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
A division has sales of $6,000,000, variable costs of $2,800,000, fixed costs of $2,400,000, and assets of $4,000,000. If the company’s minimum required
rate of return is 15% and the company’s current ROI is 18%, what is the division’s residual income?
$80,000

($100,000)
Correct

$200,000
Your Answer

$800,000

Rationale
 $80,000
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the company’s return on investment.

Rationale
 ($100,000)
This answer is incorrect. The residual income metric measures how much a business unit’s operating income exceeds the minimum required return
on the unit’s assets. The minimum required return on the unit’s assets is not based on the unit’s revenue.

Rationale
 $200,000
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets and it is calculated as “Business Unit Income − (Business Unit Assets ×
Required Rate of Return).” The division has an operating income of $800,000 ($6,000,000 − $2,800,000 − $2,400,000); therefore, the division’s
residual income equals $200,000 ($800,000 − ($4,000,000 × 15%)).

Rationale
 $800,000
This answer is incorrect. The division’s operating income is $800,000 ($6,000,000 − $2,800,000 − $2,400,000). Operating income is not the same as
residual income.
Question 65
1.C.3.e
1C3-LS09
LOS: 1.C.3.e
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
What is the return on investment (ROI) for a company with revenues of $500,000, income of $200,000, and total assets of $800,000?
0.4
Correct

0.25

0.625
Your Answer

4.00

Rationale
 0.4
This answer is incorrect. This answer was calculated by dividing income of $200,000 by revenue of $500,000 and does not represent return on
investment (ROI).

Rationale
 0.25
Correct! ROI is income divided by investment (total assets).

Rationale
 0.625
This answer is incorrect. This answer was calculated by dividing revenue of $500,000 by total assets of $800,000 and does not represent return on
investment (ROI).

Rationale
 4.00
This answer is incorrect. This answer was calculated by dividing total assets of $800,000 by income of $200,000 and does not represent return on
investment (ROI).
Question 66
1.C.3.f
retinv.ri.tb.016_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 4
Adams Street Winery has sales of $287,000. Its variable costs are $96,500, fixed costs are $82,800, and total assets are $400,000. If the winery would
increase its sales by 5% with a constant contribution margin, how would this affect their ROI?
Decrease it by 2.38%

Increase it by 1.34%

Decrease it by 1.34%
Correct

Increase it by 2.38%

Rationale
 Decrease it by 2.38%
This answer is incorrect. The current operating income is $107,700 ($287,000 − $96,500 − $82,800). Combined with assets of $400,000 the current
ROI is 26.93% ($107,700 ÷ $400,000). The current contribution margin is $190,500 ($287,000 − $96,500). If this increases 5%, it will grow to $200,025,
making operating income $117,225 ($200,025 − $82,800). The new ROI will then be 29.31% ($117,225 ÷ $400,000). This represents an increase in ROI
of 2.38%, not a decrease (29.31% − 26.93%).

Rationale
 Increase it by 1.34%
This answer is incorrect. The current operating income is $107,700 ($287,000 − $96,500 − $82,800). Combined with assets of $400,000 the current
ROI is 26.93% ($107,700 ÷ $400,000). If operating income is assumed to increase by 5%, it will be $113,085. The new ROI will then be 28.27%
($113,085 ÷ $400,000). This is an increase of 1.34% (28.27% − 26.93%). However, when sales increase by 5%, fixed costs stay the same. This means
the contribution margin, not operating income, increases 5%.

Rationale
 Decrease it by 1.34%
This answer is incorrect. The current operating income is $107,700 ($287,000 − $96,500 − $82,800). Combined with assets of $400,000 the current
ROI is 26.93% ($107,700 ÷ $400,000). If operating income is assumed to increase by 5%, it will be $113,085. The new ROI will then be 28.27%
($113,085 ÷ $400,000). However, this is an increase, not decrease, of 1.34% (28.27% − 26.93%). In addition, when sales increase by 5%, fixed costs
stay the same. This means the contribution margin, not operating income, increases 5%.

Rationale
 Increase it by 2.38%
Return on investment is a common performance metric used to evaluate investment centers as it incorporates all the items an investment center
manager is responsible for (revenues, controllable expenses, and center assets). It is calculated as “Operating Income ÷ Assets.” The current
operating income is $107,700 ($287,000 − $96,500 − $82,800). Combined with assets of $400,000 the current ROI is 26.93% ($107,700 ÷ $400,000).
The current contribution margin is $190,500 ($287,000 − $96,500). If this increases 5%, it will grow to $200,025, making operating income $117,225
($200,025 − $82,800). The new ROI will then be 29.31% ($117,225 ÷ $400,000). This represents an increase in ROI of 2.38% (29.31% − 26.93%).
Question 67
1.C.3.f
retinv.ri.tb.011_0120
LOS: 1.C.3.f
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
Jake is an investment center manager who was given a poor performance score in his yearly evaluation. Which of the following was the most likely
reason Jake received a poor review?
ROI was 2% higher than expected.

Fixed costs were 5% lower than expected.

Correct

Cost of goods sold was 12% higher than expected.

Total assets remained unchanged throughout the year.

Rationale
 ROI was 2% higher than expected.
This answer is incorrect. Having an ROI higher than expected will not likely result in Jake being given a poor performance score.

Rationale
 Fixed costs were 5% lower than expected.
This answer is incorrect. If fixed costs are 5% lower than expected, operating income will be higher than expected. If that occurs, then ROI will also
be higher than expected. Having an ROI higher than expected will not likely result in Jake being given a poor performance score.

Rationale
 Cost of goods sold was 12% higher than expected.
Return on investment is a common performance metric used to evaluate investment centers. It is calculated as “Operating Income ÷ Assets.” If cost
of goods sold is 12% higher than expected, operating income will be lower than expected. If that occurs, then ROI will also be lower than expected.
Having an ROI lower than expected will likely result in Jake being given a poor performance score.

Rationale
 Total assets remained unchanged throughout the year.
This answer is incorrect. If assets remain unchanged throughout the year, ROI will not be negatively impacted. This will not likely result in Jake
being given a poor performance score.
Question 68
1.C.3.h
1C3-LS62
LOS: 1.C.3.h
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
A company is concerned that its divisional managers are not making decisions that are in the best interests of the overall corporation. In order to prevent
this, the company should use a performance evaluation system that focuses on:
Correct

residual income.
Your Answer

controllable costs.

flexible budget variances.

operating income.

Rationale
 residual income.
Residual income is the amount of income that a division has left over after incurring all of its expenses. A decision to focus on residual income as a
performance evaluation measure would focus the divisional manager's attention on cost-cutting measures.

Rationale
 controllable costs.
This answer is incorrect. In order to prevent divisional managers from making decisions that are not in the best interests of the overall corporation,
the company should not use a performance evaluation system that focuses on controllable costs.

Rationale
 flexible budget variances.
This answer is incorrect. In order to prevent divisional managers from making decisions that are not in the best interests of the overall corporation,
the company should not use a performance evaluation system that focuses on flexible budget variances.

Rationale
 operating income.
This answer is incorrect. In order to prevent divisional managers from making decisions that are not in the best interests of the overall corporation,
the company should not use a performance evaluation system that focuses on operating income.
Question 69
1.C.3.i
1C3-LS11
LOS: 1.C.3.i
Lesson Reference: Return on Investment and Residual Income
Difficulty: medium
Bloom Code: 3
A department that is considered profitable by the current measurement tools rejects a project that would improve the company's overall profitability but
would lower the department's profits. Which of the following methods is not likely to have caused this situation?
Cash flow return on investment (CFROI)

Market value added (MVA)

Your Answer

Return on investment(ROI)
Correct

Residual Income (RI)

Rationale
 Cash flow return on investment (CFROI)
This answer is incorrect. Cash flow return on investment (CFROI) could have caused a department to reject a project that would have improved the
company's overall profitability but would lower the department's profits.

Rationale
 Market value added (MVA)
This answer is incorrect. Market value added (MVA) could have caused a department to reject a project that would have improved the company's
overall profitability but would lower the department's profits.

Rationale
 Return on investment(ROI)
This answer is incorrect. Return on investment (ROI) could have caused a department to reject a project that would have improved the company's
overall profitability but would lower the department's profits.

Rationale
 Residual Income (RI)
Managers compensated on ROI, CFROI, or MVA may reject capital investments that do not promise as good or better a return than the rate being
currently earned even if the investment is strategically beneficial to the organization as a whole. RI is a dollar amount that if positive indicates a
project that would likely be accepted.
Question 70
1.C.3.h
retinv.ri.tb.029_0120
LOS: 1.C.3.h
Lesson Reference: Return on Investment and Residual Income
Difficulty: easy
Bloom Code: 2
Which of the following correctly describes what it means when a business unit has a positive residual income?
The business unit’s actual operating income was greater than its budgeted operating income.

The business unit’s current year operating income was greater than its operating income last year.
Your Answer

The business unit’s operating income was greater than the product of its investment base and current return on investment.
Correct

The business unit’s operating income was greater than the product of its investment base and minimum required rate of return.

Rationale
 The business unit’s actual operating income was greater than its budgeted operating income.
This answer is incorrect. The residual income metric does not involve budgeted operating income.

Rationale
 The business unit’s current year operating income was greater than its operating income last year.
This answer is incorrect. The residual income metric does not involve last year’s operating income.

Rationale
 The business unit’s operating income was greater than the product of its investment base and current return on investment.
This answer is incorrect. The residual income metric does not involve a business unit’s current return on investment.

Rationale
 The business unit’s operating income was greater than the product of its investment base and minimum required rate of return.
Residual income is a common performance metric used to evaluate investment centers. This metric measures how much a business unit’s
operating income exceeds the minimum required return on the unit’s assets. A positive residual income means that the business unit’s operating
income was greater than the product of its investment base and minimum required rate of return.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 1
1.C.3.r
balscore.tb.031_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

An accounting firm is using the balanced scorecard to improve the firm’s effectiveness and efficiency. It has identified the following objectives:

Increase profit per employee

Increase the number of customer engagements
Decrease accounting fees
Keep associates current in accounting changes

Which of the following measures would fit best under the learning and growth perspective of the balanced scorecard?

Number of new clients

Correct

Number of continuing education credits earned by the staff

Your Answer

Average fee per client

Number of clients served

Rationale
 Number of new clients
This answer is incorrect. This does not fit under the learning and growth perspective since it does not focus on measures related to employee skill
sets, information systems capabilities, motivation, or organizational alignment.

Rationale
 Number of continuing education credits earned by the staff
The learning and growth perspective of the balanced scorecard focuses on measures related to employee skill sets, information system capabilities,
motivation, and organizational alignment. The number of continuing education credits earned by the staff would be an appropriate measure for
this perspective since it involves employee skill set and organizational alignment.

Rationale
 Average fee per client
This answer is incorrect. This does not fit under the learning and growth perspective since it does not focus on measures related to employee skill
sets, information systems capabilities, motivation, and organizational alignment.

Rationale
 Number of clients served
This answer is incorrect. This does not fit under the learning and growth perspective since it does not focus on measures related to employee skill
sets, information systems capabilities, motivation, or organizational alignment.

https://t.me/joinchat/AAAAAEmdkQm8l_10mjxMXQ
Question 2
1.C.3.n
balscore.tb.016_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

An accounting firm is using the balanced scorecard to improve the firm’s effectiveness and efficiency. It has identified the following objectives:

Increase profit per employee

Increase the number of customer engagements
Decrease accounting fees
Keep associates current in accounting changes

Which of these objectives best fits under the learning and growth perspective of the balanced scorecard?

Correct

Keep associates current in accounting changes

Increase the number of customer engagements

Increase profit per employee

Your Answer

Decrease accounting fees

Rationale
 Keep associates current in accounting changes
The learning and growth perspective of the balanced scorecard focuses on measures related to employee skill sets, information system capabilities,
motivation, and organizational alignment. Keeping associates current in accounting changes best fits under the learning and growth perspective of
the balanced scorecard since it is focused on employee skill sets and organizational alignment.

Rationale
 Increase the number of customer engagements
This answer is incorrect. Increasing the number of customer engagements does not fit under the learning and growth perspective of the balanced
scorecard since it does not focus on employee skill sets, information systems capabilities, motivation, or organizational alignment.

