100 multiple-choice questions of CMA Part 1: Financial Reporting, Planning,

Performance, and Control

Question 1:

Which of the following (internal) pro forma financial statements is usually the last budget
prepared at the end of a period?

a. Pro forma income statement.

b. Pro forma balance sheet.

c. Pro forma cash budget.

d. Pro forma statement of cash flows.

Answer: the correct answer is d.

The pro forma statement of cash flows requires the pro forma beginning and ending balance
sheets and the pro forma income statement for its preparation. Therefore, it is usually the last
pro forma statement to be prepared.

Question 2:

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?

a. $40,000.

b. $80,000.

c. $66,667.

d. $33,333.

Answer: the correct answer is d.

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 3:

A firm uses direct labor hours as its plant-wide cost driver for overhead. Managers estimate total
overhead during the year to be $108,000 and direct labor hours to be 15,000. Assume that
during the current period, 1500 direct labor hours were recorded and actual overhead for the
period was 9,350. Which of the following statements is true?
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a. Overhead is overapplied by $1,450
b. Overhead is underapplied by $350
c. Overhead is underapplied by $1,450
d. Overhead is overapplied by $350

Answer: the correct answer is a. Predetermined overhead rate = $108,000/15,000 = $7.2 per
DL hour. 1,500 hours were recored so Overhead applied would be: 1,500 x $7.2 = $10,800.
Overapplied Overhead = $10,800 - $9,350 = $1,450

OverApplied> actual
Underapplied<actual

Question 4:

Lawson Company discloses segment financial information for its operating segments. The
following information is available for Year 1:

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):

a. $80,000.

b. $50,000.

c. $90,000.

d. $60,000.

Answer: the correct answer is a.

The profit for Lawson is $500,000 before deducting nontraceable expenses. Segment B has
profitability of $200,000 or 40% of the total.
Hence, its share of non-traceable expense is 40% of $300,000 or $120,000.
$200,000 - $120,000 = $80,000

Question 5:

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Which of the following methods do managers use when determining what to fund in a
zerobased budget?

a. Benchmarks from best-practice firms.

b. Determining specific cost drivers and cost pools.

c. Analysis of the prior year's zero-based budget.

d. In-depth interviews of each area the manager controls.

Answer: the correct answer is d.

In order to justify what items to continue funding, managers must conduct in-depth reviews of
each area under their control.

Question 6:

Berwick Enterprises uses the percentage of sales method to forecast its pro forma financial
statements. Based on historical financial statements, the following relationships can be
established between several items and sales:

Cost of Goods Sold (COGS) is 70% of sales

Selling and administrative (S&A) Expense is 10% of sales
Cash and equivalents is 4% of sales
Accounts receivable is 20% of sales
Inventories are 23% of sales
Net fixed assets are 32% of sales
Accounts payable is 15% of sales
Accruals are 10% of sales

Berwick Enterprises is projecting a sales revenue growth of 15% in the upcoming year.
The company currently has 15,000 shares of common stock outstanding and it plans on
maintaining its dividend policy of paying out 35% of its net income as dividends. It is currently
paying 7% interest on its notes payable ($4,000 note) and 10% on its long-term debt ($17,500
bond). The company has a 35% tax rate.

Based on the above information, assume current year sales are $100,000, which of the
following amounts will be represented as Cash and Equivalents on the upcoming year's pro
forma income statement?

a. $5,000.

b. $5,600.

c. $4,600.

d. $4,000.

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Answer: the correct answer is c.
For the current year, sales are $100,000, and the projected growth rate in sales is 15%, thus
$100,000 × 1.15 = $115,000. Cash and Equivalents is 4% of sales, thus $4,600 ($115,000 ×
4%) is Cash and Equivalents

Question 7:

How is strategic analysis related to budget development?

a. Strategic analysis establishes targets for all departments and lists the methods to
achieve them.

b. Strategic analysis provides a detailed and precise estimate about the future which
helps an organization to accurately determine the resource requirements.

c. Strategic analysis matches the capabilities of an organization with available

marketplace opportunities to determine the goals of objectives for a particular period.

d. Strategic analysis determines the overall financial requirements of an organization and

also helps to procurement of funds at lower cost.

Answer: the correct answer is c.