Rationale
 Increase profit per employee
This answer is incorrect. Increasing the profit per employee does not fit under the learning and growth perspective of the balanced scorecard since
it does not focus on employee skill sets, information systems capabilities, motivation, or organizational alignment.

Rationale
 Decrease accounting fees
This answer is incorrect. Decreasing accounting fees does not fit under the learning and growth perspective of the balanced scorecard since it does
not focus on employee skill sets, information systems capabilities, motivation, or organizational alignment.
Question 3
1.C.3.n
balscore.tb.013_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
A nonprofit organization operates ten preschools in a large metropolitan area. The board of directors for the schools has implemented the balanced
scorecard to better align the organization’s goals with those of the stakeholders (students, parents, and donors). Which of the following objectives best
fits under the learning and growth perspective of the balanced scorecard?
Ensure clean and well-maintained facilities
Correct

Provide for the continued development of staff

Ensure the health and safety of students

Your Answer

Expand sources of revenue for the schools

Rationale
 Ensure clean and well-maintained facilities
This answer is incorrect. Ensuring clean and well-maintained facilities does not fit under the learning and growth perspective of the balanced
scorecard since it does not relate to employee skill sets, information systems capabilities, motivation, or organizational alignment.

Rationale
 Provide for the continued development of staff
The learning and growth perspective of the balanced scorecard focuses on measures related to employee skill sets, information system capabilities,
motivation, and organizational alignment. Providing for the continued development of staff best fits under the learning and growth perspective of
the balanced scorecard since it involves employee skill sets, motivation, and organizational alignment.

Rationale
 Ensure the health and safety of students
This answer is incorrect. Ensuring the health and safety of students does not fit under the learning and growth perspective of the balanced
scorecard since it does not relate to employee skill sets, information systems capabilities, motivation, or organizational alignment.

Rationale
 Expand sources of revenue for the schools
This answer is incorrect. Expanding sources of revenues for the schools does not fit under the learning and growth perspective of the balanced
scorecard since it does not relate to employee skill sets, information systems capabilities, motivation, or organizational alignment.
Question 4
1.C.3.m
balscore.tb.004_0120
LOS: 1.C.3.m
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
Each of the following are typically perspectives or segments of a balanced scorecard, except:
Customer
Correct

Budgeted performance

Learning and growth

Your Answer

Internal business process

Rationale
 Customer
This answer is incorrect. Balanced scorecards typically contain a customer perspective or segment.

Rationale
 Budgeted performance
A balanced scorecard is a performance management system containing measures in four areas: financial, customer, internal business process, and
learning and growth. While performance measures on a balanced scorecard may incorporate budgeted or expected performance into them,
budgeted performance by itself is not typically a separate perspective or segment.

Rationale
 Learning and growth
This answer is incorrect. Balanced scorecards typically contain a learning and growth perspective or segment.

Rationale
 Internal business process
This answer is incorrect. Balanced scorecards typically contain an internal business process perspective or segment.
Question 5
1.C.3.l
balscore.tb.002_0120
LOS: 1.C.3.l
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
Each of the following statements about key performance indicators (KPIs) are correct, except:
KPIs measure factors that are critical to the success of an organization.

KPIs often arise as a result of a SWOT analysis.

Correct

KPIs measure only financial performance.

Your Answer

KPIs focus on short-term and long-term performance.

Rationale
 KPIs measure factors that are critical to the success of an organization.
This answer is incorrect. KPIs are sometimes called critical success factors (CSFs) because they measure factors that are critical to the success of an
organization.

Rationale
 KPIs often arise as a result of a SWOT analysis.
This answer is incorrect. A SWOT analysis is part of an organization’s strategic planning process that involves analyzing the strengths, weaknesses,
opportunities, and threats facing an organization. Since this process helps an organization develop its strategy, measures to evaluate the strategy
(KPIs) result from this process.

Rationale
 KPIs measure only financial performance.
KPIs measure goals and objectives that are critical to the success of an organization. Since goals and objectives can be based on both financial and
nonfinancial performance, KPIs should also focus on both financial and nonfinancial performance.

Rationale
 KPIs focus on short-term and long-term performance.
This answer is incorrect. KPIs measure an organization’s goals and objectives. Since goals and objectives are based on both short-term and long-
term performance, KPIs should also focus on both short-term and long-term performance.
Question 6
1.C.3.o
cma11.p1.t1.me.0050_0820
LOS: 1.C.3.o
Lesson Reference: The Balanced Scorecard
Difficulty: hard
Bloom Code: 5

A sign of the successful implementation of a balanced scorecard is the presence of cause-and-effect relationship. An example of this success for a hotel is
meeting the target of

*Source: Retired ICMA CMA Exam Questions.

Your Answer

decreasing a customer's check-in time, which causes an increase in the number of implemented employee suggestions.

increasing employee training hours, which causes employee compensation to increase.

increasing profit, which causes an increase in employee job satisfaction ratings.

Correct

receiving more 5-star ratings from customers, which causes an increase in profit.

Rationale
 decreasing a customer's check-in time, which causes an increase in the number of implemented employee suggestions.
This answer is incorrect. Decreasing a customer's check-in time an increase in the number of implemented employee suggestions. The reverse may
be true.

Rationale
 increasing employee training hours, which causes employee compensation to increase.
This answer is incorrect. Increasing employee training hours is not likely to cause an increase in employee compensation.

Rationale
 increasing profit, which causes an increase in employee job satisfaction ratings.
This answer is incorrect. Increasing profit is not likely to cause an increase in employee job satisfaction ratings, but an increase in employee job
satisfaction ratings may cause an increase in profits.

Rationale
 receiving more 5-star ratings from customers, which causes an increase in profit.
There is a cause-and-effect relationship between a hotel receiving more 5-star ratings from customers, signifying happy customers, which causes an
increase in profits.
Question 7
1.C.3.r
balscore.tb.035_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

The board of directors of a chain of retail department stores has identified the following strategic objectives:

Increase gross profit margin

Increase employee satisfaction
Provide quality products
Increase sales to repeat customers

Which of the following measures is most appropriate for the customer perspective of the company’s balanced scorecard?

Your Answer

Lowering number of product returns

Correct

Increasing percentage of business growth from existing customers

Reducing cost per unit of product

Increasing employee productivity (revenue per employee)

Rationale
 Lowering number of product returns
This answer is incorrect. Lowering the number of product returns does not fit the customer perspective of the balanced scorecard since it does not
involve customer outcome measures or customer performance drivers.

Rationale
 Increasing percentage of business growth from existing customers
The customer perspective of the balanced scorecard focuses on customer outcome measures (such as market share, customer satisfaction, and
customer retention) and customer performance drivers (such as response time, delivery performance, and defects). Increasing the percentage of
business growth from existing customers would be an appropriate measure for the customer perspective of the balanced scorecard since it is a
customer outcome measure. Therefore, this is the correct answer.

Rationale
 Reducing cost per unit of product
This answer is incorrect. Reducing the cost per unit of product does not fit the customer perspective of the balanced scorecard since it does not
involve customer outcome measures or customer performance drivers.

Rationale
 Increasing employee productivity (revenue per employee)
This answer is incorrect. Increasing employee productivity (revenue per employee) does not fit the customer perspective of the balanced scorecard
since it does not involve customer outcome measures or customer performance drivers.
Question 8
1.C.3.r
balscore.tb.029_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
The business department of State Community College is increasing its online course offerings. Its main objectives include: uniformity of quality
instruction, competitive pricing structure per credit hour, increased market share, and recovery of revenue lost to other institutions. Which of these
objectives is best linked to the internal process perspective of the balanced scorecard?
Competitive pricing structure

Recovery of revenue lost to other institutions

Your Answer

Increased market share

Correct

Uniformity of quality instruction

Rationale
 Competitive pricing structure
This answer is incorrect. This would not be an appropriate measure for the internal process perspective since it is not focused on measuring
innovation, operations, or post-sales service.

Rationale
 Recovery of revenue lost to other institutions
This answer is incorrect. This would not be an appropriate measure for the internal process perspective since it does not involve measuring
innovation, operations, or post-sales service.

Rationale
 Increased market share
This answer is incorrect. This would not be an appropriate measure for the internal process perspective since it does not involve measuring
innovation, operations, or post-sales service.

Rationale
 Uniformity of quality instruction
The internal process perspective of the balanced scorecard focuses on measures in the process areas of innovation, operations, and post-sales
service. The uniformity of quality instruction would be an appropriate measure for this perspective since it involves measuring innovation and
operation processes.
Question 9
1.C.3.r
balscore.tb.027_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
A company is concerned that the number of patents and new products being developed by the company is declining. Which one of the following
perspectives of the balanced scorecard is most relevant to this issue?
Correct

Internal process perspective

Financial perspective

Learning and growth perspective

Your Answer

Customer perspective

Rationale
 Internal process perspective
A balanced scorecard is used to help organizations move away from concentrating solely on financial information in performance evaluation. It
contains measures in four perspectives: financial, customer, internal business processes, and learning and growth measures. The internal business
process perspective focuses on areas such as innovation, operations, and post-sales service. Developing patents and new products is part of
innovation. If a company is concerned that developing patents and new products is declining, the internal business process perspective is the most
relevant to focus on.

Rationale
 Financial perspective
This answer is incorrect. The financial perspective focuses on evaluating overall performance with measures such as net income and sales. It is not
the most relevant perspective to focus on if a company is concerned that developing patents and new products is declining as these measures
focus on the outcome of new product development, not the process itself.

Rationale
 Learning and growth perspective
This answer is incorrect. The learning and growth perspective focuses on areas such as employee skill sets, information systems capabilities and
empowerment, motivation, and organizational alignment. It focuses on creating new capabilities with measures such as skill development and
employee satisfaction. While creating new capabilities is often necessary to developing patents and new products, it focuses on inputs into the new
product development process, not the process itself.

Rationale
 Customer perspective
This answer is incorrect. The customer perspective focuses on specific outcome measures and specific performance drivers for different market
segments. It includes measures such as customer satisfaction and customer retention. It is not the most relevant perspective to focus on if a
company is concerned that developing patents and new products is declining as these measures focus on the outcome of new product
development, not the process itself.
Question 10
1.C.3.l
1C3-LS53
LOS: 1.C.3.l
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
All of the following are considered appropriate goals for measuring a division manager's efficiency for a budgeting period except:
a reduction in the organizational structure (fewer employees doing a given amount of work).
Your Answer

a targeted share of the market.

budgeted operating income.

Correct

earnings per share projections.

Rationale
 a reduction in the organizational structure (fewer employees doing a given amount of work).
This answer is incorrect. A reduction in the organizational structure (fewer employees doing a given amount of work) is considered an appropriate
goal for measuring a division manager's efficiency for a budgeting period.

Rationale
 a targeted share of the market.
This answer is incorrect. A targeted share of the market is considered an appropriate goal for measuring a division manager's efficiency for a
budgeting period.

Rationale
 budgeted operating income.
This answer is incorrect. Budgeted operating income is considered an appropriate goal for measuring a division manager's efficiency for a
budgeting period.

Rationale
 earnings per share projections.
Measuring a division manager's efficiency for a budgeting period should include those measures that the division manager can control, including
budgeted operating income, a targeted share of the market, and a more efficient organizational structure.
Question 11
1.C.3.m
balscore.tb.003_0120
LOS: 1.C.3.m
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 1
Which of the following statements correctly describes the purpose of a balanced scorecard?
Correct

A balanced scorecard balances financial and nonfinancial performance measures to help an organization achieve its goals.

A balanced scorecard balances customer and supplier performance measures to help an organization achieve its goals.
Your Answer

A balanced scorecard balances employee and management performance measures to help an organization achieve its goals.

A balanced scorecard balances current year and prior year performance measures to help an organization achieve its goals.

Rationale
 A balanced scorecard balances financial and nonfinancial performance measures to help an organization achieve its goals.
A balanced scorecard is a performance management system containing measures in four areas: financial, customer, internal business process, and
learning and growth. The last three areas are typically nonfinancial in nature. This approach helps an organization get a “balanced” view of
performance, making it more likely it will achieve its goals.

Rationale
 A balanced scorecard balances customer and supplier performance measures to help an organization achieve its goals.
This answer is incorrect. Balanced scorecards contain performance measures that focus on more than just customer and supplier performance.

Rationale
 A balanced scorecard balances employee and management performance measures to help an organization achieve its goals.
This answer is incorrect. Balanced scorecards contain performance measures that focus on more than just employee and management
performance.

Rationale
 A balanced scorecard balances current year and prior year performance measures to help an organization achieve its goals.
This answer is incorrect. Balanced scorecards typically do not contain prior year performance measures.
Question 12
1.C.3.n
1C3-AT05
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
The balanced scorecard provides an action plan for achieving competitive success by focusing management attention on critical success factors. All of
the following are critical success factors commonly focused upon in the balanced scorecard except:
employee innovation and learning.

internal business processes.

financial performance measures.

Correct

competitor business strategies.

Rationale
 employee innovation and learning.
This answer is incorrect. Employee innovation and learning is one of the critical success factors commonly focused upon in the balanced scorecard.

Rationale
 internal business processes.
This answer is incorrect. Internal business processes is one of the critical success factors commonly focused upon in the balanced scorecard.

Rationale
 financial performance measures.
This answer is incorrect. Financial performance measures is one of the critical success factors commonly focused upon in the balanced scorecard.

Rationale
 competitor business strategies.
Correct! The critical success factors used in the balanced scorecard are:

financial performance
customer satisfaction
internal business processes
innovation and learning
Question 13
1.C.3.o
balscore.tb.021_0120
LOS: 1.C.3.o
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
Each of the following statements concerning the successful implementation and use of the balanced scorecard are correct, except:
Correct

Top management does not need to “buy into” the balanced scorecard since the balanced scorecard is used at the business unit level.
Your Answer

Balanced scorecard measures should be consistent with an organization’s strategy.

Balanced scorecard measures should be changed as an organization’s strategy changes.

Balanced scorecard measures should be used as part of the performance evaluation process.

Rationale
 Top management does not need to “buy into” the balanced scorecard since the balanced scorecard is used at the business unit level.
While a balanced scorecard is often used at the business unit level, it can also be used at the top of an organization. Even if the balanced scorecard
is used only at the business unit level, top management support is critical because top management typically needs to approve the resources
needed to implement a scorecard and approve changes in performance evaluation procedures that result from balanced scorecard
implementation. Top management needs to “buy into” the balanced scorecard for it to be successful.

Rationale
 Balanced scorecard measures should be consistent with an organization’s strategy.
This answer is incorrect. A balanced scorecard can be used to help an organization implement its strategy. To do this, the balanced scorecard
measures need to be consistent with the organization’s strategy, or else the organization will focus on items that will not ultimately help it achieve
its goals.

Rationale
 Balanced scorecard measures should be changed as an organization’s strategy changes.
This answer is incorrect. Balanced scorecard measures should be changed as an organization updates its strategy because the organization’s goals
are likely to change as its strategy changes.

Rationale
 Balanced scorecard measures should be used as part of the performance evaluation process.
This answer is incorrect. Using balanced scorecard measures in the performance evaluation process is a powerful way to get employees to pay
attention to those measures.
Question 14
1.C.3.n
balscore.tb.017_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

An accounting firm is using the balanced scorecard to improve the firm’s effectiveness and efficiency. They have identified the following objectives:

Increase profit per employee

Increase the number of customer engagements
Decrease accounting fees
Keep associates current in accounting changes

Which of these objectives best fits under the customer perspective of the balanced scorecard?

Your Answer

Keep associates current in accounting changes

Correct

Decrease accounting fees

Increase profit per employee

Increase number of customer engagements

Rationale
 Keep associates current in accounting changes
This answer is incorrect. Keeping associates current in accounting changes does not fit under the customer perspective of the balanced scorecard
since it is not focused on customer outcome measures or customer performance drivers.

Rationale
 Decrease accounting fees
The customer perspective of the balanced scorecard focuses on customer outcome measures (such as market share, customer satisfaction, and
customer retention) and customer performance drivers (such as response time, delivery performance, and defects). Decreasing accounting fees
best fits under the customer perspective of the balanced scorecard since it is a driver of customer performance measures.

Rationale
 Increase profit per employee
This answer is incorrect. Increasing the profit per employee does not fit under the customer perspective of the balanced scorecard since it is not
focused on customer outcome measures or customer performance drivers.

Rationale
 Increase number of customer engagements
This answer is incorrect. Increasing the number of customer engagements does not fit under the customer perspective of the balanced scorecard
even though it involves customers. It better fits under the internal process perspective since it involves adding value while gaining customer
feedback.
Question 15
1.C.3.n
1C3-LS43
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
A periodic survey of employee motivation is an example of a:
learning and growth outcome measure.
Your Answer

customer outcome measure.

customer performance driver.

Correct

learning and growth performance driver.

Rationale
 learning and growth outcome measure.
This answer is incorrect. A periodic survey of employee motivation is not an example of a learning and growth outcome measure.

Rationale
 customer outcome measure.
This answer is incorrect. A periodic survey of employee motivation is not an example of a customer outcome measure.

Rationale
 customer performance driver.
This answer is incorrect. A periodic survey of employee motivation is not an example of a customer performance driver.

Rationale
 learning and growth performance driver.
Performance drivers include periodic surveys of employee motivation because they are measures that can be made to judge the current progress
toward a goal and are part of learning and growth because they measure employee motivation and morale.
Question 16
1.C.3.r
balscore.tb.033_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
A nonprofit organization operates ten preschools in a large metropolitan area. The board of directors for the schools has implemented the balanced
scorecard to better align the organization’s goals with those of stakeholders (students, parents, and donors). Which of the following measures best fits
under the customer perspective of the balanced scorecard?
Number of critical building maintenance requests and responses within 24 hours

Number of staff engaged in professional development opportunities

Number of outside contracts to rent facilities on weekends

Correct

Number of staff qualified in first aid and CPR

Rationale
 Number of critical building maintenance requests and responses within 24 hours
This answer is incorrect. The number of critical building maintenance requests and responses within 24 hours does not fit under the customer
perspective since it does not involve either customer outcome measures or customer performance drivers.

Rationale
 Number of staff engaged in professional development opportunities
This answer is incorrect. The number of staff engaged in professional development opportunities does not fit under the customer perspective of the
balanced scorecard since it does not involve either customer outcome measures or customer performance drivers.

Rationale
 Number of outside contracts to rent facilities on weekends
This answer is incorrect. The number of outside contracts to rent facilities on weekends does not fit under the customer perspective of the balanced
scorecard since it does not involve either customer outcome measures or customer performance drivers.

Rationale
 Number of staff qualified in first aid and CPR
The customer perspective of the balanced scorecard focuses on customer outcome measures (such as market share, customer satisfaction, and
customer retention) and customer performance drivers (such as response time, delivery performance, and defects). The number of staff qualified in
first aid and CPR would be an appropriate measure for the customer perspective of the balanced scorecard since it is a driver of customer
performance measures such as customer satisfaction.
Question 17
1.C.3.n
balscore.tb.009_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

The board of directors of a chain of retail department stores has identified the following strategic objectives:

Increase gross profit margin

Increase employee satisfaction
Provide quality products
Increase sales to repeat customers

Which of these objectives is most closely linked to the learning and growth perspective of the balanced scorecard?

Correct

Increase employee satisfaction

Provide quality products

Your Answer

Increase sales to repeat customers

Increase gross profit margin

Rationale
 Increase employee satisfaction
The learning and growth perspective of the balanced scorecard focuses on measures related to employee skill sets, information system capabilities,
motivation, and organizational alignment. Increasing employee satisfaction is linked to this perspective of the balanced scorecard since it involves
employee skill sets and motivation.

Rationale
 Provide quality products
This answer is incorrect. Providing quality products is not linked to the learning and growth perspective of the balanced scorecard since it is not a
measure related to employee skill sets, information systems capabilities, motivation, or organizational alignment.

Rationale
 Increase sales to repeat customers
This answer is incorrect. Increasing sales to repeat customers is not linked to the learning and growth perspective of the balanced scorecard since it
is not a measure related to employee skill sets, information systems capabilities, motivation, or organizational alignment.

Rationale
 Increase gross profit margin
This answer is incorrect. Increasing gross profit margin is not linked to the learning and growth perspective of the balanced scorecard since it is not
a measure related to employee skill sets, information systems capabilities, motivation, or organizational alignment.
Question 18
1.C.3.m
1C3-AT22
LOS: 1.C.3.m
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Which one of the following best describes the performance elements contained in most balanced scorecards?
Financial performance measures: No; Nonfinancial performance measures: Yes.

Financial performance measures: Yes; Nonfinancial performance measures: No.

Financial performance measures: No; Nonfinancial performance measures: No.

Correct

Financial performance measures: Yes; Nonfinancial performance measures: Yes.

Rationale
 Financial performance measures: No; Nonfinancial performance measures: Yes.
This answer is incorrect. A balanced scorecard does include nonfinancial performance measures. However, it also includes financial performance
measures.

Rationale
 Financial performance measures: Yes; Nonfinancial performance measures: No.
This answer is incorrect. A balanced scorecard does include financial performance measures. However, it also includes nonfinancial performance
measures.

Rationale
 Financial performance measures: No; Nonfinancial performance measures: No.
This answer is incorrect. A balanced scorecard does include financial and nonfinancial performance measures.

Rationale
 Financial performance measures: Yes; Nonfinancial performance measures: Yes.
The balanced scorecard contains both financial performance measures and nonfinancial performance measures.
Question 19
1.C.3.r
1C3-AT17d
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Alfa Inc. produces educational materials for children. They pride themselves in serving their customers better than their competitors and have been able
to grow their business by keeping a focus on customer service. Alfa has recently adopted a balanced scorecard performance measurement system.
Which of the following would be the primary measure used by Alfa Inc. in their balanced scorecard?
Correct

Number of repeat sales by current customers.

Gross margin.

Timeliness of new products to market.

Your Answer

Cycle time.

Rationale
 Number of repeat sales by current customers.
The number of repeat sales by current customers ties to the corporate mission of serving their customers better than their competitors serve their
customers.

Rationale
 Gross margin.
This answer is incorrect. Gross margin would not be the primary measure used by Alfa Inc. in their balanced scorecard.

Rationale
 Timeliness of new products to market.
This answer is incorrect. Timeliness of new products to market would not be the primary measure used by Alfa Inc. in their balanced scorecard.

Rationale
 Cycle time.
This answer is incorrect. Cycle time would not be the primary measure used by Alfa Inc. in their balanced scorecard.
Question 20
1.C.3.q
aq.balscore.008_0820
LOS: 1.C.3.q
Lesson Reference: The Balanced Scorecard
Difficulty: hard
Bloom Code: 5

Bricks and Cinderblocks, Corp. (BCC) provided the following information from their Balanced Scorecard.

Perspective Strategic Objectives Y1 Target Y1 Actual Variance

Financial F1: Revenues $560,000 $548,800 −$1,120 U
F2: Maximize return on equity 7% 9% 2% F
F3: Positive EVA $30,000 $31,000 $1,000 F
F4: 10% revenue growth 12% 10% −2% U
F5: Asset utilization 86% 86% 0%
Customer C1: Price 3% 2% −1% U
C2: Customer retention 78% 81% 3% F
C3: Lowest-cost suppliers 3% 5% 2% F
C4: Product innovation 12% 11% −1% U
Internal Business Process P1: Improve production work flow 0.5 days 0.6 days 0.1 days U
P2: New product success 650 orders 641 orders −9 orders U
P3: Sales penetration 2% −5% −7% U
P4: Reduce inventory 33% 33% 0%
Learning and Growth L1: Link strategy to reward system 64% 69% 5% F
L2: Fill critical competency gaps 58% 55% −3% U
L3: Become customer-driven culture 68% 72% 4% F
L4: Quality leadership 4.5 4.8 0.3 F

What perspective of the Balanced Scorecard likely needs the most attention by BCC management?

Financial perspective
Your Answer

Customer perspective
Correct

Internal business process perspective

Learning and growth

Rationale
 Financial perspective
This answer is incorrect. The financial perspective is not the perspective of the Balanced Scorecard that likely needs the most attention as it has two
favorable measures.

Rationale
 Customer perspective
This answer is incorrect. The customer perspective is not the perspective of the Balanced Scorecard that likely needs the most attention as it has
two favorable measures.

Rationale
 Internal business process perspective
The internal process perspective is the perspective of the Balanced Scorecard that likely needs the most attention as it has no favorable measures.
BCC should devote more of their attention to improving this area.

Rationale
 Learning and growth
This answer is incorrect. The learning and growth perspective is not the perspective of the Balanced Scorecard that likely needs the most attention
as it had three favorable measures.
Question 21
1.C.3.n
1C3-LS41
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
Which of the following perspectives of the balanced scorecard should every cause-and-effect chain be linked to?
Learning and growth

Customer
Correct

Financial
Your Answer

Internal business process

Rationale
 Learning and growth
This answer is incorrect. Learning and growth is not the perspective of the balanced scorecard that every cause-and-effect chain should be linked
to.

Rationale
 Customer
This answer is incorrect. Customer is not the perspective of the balanced scorecard that every cause-and-effect chain should be linked to.

Rationale
 Financial
Each cause-and-effect relationship chain should end with a relevant financial measure to determine the success of the endeavor.

Rationale
 Internal business process
This answer is incorrect. Internal business process is not the perspective of the balanced scorecard that every cause-and-effect chain should be
linked to.
Question 22
1.C.3.m
1C3-LS64
LOS: 1.C.3.m
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3

Which of the following statements about a balanced scorecard is incorrect?

* Source: Retired ICMA CMA Exam Questions.

It seeks to address the problems associated with traditional financial measures used to assess performance.
Your Answer

It relies on the perception of the users with regard to service provided.

Correct

It is directly derived from the scientific management theories.

The notion of value chain analysis plays a major role in the drawing up of a balanced scorecard.

Rationale
 It seeks to address the problems associated with traditional financial measures used to assess performance.
This answer is incorrect. "It seeks to address the problems associated with traditional financial measures used to assess performance" is a correct
statement about a balanced scorecard.

Rationale
 It relies on the perception of the users with regard to service provided.
This answer is incorrect. "It relies on the perception of the users with regard to service provided" is a correct statement about a balanced scorecard.

Rationale
 It is directly derived from the scientific management theories.
The balanced scorecard seeks to address the problems associated with traditional financial measures used to assess performance, the notion of
value chain analysis plays a major role in the drawing up of a balanced scorecard, and it relies on the perception of the users with regard to service
provided.

Rationale
 The notion of value chain analysis plays a major role in the drawing up of a balanced scorecard.
This answer is incorrect. "The notion of value chain analysis plays a major role in the drawing up of a balanced scorecard" is a correct statement
about a balanced scorecard.
Question 23
1.C.3.o
aq.balscore.007_1807
LOS: 1.C.3.o
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
All of the following are characteristics of successful implementation of a Balanced Scorecard (BSC) except:
the leadership team drafts out a balanced scorecard and strategy map to introduce to middle management supervisors.
Correct

an implementation team is established composed of top company executives.

Your Answer

the leadership team works to clarify the organization's vision and mission into a strategy that can be communicated as an actionable statement(s) to
all key stakeholders.

the leadership team identifies and eliminates nonstrategic investments.

Rationale
 the leadership team drafts out a balanced scorecard and strategy map to introduce to middle management supervisors.
This answer is incorrect. The leadership team drafting out a balanced scorecard and strategy map to introduce to middle management supervisors
is a characteristic of successful implementation of a BSC.

Rationale
 an implementation team is established composed of top company executives.
An implementation team is established composed of a cross-functional representation of key leaders, managers, and front-line employees, not top
company executives only. This team handles the front-line issues involved in a significant change management process for the organization.
Specifically, the implementation team works to further refine the BSC as needed to accommodate implementation, design and deploy the
marketing campaign through the organization, and execute and guide training events.

Rationale
 the leadership team works to clarify the organization's vision and mission into a strategy that can be communicated as an actionable
statement(s) to all key stakeholders.
This answer is incorrect. The leadership team working to clarify the organization's vision and mission into a strategy that can be communicated as
an actionable statement(s) to all key stakeholders is a characteristic of successful implementation of a BSC.

Rationale
 the leadership team identifies and eliminates nonstrategic investments.
This answer is incorrect. The leadership team identifying and eliminating nonstrategic investments is a characteristic of successful implementation
of a BSC.
Question 24
1.C.3.o
1C3-LS47
LOS: 1.C.3.o
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
Critical success factors in the balanced scorecard (BSC) must:
improve quality.
Correct

be measurable.
Your Answer

be financial.

consider the customer first.

Rationale
 improve quality.
This answer is incorrect. Critical success factors in the balanced scorecard (BSC) do not have to improve quality.

Rationale
 be measurable.
According to Kaplan and Norton, "If you can't measure it, you can't manage it." These measurements must encompass more than just financial
measures for the BSC to be successful.

Rationale
 be financial.
This answer is incorrect. Critical success factors in the balanced scorecard (BSC) do not have to be financial.

Rationale
 consider the customer first.
This answer is incorrect. Critical success factors in the balanced scorecard (BSC) do not have to consider the customer first.
Question 25
1.C.3.n
cma11.p1.t1.me.0060_0820
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3

An example of an item that would fall under the customer perspective on the balanced scorecard of an airline is

*Source: Retired ICMA CMA Exam Questions.

Correct

customer complaints will decrease by 10%.

customers will have to wait no longer than 15 minutes to check their bags.
Your Answer

90% of the flights will arrive on time.

three new in-flight meals will replace existing offerings that are unpopular with customers.

Rationale
 customer complaints will decrease by 10%.
Customer attitudes toward the organization including customer complaints would be the customer perspective on the balanced scorecard of an
airline.

Rationale
 customers will have to wait no longer than 15 minutes to check their bags.
This answer is incorrect. Bag check is an internal business process or an operational process and therefore would not fall under the customer
perspective on the balanced scorecard of an airline.

Rationale
 90% of the flights will arrive on time.
This answer is incorrect. Flights arriving on time would be an internal business process and therefore would not fall under the customer perspective
on the balanced scorecard of an airline.

Rationale
 three new in-flight meals will replace existing offerings that are unpopular with customers.
This answer is incorrect. New in-flight meals would be an internal business process and therefore would not fall under the customer perspective on
the balanced scorecard of an airline.
Question 26
1.C.3.n
balscore.tb.011_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
A nonprofit organization operates ten preschools in a large metropolitan area. The board of directors for the schools has implemented the balanced
scorecard to better align the organization’s goals with those of the stakeholders (students, parents, and donors). Which of the following objectives best
fits under the internal process perspective of the balanced scorecard?
Expand sources of revenue for the schools

Ensure the health and safety of students

Correct

Ensure clean and well-maintained facilities

Provide for the continued development of staff

Rationale
 Expand sources of revenue for the schools
This answer is incorrect. Expanding sources of revenue for the schools does not fit under the internal process perspective of the balanced scorecard
since it does not involve internal process measures addressing innovation, operations, or post-sales service.

Rationale
 Ensure the health and safety of students
This answer is incorrect. Ensuring the health and safety of students does not fit under the internal process perspective of the balanced scorecard
since it does not involve internal process measures addressing innovation, operations, or post-sales service.

Rationale
 Ensure clean and well-maintained facilities
The internal process perspective of the balanced scorecard focuses on measures in the process areas of innovation, operations, and post-sales
service. Ensuring clean and well-maintained facilities best fits under this perspective of the balanced scorecard since it involves operations
processes.

Rationale
 Provide for the continued development of staff
This answer is incorrect. Providing for the continued development of staff does not fit under the internal process perspective of the balanced
scorecard since it does not involve internal process measures addressing innovation, operations, or post-sales service.
Question 27
1.C.3.o
balscore.tb.020_0120
LOS: 1.C.3.o
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
Each of the following statements represents a “best practice” for implementing and using the balanced scorecard, except:
Balanced scorecard measures should be linked in a “cause-and-effect” manner.
Correct

All balanced scorecard measures should be objective.

Your Answer

Balanced scorecard measures should be changed as an organization’s strategy changes.

Balanced scorecard measures should be used as part of the performance evaluation process.

Rationale
 Balanced scorecard measures should be linked in a “cause-and-effect” manner.
This answer is incorrect. Linking balanced scorecard measures in a “cause-and-effect” manner enables organizations to see how a change in one
measure will affect another measure. This can help the organization decide what steps should be taken to improve performance.

Rationale
 All balanced scorecard measures should be objective.
A balanced scorecard is a performance management system containing measures in four areas: financial, customer, internal business process, and
learning and growth. Balanced scorecards are used to help an organization achieve its goals. While objective measures are good since they are free
from bias, it is not always possible to get objective measures. It is more important that performance measures relate to the organization’s strategy
than that the measures are objective.

Rationale
 Balanced scorecard measures should be changed as an organization’s strategy changes.
This answer is incorrect. Balanced scorecard measures should be changed as an organization updates its strategy because its goals are likely to
change as its strategy changes.

Rationale
 Balanced scorecard measures should be used as part of the performance evaluation process.
This answer is incorrect. Using balanced scorecard measures in the performance evaluation process is a powerful way to get employees to pay
attention to those measures.
Question 28
1.C.3.n
balscore.tb.006_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

The board of directors of a chain of retail department stores has identified the following strategic objectives:

Increase gross profit margin

Increase employee satisfaction
Provide quality products
Increase sales to repeat customers

Which of these objectives is most closely linked to the financial perspective of the balanced scorecard?

Provide quality products

Correct

Increase gross profit margin

Your Answer

Increase sales to repeat customers

Increase employee satisfaction

Rationale
 Provide quality products
This answer is incorrect. Providing quality products is not linked to the financial perspective of the balanced scorecard since it does not involve
traditional financial performance measures.

Rationale
 Increase gross profit margin
The financial perspective of the balanced scorecard focuses on areas such as liquidity, profitability, and market value. Increasing gross profit
margin is linked to the financial perspective of the balanced scorecard since it involves a measure of profitability.

Rationale
 Increase sales to repeat customers
This answer is incorrect. Increasing sales to repeat customers is not linked to the financial perspective of the balanced scorecard since it does not
involve traditional financial performance measures.

Rationale
 Increase employee satisfaction
This answer is incorrect. Increasing employee satisfaction is not linked to the financial perspective of the balanced scorecard since it does not
involve traditional financial performance measures.
Question 29
1.C.3.l
aq.balscore.001_1807
LOS: 1.C.3.l
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
All of the following describe key performance indicators (KPIs) except:
a small set of critical data points.
Correct

a term describing all the measures used in an organization in the process of running the business.
Your Answer

measures that indicate to the executive team and other stakeholders whether the organization is on track to accomplishing its strategic objectives.

a good way to get a quick sense of an organization's strategy.

Rationale
 a small set of critical data points.
This answer is incorrect. KPIs are a small set of critical data points.

Rationale
 a term describing all the measures used in an organization in the process of running the business.
KPIs are not just another term to describe measures at the organization. Many companies will track thousands of measures in the process of
running the business. KPIs, as the name implies, are a small set of critical data points that indicate to the executive team and other stakeholders
whether the organization is on track to accomplishing its strategic objectives.

Rationale
 measures that indicate to the executive team and other stakeholders whether the organization is on track to accomplishing its strategic
objectives.
This answer is incorrect. KPIs indicate to the executive team and other stakeholders whether the organization is on track to accomplishing its
strategic objectives.

Rationale
 a good way to get a quick sense of an organization's strategy.
This answer is incorrect. A good way to get a quick sense of an organization's strategy is to look at the KPIs being used to guide decision making and
track progress within the organization.
Question 30
1.C.3.n
aq.balscore.005_1807
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
What perspective of the Balanced Scorecard (BSC) is focused on identifying the key areas to continue developing and improving in order to subsequently
support key internal processes and key customer values?
Financial perspective

Internal perspective
Your Answer

Customer perspective
Correct

Learning perspective

Rationale
 Financial perspective
This answer is incorrect. The financial perspective is focused on identifying what the shareholders are expecting, which will define the types of
financial performance measures that should be established.

Rationale
 Internal perspective
This answer is incorrect. The internal perspective is focused on identifying the most important business processes, which depends on how the
organization's internal processes are tied to successfully delivering on the customer perspective. The three types of internal processes are
innovation, production and delivery, and post-sale service or support.

Rationale
 Customer perspective
This answer is incorrect. The customer perspective is focused on understanding what customers truly value by identifying what value customers are
willing to pay for.

Rationale
 Learning perspective
This answer is correct. The learning perspective is focused on the question: “How do we sustain change and progress?” This is about identifying the
key areas to improve in order to subsequently support key internal processes and key customer values.
Question 31
1.C.3.q
1C3-CQ17
LOS: 1.C.3.q
Lesson Reference: The Balanced Scorecard
Difficulty: hard
Bloom Code: 5

Assume the following information from the financial section of the Balanced Scorecard for Dry Erase Kit, Inc.:

Overall goal: Grow sales by 20% over the next two years
Y1 Target Y1 Actual Variance
Revenues: $432,000 $424,000 $8,000 U
Perspective Strategic Objectives
Financial F1: Maximize return on equity 9% 8% 1% U
F2: Positive EVA $20,000 $18,000 $2,000 U
F3: 10% revenue growth 8% 6% 2% U
F4: Asset utilization 85% 87% 2% F
Customer C1: Price −4% −4% 0
C2: Customer retention 75% 70% 5% U
C3: Lowest-cost suppliers −6% −7% −1% F
C4: Product innovation 10% 8% 2% U
Internal business process P1: Improve production work flow 0.3 days 0.25 days 0.05 days F
P2: New product success 1,000 orders 800 orders 200 orders U
P3: Sales penetration 0% −7% −7% U
P4: Reduce inventory 30% 29% 1% F
Learning and growth L1: Link strategy to reward system 65% 63% 2% U
L2: Fill critical competency gaps 75% 75% 0
L3: Become customer-driven culture 77% 74% 3% U
L4: Quality leadership 8.9 8.9 0

What overall factors may have most likely lead to the −7% result in sales penetration for Dry Erase Kit, Inc.?

Correct

The lack of customer retention and a customer-driven culture, leading to managing customer retention more effectively.
Your Answer

The quality leadership.

The lack of revenue growth.

The lack of sales force competency, leading to more effective product training for the sales force.

Rationale
 The lack of customer retention and a customer-driven culture, leading to managing customer retention more effectively.
The balanced scorecard assists an organization in analyzing benchmarks. In the case of Dry Erase Kit, Inc., the organization can see that the
customer retention and the customer-driven culture is weak, and most likely has lead to the lack of sales penetration.

Rationale
 The quality leadership.
This answer is incorrect. The quality leadership did not most likely lead to the −7% result in sales penetration for Dry Erase Kit, Inc.

Rationale
 The lack of revenue growth.
This answer is incorrect. The lack of revenue growth did not most likely lead to the −7% result in sales penetration for Dry Erase Kit, Inc.

Rationale
 The lack of sales force competency, leading to more effective product training for the sales force.
This answer is incorrect. The lack of sales force competency, leading to more effective product training for the sales force did not most likely lead to
the −7% result in sales penetration for Dry Erase Kit, Inc.
Question 32
1.C.3.l
1C3-LS44
LOS: 1.C.3.l
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 1
The process time critical success factor would be measured best by which of the following?
Return on investment

Customer satisfaction
Correct

Turnaround
Your Answer

Surveys

Rationale
 Return on investment
This answer is incorrect. The process time critical success factor would not be best measured by return on investment.

Rationale
 Customer satisfaction
This answer is incorrect. The process time critical success factor would not be best measured by customer satisfaction.

Rationale
 Turnaround
Turnaround time measures the time from when a process begins and when it ends, a primary element for process time.

Rationale
 Surveys
This answer is incorrect. The process time critical success factor would not be best measured by surveys.
Question 33
1.C.3.r
balscore.tb.028_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Dripolator purchases raw coffee beans and then roasts, packages, and sells them. The company is focusing on freshness and quality, as well as on
expanding to other markets. Which of the following measures would be most appropriate for Dripolator to use when focusing on the internal process
perspective of the balanced scorecard?
Number of employees being trained in grading coffee beans
Your Answer

Increase in customers in the southeast region

Correct

Number of packaging defects

Annual percent increase in contribution margin

Rationale
 Number of employees being trained in grading coffee beans
This answer is incorrect. This would not be an appropriate measure for the internal process perspective since it is not focused on measuring
innovation, operations, or post-sales service.

Rationale
 Increase in customers in the southeast region
This answer is incorrect. This would not be an appropriate measure for the internal process perspective since it is not focused on measuring
innovation, operations, or post-sales service.

Rationale
 Number of packaging defects
The internal process perspective of the balanced scorecard focuses on measures in the process areas of innovation, operations, and post-sales
service. The number of packaging defects would be an appropriate measure for this perspective since it involves measuring operation processes.

Rationale
 Annual percent increase in contribution margin
This answer is incorrect. This would not be an appropriate measure for the internal process since it is not focused on measuring innovation,
operations, or post-sales service.
Question 34
1.C.3.n
balscore.tb.014_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

An accounting firm is using the balanced scorecard to improve the firm’s effectiveness and efficiency. It has identified the following objectives:

Increase profit per employee

Increase the number of services offered
Decrease accounting fees
Keep associates current in accounting changes

Which of these objectives best fits under the internal process perspective of the balanced scorecard?

Keep associates current in accounting changes

Increase profit per employee

Correct

Increase the number of services offered

Decrease accounting fees

Rationale
 Keep associates current in accounting changes
This answer is incorrect. Keeping associates current in accounting changes does not fit under the internal process perspective of the balanced
scorecard since it does not involve internal process measures addressing innovation, operations, or post-sales service.

Rationale
 Increase profit per employee
This answer is incorrect. Increasing the profit per employee does not fit under the internal process perspective of the balanced scorecard since it
does not involve internal process measures addressing innovation, operations, or post-sales service.

Rationale
 Increase the number of services offered
The internal process perspective of the balanced scorecard focuses on measures in the process areas of innovation, operations, and post-sales
service. Increasing the number of services offered best fits under the internal process perspective of the balanced scorecard since it involves
innovation processes.

Rationale
 Decrease accounting fees
This answer is incorrect. Decreasing accounting fees does not fit under the internal process perspective of the balanced scorecard since it does not
involve internal process measures addressing innovation, operations, or post-sales service.
Question 35
1.C.3.q
1C3-CQ16
LOS: 1.C.3.q
Lesson Reference: The Balanced Scorecard
Difficulty: hard
Bloom Code: 5

Assume the following information from the financial section of the Balanced Scorecard for Dry Erase Kit, Inc.:

Overall goal: Grow sales by 20% over the next two years
Y1 Target Y1 Actual Variance
Revenues: $432,000 $424,000 $8,000 U
Perspective Strategic Objectives
Financial F1: Maximize return on equity 9% 10% 1% F
F2: Positive EVA $20,000 $22,000 $2,000 F
F3: 10% revenue growth 8% 6% 2% U
F4: Asset utilization 85% 87% 2% F
Customer C1: Price −4% −3% −1% U
C2: Customer retention 75% 70% 5% U
C3: Lowest-cost suppliers −6% −7% −1% F
C4: Product innovation 10% 8% 2% U
Internal business process P1: Improve production work flow 0.3 days 0.25 days 0.05 days F
P2: New product success 1,000 orders 800 orders 200 orders U
P3: Sales penetration 0% −7% −7% U
P4: Reduce inventory 30% 29% 1% F
Learning and growth L1: Link strategy to reward system 65% 67% 2% F
L2: Fill critical competency gaps 75% 78% 3% F
L3: Become customer-driven culture 77% 74% 3% U
L4: Quality leadership 8.9 8.9 0

What perspective of the Balance Scorecard had the least opportunistic results for Dry Erase Kit, Inc.?

The learning and growth perspective.

The financial perspective.

Your Answer

The internal business process perspective.

Correct

The customer perspective.

Rationale
 The learning and growth perspective.
This answer is incorrect. The learning and growth perspective does not have the least opportunistic results for Dry Erase Kit, Inc.

Rationale
 The financial perspective.
This answer is incorrect. The financial perspective does not have the least opportunistic results for Dry Erase Kit, Inc.

Rationale
 The internal business process perspective.
This answer is incorrect. The internal business process perspective does not have the least opportunistic results for Dry Erase Kit, Inc.

Rationale
 The customer perspective.
The balanced scorecard assists an organization in analyzing benchmarks. In the case of Dry Erase Kit, Inc., the customer perspective had the most
unfavorable variances of the four perspectives: customer had three unfavorable and one favorable, financial had one unfavorable and three
favorable, internal business process had two unfavorable and two favorable, and learning and growth had one unfavorable and two favorable.
Question 36
1.C.3.n
balscore.tb.007_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

The board of directors of a chain of retail department stores has identified the following strategic objectives:

Increase gross profit margin

Increase employee satisfaction
Provide quality products
Increase sales to repeat customers

Which of these objectives is most closely linked to the customer perspective of the balanced scorecard?

Provide quality products

Correct

Increase sales to repeat customers

Your Answer

Increase gross profit margin

Increase employee satisfaction

Rationale
 Provide quality products
This answer is incorrect. Providing quality products is not linked to the customer perspective of the balanced scorecard since it does not involve
either customer outcome measures or customer performance drivers.

Rationale
 Increase sales to repeat customers
The customer perspective of the balanced scorecard focuses on customer outcome measures (such as market share, customer satisfaction, and
customer retention) as well as customer performance drivers (such as response time, delivery performance, and defects). Increasing sales to repeat
customers is linked to the customer perspective of the balanced scorecard since it involves a customer outcome measure.

Rationale
 Increase gross profit margin
This answer is incorrect. Increasing gross profit margin is not linked to the customer perspective of the balanced scorecard since it does not involve
either customer outcome measures or customer performance drivers.

Rationale
 Increase employee satisfaction
This answer is incorrect. Increasing employee satisfaction is not linked to the customer perspective of the balanced scorecard since it does not
involve either customer outcome measures or customer performance drivers.
Question 37
1.C.3.n
1C3-LS16d
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 1
All of the following are categories of the balanced scorecard except:
Correct

investment.
Your Answer

learning and innovation.

financial.

customer.

Rationale
 investment.
The final category of the balanced scorecard is internal business process.

Rationale
 learning and innovation.
This answer is incorrect. Learning and innovation is a category of the balanced scorecard.

Rationale
 financial.
This answer is incorrect. Financial is a category of the balanced scorecard.

Rationale
 customer.
This answer is incorrect. Customer is a category of the balanced scorecard.
Question 38
1.C.3.r
balscore.tb.034_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

The board of directors of a chain of retail department stores has identified the following strategic objectives:

Increase gross profit margin

Increase employee satisfaction
Provide quality products
Increase sales to repeat customers

Which of the following measures would be most appropriate under the learning and growth perspective of the company’s balanced scorecard?

Correct

Number of cross-trained employees

Your Answer

Lowering number of product returns

Increasing percentage of business growth from existing customers

Reducing cost per unit of product

Rationale
 Number of cross-trained employees
The learning and growth perspective of the balanced scorecard focuses on measures related to employee skill sets, information system capabilities,
motivation, and organizational alignment. The number of cross-trained employees would be an appropriate measure for the learning and growth
perspective of the balanced scorecard since it involves employee skill set and organizational alignment.

Rationale
 Lowering number of product returns
This answer is incorrect. Lowering the number of product returns does not fit the learning and growth perspective of the balanced scorecard since it
does not involve employee skill sets, information systems capabilities, and empowerment, motivation, and organizational alignment.

Rationale
 Increasing percentage of business growth from existing customers
This answer is incorrect. Increasing the percentage of business growth from existing customers does not fit the learning and growth perspective of
the balanced scorecard since it does not involve employee skill sets, information systems capabilities, and empowerment, motivation, and
organizational alignment.

Rationale
 Reducing cost per unit of product
This answer is incorrect. Reducing the cost per unit of product does not fit the learning and growth perspective of the balanced scorecard since it
does not involve employee skill sets, information systems capabilities, and empowerment, motivation, and organizational alignment.
Question 39
1.C.3.q
balscore.tb.023_0120
LOS: 1.C.3.q
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Last year, RL Enterprises had exceptional brand recognition and produced a high percentage of defect-free products. Unfortunately, it also had a
plummeting credit rating and reported numerous accidents within its facilities. Which of the following best sums up RL’s balanced scorecard for the
year?
Correct

Customer and internal process categories scored high, while the financial and learning and growth categories scored low.
Your Answer

Financial and internal process categories scored high, while the learning and growth and customer categories scored low.

Internal process and learning and growth categories scored high, while the customer and financial categories scored low.

Financial and customer categories scored high, while the internal process and learning and growth categories scored low.

Rationale
 Customer and internal process categories scored high, while the financial and learning and growth categories scored low.
A balanced scorecard is used to help organizations move away from concentrating solely on financial information in performance evaluation. It
contains measures in four categories: financial, customer, internal business processes, and learning and growth measures. Credit rating is a
financial measure, brand recognition is a customer measure, defect-free products is an internal business process measure, and accidents within
facilities is a learning and growth measure. Based on this, RL did well in the customer and internal business process categories but poorly in the
financial and learning and growth categories.

Rationale
 Financial and internal process categories scored high, while the learning and growth and customer categories scored low.
This answer is incorrect. Credit rating is a financial measure, brand recognition is a customer measure, defect-free products is an internal business
process measure, and accidents within facilities is a learning and growth measure. Based on this, RL did well in the internal business process
category but poorly, not well, in the financial category. In addition, it did poorly in the learning and growth category but well, not poorly, in the
customer category.

Rationale
 Internal process and learning and growth categories scored high, while the customer and financial categories scored low.
This answer is incorrect. Credit rating is a financial measure, brand recognition is a customer measure, defect-free products is an internal business
process measure, and accidents within facilities is a learning and growth measure. Based on this, RL did well in the internal business process
category but poorly, not well, in the learning and growth category. In addition, it did poorly in the financial category but well, not poorly, in the
customer category.

Rationale
 Financial and customer categories scored high, while the internal process and learning and growth categories scored low.
This answer is incorrect. Credit rating is a financial measure, brand recognition is a customer measure, defect-free products is an internal business
process measure, and accidents within facilities is a learning and growth measure. Based on this, RL did well in the customer category but poorly,
not well, in the financial category. In addition, it did poorly in the learning and growth category but well, not poorly, in the internal business process
category.
Question 40
1.C.3.q
balscore.tb.025_0120
LOS: 1.C.3.q
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Last year, RL Enterprises had excellent customer response time and high labor utilization rates. Unfortunately, its profit per employee and its number of
cross-trained employees were both well below average. Which of the following best sums up RL’s balanced scorecard for the year?
Internal process and learning and growth categories scored high, while the customer and financial categories scored low.
Your Answer

Customer and learning and growth categories scored high, while the financial and internal process categories scored low.
Correct

Customer and internal process categories scored high, while the financial and learning and growth categories scored low.

Financial and internal process categories scored high, while the customer and learning and growth categories scored low.

Rationale
 Internal process and learning and growth categories scored high, while the customer and financial categories scored low.
This answer is incorrect. Profit per employee is a financial measure, customer response time is a customer measure, labor utilization is an internal
business process measure, and cross-trained employees is a learning and growth measure. Based on this, RL did well in the internal business
process category but poorly, not well, in the learning and growth category. In addition, it did poorly in the financial category but well, not poorly, in
the customer category.

Rationale
 Customer and learning and growth categories scored high, while the financial and internal process categories scored low.
This answer is incorrect. Profit per employee is a financial measure, customer response time is a customer measure, labor utilization is an internal
business process measure, and cross-trained employees is a learning and growth measure. Based on this, RL did well in the customer category but
poorly, not well, in the learning and growth category. In addition, it did poorly in the financial category but well, not poorly, in the internal business
process category.

Rationale
 Customer and internal process categories scored high, while the financial and learning and growth categories scored low.
A balanced scorecard is used to help organizations move away from concentrating solely on financial information in performance evaluation. It
contains measures in four categories: financial, customer, internal business processes, and learning and growth measures. Profit per employee is a
financial measure, customer response time is a customer measure, labor utilization is an internal business process measure, and cross-trained
employees is a learning and growth measure. Based on this, RL did well in the customer and internal business process categories but poorly in the
financial and learning and growth categories.

Rationale
 Financial and internal process categories scored high, while the customer and learning and growth categories scored low.
This answer is incorrect. Profit per employee is a financial measure, customer response time is a customer measure, labor utilization is an internal
business process measure, and cross-trained employees is a learning and growth measure. Based on this, RL did well in the internal business
process category but poorly, not well, in the financial category. In addition, it did poorly in the learning and growth category but well, not poorly, in
the customer category.
Question 41
1.C.3.r
balscore.tb.030_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Dripolator purchases raw coffee beans and then roasts, packages, and sells them. The company is focusing on freshness and quality, as well as on
expanding to other markets. Which of the following measures would be most appropriate for Dripolator to use when focusing on the financial
perspective of the balanced scorecard?
Correct

Annual percent increase in contribution margin

Number of employees being trained in grading coffee beans

Your Answer

Number of packaging defects

Increase in customers in the southeast region

Rationale
 Annual percent increase in contribution margin
The financial perspective of the balanced scorecard involves traditional financial performance measures and focuses on areas such as liquidity,
profitability, and market value. The annual percent increase in contribution margin would be an appropriate measure under this perspective since
it involves measuring the profitability of the company.

Rationale
 Number of employees being trained in grading coffee beans
This answer is incorrect. This would not be an appropriate measure for the financial perspective since it does not involve measuring areas of
financial performance such as liquidity, profitability, or market value.

Rationale
 Number of packaging defects
This answer is incorrect. This would not be an appropriate measure for the financial perspective since it does not involve measuring areas of
financial performance such as liquidity, profitability, or market value.

Rationale
 Increase in customers in the southeast region
This answer is incorrect. This would not be an appropriate measure for the financial perspective since it does not involve measuring areas of
financial performance such as liquidity, profitability, or market value.
Question 42
1.C.3.n
aq.balscore.004_1807
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 1
What perspective of the Balanced Scorecard (BSC) is focused on the question: “At what business process must we excel?”
Correct

Internal perspective

Learning perspective

Customer perspective
Your Answer

Financial perspective

Rationale
 Internal perspective
The internal perspective is focused on the question: “At what business processes must we excel?” This depends on how the organization's internal
processes are tied to successfully delivering on the customer perspective. The three types of internal processes are innovation, production and
delivery, and post-sale service or support.

Rationale
 Learning perspective
This answer is incorrect. The learning perspective is focused on the question: “How do we sustain change and progress?”

Rationale
 Customer perspective
This answer is incorrect. The customer perspective is focused on the question: “What do our customers value?”

Rationale
 Financial perspective
This answer is incorrect. The financial perspective is focused on the question: “How do we look to our shareholders?”
Question 43
1.C.3.l
1C3-LS54
LOS: 1.C.3.l
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
David Burke is manager of claims processing for Continental Health Care System. His performance is evaluated using various measures agreed upon in
advance with Diane Lewis, general manager. Lewis asked Burke to recommend several measures to evaluate the performance of his unit next year. All of
the following performance measures would likely have a positive effect on Burke's motivation and performance except:
percentage of claims processed accurately the first time.
Correct

total dollar amount of claims processed per month.

Your Answer

processing cost per claim.

average processing time per claim.

Rationale
 percentage of claims processed accurately the first time.
This answer is incorrect. The performance measure percentage of claims processed accurately the first time would likely have a positive effect on
Burke's motivation and performance.

Rationale
 total dollar amount of claims processed per month.
Performance measures should always have a positive effect on motivation and performance of managers and employees alike. In this case,
providing a performance measure based on total dollar amount of claims processed per month would not motivate or improve performance.

Rationale
 processing cost per claim.
This answer is incorrect. The performance measure processing cost per claim would likely have a positive effect on Burke's motivation and
performance.

Rationale
 average processing time per claim.
This answer is incorrect. The performance measure average processing time per claim would likely have a positive effect on Burke's motivation and
performance.
Question 44
1.C.3.n
1C3-LS49
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
Which of the following is the best key outcome measure for the innovation internal business process factor of the balanced scorecard?
Cycle time
Correct

Time to market

Quality
Your Answer

New patents

Rationale
 Cycle time
This answer is incorrect. Cycle time is not the best key outcome measure for the innovation internal business process factor of the balanced
scorecard.

Rationale
 Time to market
Time to market is a key metric for evaluating the success of a new product introduction because the first company to introduce a product has a
distinct market share advantage. New patents and cycle time are performance drivers.

Rationale
 Quality
This answer is incorrect. Quality is not the best key outcome measure for the innovation internal business process factor of the balanced scorecard.

Rationale
 New patents
This answer is incorrect. New patents is not the best key outcome measure for the innovation internal business process factor of the balanced
scorecard.
Question 45
1.C.3.m
aq.balscore.003_0820
LOS: 1.C.3.m
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 1
Which of the following most accurately describes the Balanced Scorecard (BSC)?
A tool that is used to evaluate potential threats and possible alliances in the marketplace
Your Answer

A tool that is not helpful to not-for-profit organizations in planning and executing business strategy
Correct

A tool centered on the organization's strategic vision and strategic mission

A tool used to evaluate the strengths, weaknesses, opportunities, and threats of an organization

Rationale
 A tool that is used to evaluate potential threats and possible alliances in the marketplace
This answer is incorrect. The BSC is used to guide and align the work the organization does to strategically align learning and growth that supports
critical internal processes in order to successfully deliver value to customers and investors.

Rationale
 A tool that is not helpful to not-for-profit organizations in planning and executing business strategy
This answer is incorrect. The initial design of the BSC is to support for-profit organizations, but BSC models are also helpful to not-for-profit
organizations.

Rationale
 A tool centered on the organization's strategic vision and strategic mission
The organization's strategic vision and strategic mission are at the center of the BSC.

Rationale
 A tool used to evaluate the strengths, weaknesses, opportunities, and threats of an organization
This answer is incorrect. This answer is describing a SWOT analysis. While the BSC touches on these areas in different ways, it spends more time
focusing on four questions: (1) How do we look to our shareholders? (2) What do our customers value? (3) At what business processes must we
excel? (4) How do we sustain change and progress?
Question 46
1.C.3.n
1C3-LS21
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
Which of the following balanced scorecard factors would include the critical success factors of market share, quality, and timeliness?
Learning and innovation

Financial
Your Answer

Internal business process

Correct

Customer

Rationale
 Learning and innovation
This answer is incorrect. Learning and innovation would not include the critical success factors of market share, quality, and timeliness.

Rationale
 Financial
This answer is incorrect. Financial would not include the critical success factors of market share, quality, and timeliness.

Rationale
 Internal business process
This answer is incorrect. Internal business process would not include the critical success factors of market share, quality, and timeliness.

Rationale
 Customer
The customer factor is concerned with market share, quality, timeliness, customer acquisition, satisfaction, and retention.
Question 47
1.C.3.l
1C3-LS42
LOS: 1.C.3.l
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 1
Which of the following is a customer performance driver?
Market share
Correct

Lead time

Profitability

Retention

Rationale
 Market share
This answer is incorrect. Market share is not a customer performance driver.

Rationale
 Lead time
Customer performance drivers include lead time, while the other options are outcome measures.

Rationale
 Profitability
This answer is incorrect. Profitability is not a customer performance driver.

Rationale
 Retention
This answer is incorrect. Retention is not a customer performance driver.
Question 48
1.C.3.o
balscore.tb.018_0120
LOS: 1.C.3.o
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
Each of the following statements represents a “best practice” for implementing and using the balanced scorecard, except:
Your Answer

Balanced scorecard measures should be linked in a “cause-and-effect” manner.

Balanced scorecard measures should be consistent with an organization’s strategy.

Correct

Balanced scorecard measures should not be changed to facilitate tracking of performance over time.

Balanced scorecard measures should be used as part of the performance evaluation process.

Rationale
 Balanced scorecard measures should be linked in a “cause-and-effect” manner.
This answer is incorrect. Linking balanced scorecard measures in a “cause-and-effect” manner enables organizations to see how a change in one
measure will affect another measure. This can help the organization decide what steps should be taken to improve performance.

Rationale
 Balanced scorecard measures should be consistent with an organization’s strategy.
This answer is incorrect. A balanced scorecard can be used to help an organization implement its strategy in order to achieve its goals. The
balanced scorecard measures need to be consistent with the organization’s strategy, or else the organization will focus on items that will not
ultimately help it achieve its goals.

Rationale
 Balanced scorecard measures should not be changed to facilitate tracking of performance over time.
A balanced scorecard is a performance management system containing measures in four areas: financial, customer, internal business process, and
learning and growth. Because a balanced scorecard is used to help an organization achieve its goals, the measures included should be updated as
an organization updates its strategy because its goals are likely to change as its strategy changes. Tracking performance measures that are no
longer relevant is a waste of time and money.

Rationale
 Balanced scorecard measures should be used as part of the performance evaluation process.
This answer is incorrect. Using balanced scorecard measures in the performance evaluation process is a powerful way to get employees to pay
attention to those measures.
Question 49
1.C.3.m
1C3-LS46
LOS: 1.C.3.m
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 1
Which of the following measurement tools allows a company to align unit goals to overall strategy?
Activity-based management
Correct

Balanced scorecard
Your Answer

Management by exception

Total quality management

Rationale
 Activity-based management
This answer is incorrect. Activity-based management does not allow a company to align unit goals to overall strategy.

Rationale
 Balanced scorecard
The balanced scorecard is not only aligned with strategy; it is a blueprint for achieving strategy.

Rationale
 Management by exception
This answer is incorrect. Management by exception does not allow a company to align unit goals to overall strategy.

Rationale
 Total quality management
This answer is incorrect. Total quality management does not allow a company to align unit goals to overall strategy.
Question 50
1.C.3.r
1C3-LS63
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
To insure that a divisional vice president places appropriate focus on both the short-term and the long-term objectives of the division, the best approach
would be to evaluate the vice president's performance by using:
return on investment (ROI), which permits easy and quick comparisons to other similar divisions.

residual income, since it will eliminate the rejection of capital investments that have a return less than ROI but greater than the cost of capital.
Correct

financial and nonfinancial measures, including the evaluation of quality, customer satisfaction, and market performance.

division segment margin or profit margin.

Rationale
 return on investment (ROI), which permits easy and quick comparisons to other similar divisions.
This answer is incorrect. To insure that a divisional vice president places appropriate focus on both the short-term and the long-term objectives of
the division, the best approach would not be to evaluate the vice president's performance by using return on investment (ROI).

Rationale
 residual income, since it will eliminate the rejection of capital investments that have a return less than ROI but greater than the cost of
capital.
This answer is incorrect. To insure that a divisional vice president places appropriate focus on both the short-term and the long-term objectives of
the division, the best approach would not be to evaluate the vice president's performance by using return on residual income.

Rationale
 financial and nonfinancial measures, including the evaluation of quality, customer satisfaction, and market performance.
When there is a focus on short- and long-term objectives of a firm or division, it is important to measure performance based on financial and
nonfinancial measures.

Rationale
 division segment margin or profit margin.
This answer is incorrect. To insure that a divisional vice president places appropriate focus on both the short-term and the long-term objectives of
the division, the best approach would not be to evaluate the vice president's performance by using division segment margin or profit margin.
Question 51
1.C.3.o
balscore.tb.019_0120
LOS: 1.C.3.o
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
Each of the following statements represents a “best practice” for implementing and using the balanced scorecard, except:
Balanced scorecard measures should be linked in a “cause-and-effect” manner.

Balanced scorecard measures should be consistent with an organization’s strategy.

Your Answer

Balanced scorecard measures should be changed as an organization’s strategy changes.

Correct

Balanced scorecard measures should not be used as part of the performance evaluation process as employees may focus too much on them.

Rationale
 Balanced scorecard measures should be linked in a “cause-and-effect” manner.
This answer is incorrect. Linking balanced scorecard measures in a “cause-and-effect” manner enables organizations to see how a change in one
measure will affect another measure. This can help the organization decide what steps should be taken to improve performance.

Rationale
 Balanced scorecard measures should be consistent with an organization’s strategy.
This answer is incorrect. A balanced scorecard can be used to help an organization implement its strategy in order to achieve its goals. The
balanced scorecard measures need to be consistent with the organization’s strategy, or else the organization will focus on items that will not
ultimately help it achieve its goals.

Rationale
 Balanced scorecard measures should be changed as an organization’s strategy changes.
This answer is incorrect. Balanced scorecard measures should be changed as an organization updates its strategy because its goals are likely to
change as its strategy changes.

Rationale
 Balanced scorecard measures should not be used as part of the performance evaluation process as employees may focus too much on
them.
A balanced scorecard is used to help an organization achieve its goals. Using balanced scorecard measures in the performance evaluation process
is a powerful way to get employees to pay attention to those measures.
Question 52
1.C.3.r
1C3-LS57
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3

Which one of the following should be used for evaluating the performance of the Repair and Maintenance Department that repairs production
equipment in a firm devoted to making keyboards for computers?

* Source: Retired ICMA CMA Exam Questions.

The variance between the firm's budgeted and actual net income.

The fixed overhead volume variances.

Correct

The response time and degree of satisfaction among the production departments.
Your Answer

The total factory overhead variances.

Rationale
 The variance between the firm's budgeted and actual net income.
This answer is incorrect. The variance between the firm's budgeted and actual net income should not be used for evaluating the performance of the
Repair and Maintenance Department that repairs production equipment in a firm devoted to making keyboards for computers.

Rationale
 The fixed overhead volume variances.
This answer is incorrect. The fixed overhead volume variances should not be used for evaluating the performance of the Repair and Maintenance
Department that repairs production equipment in a firm devoted to making keyboards for computers.

Rationale
 The response time and degree of satisfaction among the production departments.
Performance measures should always have a positive effect on motivation and performance of managers and employees alike. In this case,
providing a performance measure based on the response time and degree of satisfaction among the production departments would motivate and
improve performance.

Rationale
 The total factory overhead variances.
This answer is incorrect. The total factory overhead variances should not be used for evaluating the performance of the Repair and Maintenance
Department that repairs production equipment in a firm devoted to making keyboards for computers.
Question 53
1.C.3.r
balscore.tb.032_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

An accounting firm is using the balanced scorecard to improve the firm’s effectiveness and efficiency. It has identified the following objectives:

Increase profit per employee

Increase the number of customer engagements
Decrease accounting fees
Keep associates current in accounting changes

Which of the following measures would fit best under the financial perspective of the balanced scorecard?

Your Answer

Number of continuing education credits earned by the staff

Percentage of error-free tax returns

Correct

Number of new clients

Number of hours to respond to customer inquiries

Rationale
 Number of continuing education credits earned by the staff
This answer is incorrect. The number of continuing education credits earned by the staff would not be an appropriate measure for the financial
perspective since it does not measure an area of financial performance such as liquidity, profitability, or market value.

Rationale
 Percentage of error-free tax returns
This answer is incorrect. The percentage of error-free tax returns would not be an appropriate measure for the financial perspective since it does
not measure an area of financial performance such as liquidity, profitability, or market value.

Rationale
 Number of new clients
The financial perspective of the balanced scorecard involves traditional financial performance measures and focuses on areas such as liquidity,
profitability, and market value. The number of new clients would be an appropriate measure for the financial perspective since it is a way to
measure the profitability of the company.

Rationale
 Number of hours to respond to customer inquiries
This answer is incorrect. The number of hours to respond to customer inquiries would not be an appropriate measure for the financial perspective
since it does not measure an area of financial performance such as liquidity, profitability, or market value.
Question 54
1.C.3.r
balscore.tb.026_0120
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
A company is concerned that product quality may be declining. Which one of the following measures is most relevant to this issue?
Number of production employees
Your Answer

Age of production equipment

Experience of production manager

Correct

Number of quality defects

Rationale
 Number of production employees
This answer is incorrect. If a company is worried that product quality is declining, the number of production employees would not be relevant to
measure. There may be a relationship between product output and number of production employees, but there is not an apparent link between the
number of production employees and product quality.

Rationale
 Age of production equipment
This answer is incorrect. The age of production equipment would not be relevant to measure as there is not an apparent link between production
equipment age and product quality.

Rationale
 Experience of production manager
This answer is incorrect. The production manager’s experience would not be relevant to measure as there is not an apparent link between a
production manager’s experience and product quality.

Rationale
 Number of quality defects
It is important that performance measures are linked to organizational goals and objectives. If a company is worried that product quality is
declining, the number of quality defects would be relevant to measure as an increase in the number of quality defects is likely related to a decrease
in product quality.
Question 55
1.C.3.l
aq.balscore.002_1807
LOS: 1.C.3.l
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
All of the following are challenges in the process of designing and deploying key performance indicators (KPIs) except:
Correct

having so few KPIs in the organization that it creates confusion.

struggling to determine which KPIs are most important in the organization.

accurately representing a strategic objective with one or more KPIs.

Your Answer

essentially abandoning a strategic objective by failing to establish a KPI for it.

Rationale
 having so few KPIs in the organization that it creates confusion.
Most often, confusion is caused by having too many KPIs in the organization. More KPIs means more metrics to track and focus on.

Rationale
 struggling to determine which KPIs are most important in the organization.
This answer is incorrect. Struggling to determine which KPIs are most important in the organization is a challenge in the process of designing and
deploying KPIs.

Rationale
 accurately representing a strategic objective with one or more KPIs.
This answer is incorrect. Accurately representing a strategic objective with one or more KPIs is a challenge in the process of designing and
deploying KPIs.

Rationale
 essentially abandoning a strategic objective by failing to establish a KPI for it.
This answer is incorrect. Essentially abandoning a strategic objective by failing to establish a KPI for it is a challenge in the process of designing and
deploying KPIs.
Question 56
1.C.3.q
balscore.tb.024_0120
LOS: 1.C.3.q
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Last year, JT Engineering achieved an exemplary credit rating and high employee retention. Unfortunately, its customer retention was low and its
customer service expenses per customer were high due to a high percentage of faulty products. Which of the following best sums up JT’s balanced
scorecard for the year?
Internal process and learning and growth categories scored high, while the customer and financial categories scored low.
Correct

Financial and learning and growth categories scored high, while the customer and internal process categories scored low.
Your Answer

Customer and learning and growth categories scored high, while the financial and internal process categories scored low.

Financial and internal process categories scored high, while the customer and learning and growth categories scored low.

Rationale
 Internal process and learning and growth categories scored high, while the customer and financial categories scored low.
This answer is incorrect. Credit rating is a financial measure, customer retention and customer service expenses are customer measures, faulty
products is an internal business process measure, and employee retention is a learning and growth measure. Based on this, JT did well in the
learning and growth category but poorly, not well, in the internal business process category. In addition, it did poorly in the customer category but
well, not poorly, in the financial category.

Rationale
 Financial and learning and growth categories scored high, while the customer and internal process categories scored low.
A balanced scorecard is used to help organizations move away from concentrating solely on financial information in performance evaluation. It
contains measures in four categories: financial, customer, internal business processes, and learning and growth measures. Credit rating is a
financial measure, customer retention and customer service expenses are customer measures, faulty products is an internal business process
measure, and employee retention is a learning and growth measure. Based on this, JT did well in the financial and learning and growth categories
but poorly in the customer and internal business process categories.

Rationale
 Customer and learning and growth categories scored high, while the financial and internal process categories scored low.
This answer is incorrect. Credit rating is a financial measure, customer retention and customer service expenses are customer measures, faulty
products is an internal business process measure, and employee retention is a learning and growth measure. Based on this, JT did well in the
learning and growth category but poorly, not well, in the customer category. In addition, it did poorly in the internal business process category but
well, not poorly, in the financial category.

Rationale
 Financial and internal process categories scored high, while the customer and learning and growth categories scored low.
This answer is incorrect. Credit rating is a financial measure, customer retention and customer service expenses are customer measures, faulty
products is an internal business process measure, and employee retention is a learning and growth measure. Based on this, JT did well in the
financial category but poorly, not well, in the internal business process category. In addition, it did poorly in the customer category but well, not
poorly, in the learning and growth category.
Question 57
1.C.3.n
balscore.tb.010_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
A nonprofit organization operates ten preschools in a large metropolitan area. The board of directors for the schools has implemented the balanced
scorecard to better align the organization’s goals with those of the stakeholders (students, parents, and donors). Which of the following objectives best
fits under the financial perspective of the balanced scorecard?
Ensure clean and well-maintained facilities
Correct

Expand sources of revenue for the schools

Your Answer

Ensure the health and safety of students

Provide for the continued development of staff

Rationale
 Ensure clean and well-maintained facilities
This answer is incorrect. Ensuring clean and well-maintained facilities does not fit under the financial perspective of the balanced scorecard since it
does not involve traditional financial performance measures.

Rationale
 Expand sources of revenue for the schools
The financial perspective of the balanced scorecard involves traditional financial performance measures and focuses on areas such as liquidity,
profitability, and market value. Expanding sources of revenue for the school’s best fits under this perspective of the balanced scorecard since it
involves the liquidity and profitability of the schools.

Rationale
 Ensure the health and safety of students
This answer is incorrect. Ensuring the health and safety of students does not fit under the financial perspective of the balanced scorecard since it
does not involve traditional financial performance measures.

Rationale
 Provide for the continued development of staff
This answer is incorrect. Providing for the continued development of staff does not fit under the financial perspective of the balanced scorecard
since it does not involve traditional financial performance measures.
Question 58
1.C.3.n
aq.balscore.006_1807
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2
Which of the following correctly orders the deployment list found within each perspective of the Balanced Scorecard?
Targets, initiatives, objectives, and measures

Objectives, targets, initiatives, and measures

Your Answer

Targets, objectives, measures, and initiatives

Correct

Objectives, measures, targets, and initiatives

Rationale
 Targets, initiatives, objectives, and measures
This answer is incorrect. Objectives and measures are determined before targets and initiatives.

Rationale
 Objectives, targets, initiatives, and measures
This answer is incorrect. Measures are established after the objectives are set.

Rationale
 Targets, objectives, measures, and initiatives
This answer is incorrect. Targets are determined after objectives and measures are put in place.

Rationale
 Objectives, measures, targets, and initiatives
Within each perspective the organization must first establish a clear set of actionable strategic objectives that answers the key strategic question
for each perspective. With the strategic objectives in place, the organization then designs one or more measures (i.e., KPIs) to capture progress on
each objective. Before the start of each operating period, the target or goal for each measure is determined. Finally, initiatives are put in place (i.e.,
resources are committed) to accomplish the target. Using these four steps, the organization's strategy is operationalized through the BSC.
Question 59
1.C.3.r
aq.balscore.009_0820
LOS: 1.C.3.r
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4

Fast Tax Prep, LLC (FTP LLC) is an accounting firm that specializes in tax return preparation for individuals and small business clients. FTP LLC is
implementing a balanced scorecard and has identified the following ten key performance indicators (KPIs):

Number of Employee Training Events

Number of Client Touch Points (personally connecting with client to acknowledge business events, family celebrations, etc.)
Tax Service Income Growth (quarterly percentage growth)
Client Promotion Score (survey on likelihood of clients to recommend firm to friends and colleagues)
Client Tax Return Satisfaction (survey score)
Number of Custom Tax Planning Strategies (created for clients)
Tax Service Income (monthly)
Tax Return Preparation Speed and Accuracy (a combined score based on days to complete the return and return errors)
Return on Partner Equity (ROE)
Employee Satisfaction (survey score)

Which set of the key performance indicators (KPIs) listed are most likely located in the customer perspective?

Your Answer

Employee Satisfaction, Employee Training Events

Client Touch Points, Tax Return Preparation Speed/Accuracy

Correct

Client Promotion Score, Tax Return Satisfaction, Custom Tax Strategies

Return on Partner Equity, Tax Service Income, Tax Service Income Growth

Rationale
 Employee Satisfaction, Employee Training Events
This answer is incorrect. Employee satisfaction and employee training events are most likely located in the learning perspective.

Rationale
 Client Touch Points, Tax Return Preparation Speed/Accuracy
This answer is incorrect. Tax return preparation speed/accuracy are most likely located in the internal process perspective. Client touch points
could likely go in either the internal process perspective or the customer perspective.

Rationale
 Client Promotion Score, Tax Return Satisfaction, Custom Tax Strategies
Client promotion score, tax return satisfaction, and custom tax strategies are most likely located in the customer perspective. Custom tax strategies
could be located within the internal process perspective rather than within the customer perspective, but in this situation they are likely to be an
appropriate measure of the customer perspective.

Rationale
 Return on Partner Equity, Tax Service Income, Tax Service Income Growth
This answer is incorrect. Return on partner equity, tax service income, and tax service income growth are most likely located in the financial
perspective.
Question 60
1.C.3.m
balscore.tb.005_0120
LOS: 1.C.3.m
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 4
Each of the following statements about the balanced scorecard are correct, except:
A balanced scorecard balances financial and nonfinancial performance measures to help an organization achieve its goals.

A balanced scorecard should contain a mix of lagging and leading performance measures.
Correct

A balanced scorecard is appropriate in a for-profit organization but not in a not-for-profit organization.

Your Answer

An organization should update its balanced scorecard measures as it updates its strategy.

Rationale
 A balanced scorecard balances financial and nonfinancial performance measures to help an organization achieve its goals.
This answer is incorrect. A balanced scorecard measures performance from a financial and nonfinancial perspective. This gives an organization a
“balanced” view of its performance, making it more likely it will achieve its goals.

Rationale
 A balanced scorecard should contain a mix of lagging and leading performance measures.
This answer is incorrect. Lagging performance measures explain past or current performance while leading measures are an early-warning system
that can predict future performance. Both types of measures are useful in a balanced scorecard as lagging measures let an organization know if
goals were achieved while leading measures help an organization know whether it is on the path to achieving its goals.

Rationale
 A balanced scorecard is appropriate in a for-profit organization but not in a not-for-profit organization.
A balanced scorecard is a performance management system containing measures in four areas: financial, customer, internal business process, and
learning and growth. While not-for-profit organizations may not focus on financial goals as the ultimate measure of performance, they can still
benefit from using the balanced scorecard structure to evaluate performance.

Rationale
 An organization should update its balanced scorecard measures as it updates its strategy.
This answer is incorrect. Balanced scorecards are used to help an organization achieve its goals. The measures in an organization’s balanced
scorecard should be updated as the organization updates its strategy because its goals are likely to change as its strategy changes.
Question 61
1.C.3.q
balscore.tb.022_0120
LOS: 1.C.3.q
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
Last year, JT Engineering recorded net income and share prices, as well as its highest customer retention in years. In addition, it reduced its waste and
improved its quality. In spite of this success, however, JT had a poor employee retention rate and a record number of ethics violations. Which of the
following best sums up JT’s balanced scorecard for the year?
Your Answer

Financial, internal process, and learning and growth categories scored high, while the customer category scored low.

Customer, internal process, and learning and growth categories scored high, while the financial category scored low.

Financial, customer, and learning and growth categories scored high, while the internal process category scored low.
Correct

Financial, customer, and internal process categories scored high, while the learning and growth category scored low.

Rationale
 Financial, internal process, and learning and growth categories scored high, while the customer category scored low.
This answer is incorrect. Net income and share prices are financial measures, customer retention is a customer measure, waste reduction and
quality are internal business process measures, and employee retention and the number of ethics violations are learning and growth measures.
Based on this, JT did well in the financial and internal business process categories but poorly in the learning and growth category. It also did well,
not poorly, in the customer category.

Rationale
 Customer, internal process, and learning and growth categories scored high, while the financial category scored low.
This answer is incorrect. Net income and share prices are financial measures, customer retention is a customer measure, waste reduction and
quality are internal business process measures, and employee retention and the number of ethics violations are learning and growth measures.
Based on this, JT did well in the customer and internal business process categories but poorly in the learning and growth category. It also did well,
not poorly, in the financial category.

Rationale
 Financial, customer, and learning and growth categories scored high, while the internal process category scored low.
This answer is incorrect. Net income and share prices are financial measures, customer retention is a customer measure, waste reduction and
quality are internal business process measures, and employee retention and the number of ethics violations are learning and growth measures.
Based on this, JT did well in the financial and customer categories but poorly in the learning and growth category. It also did well, not poorly, in the
internal business process category.

Rationale
 Financial, customer, and internal process categories scored high, while the learning and growth category scored low.
A balanced scorecard is used to help organizations move away from concentrating solely on financial information in performance evaluation. It
contains measures in four categories: financial, customer, internal business processes, and learning and growth measures. Net income and share
prices are financial measures, customer retention is a customer measure, waste reduction and quality are internal business process measures, and
employee retention and the number of ethics violations are learning and growth measures. Based on this, JT did well in the financial, customer,
and internal business process categories but poorly in the learning and growth categories.
Question 62
1.C.3.n
balscore.tb.015_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: easy
Bloom Code: 2

An accounting firm is using the balanced scorecard to improve the firm’s effectiveness and efficiency. It has identified the following objectives:

Increase profit per employee

Increase number of customer engagements
Decrease accounting fees
Keep associates current in accounting changes

Which of these objectives best fits under the financial perspective of the balanced scorecard?

Keep associates current in accounting changes

Your Answer

Increase number of customer engagements

Decrease accounting fees

Correct

Increase profit per employee

Rationale
 Keep associates current in accounting changes
This answer is incorrect. Keeping associates current in accounting changes does not fit under the financial perspective of the balanced scorecard
since it does not involve traditional financial performance measures.

Rationale
 Increase number of customer engagements
This answer is incorrect. Increasing the number of customer engagements does not fit under the financial perspective of the balanced scorecard
since it does not involve traditional financial performance measures.

Rationale
 Decrease accounting fees
This answer is incorrect. Decreasing accounting fees does not fit under the financial perspective of the balanced scorecard even though it is
measured in terms of dollars. It fits better under the customer perspective since it is a driver of customer performance measures.

Rationale
 Increase profit per employee
The financial perspective of the balanced scorecard involves traditional financial performance measures and focuses on areas such as liquidity,
profitability, and market value. Increasing the profit per employee fits best under the financial perspective of the balanced scorecard since it
involves profitability of the accounting firm.
Question 63
1.C.3.n
balscore.tb.012_0120
LOS: 1.C.3.n
Lesson Reference: The Balanced Scorecard
Difficulty: medium
Bloom Code: 3
A nonprofit organization operates ten preschools in a large metropolitan area. The board of directors for the schools has implemented the balanced
scorecard to better align the organization’s goals with those of the stakeholders (students, parents, and donors). Which of the following objectives best
fits under the customer perspective of the balanced scorecard?
Your Answer

Ensure clean and well-maintained facilities

Expand sources of revenue for the schools

Provide for the continued development of staff

Correct

Ensure the health and safety of students

Rationale
 Ensure clean and well-maintained facilities
This answer is incorrect. Ensuring clean and well-maintained facilities does not fit under the customer perspective of the balanced scorecard since
it does not focus on either customer outcome measures or customer performance drivers.

Rationale
 Expand sources of revenue for the schools
This answer is incorrect. Expanding sources of revenue for the schools does not fit under the customer perspective of the balanced scorecard since
it does not focus on either customer outcome measures or customer performance drivers.

Rationale
 Provide for the continued development of staff
This answer is incorrect. Providing for the continued development of staff does not fit under the customer perspective of the balanced scorecard
since it does not focus on either customer outcome measures or customer performance drivers.

Rationale
 Ensure the health and safety of students
The customer perspective of the balanced scorecard focuses on customer outcome measures (such as market share, customer satisfaction, and
customer retention) and customer performance drivers (such as response time, delivery performance, and defects). Ensuring the health and safety
of student’s best fits under the customer perspective of the balanced scorecard since it involves a customer performance driver.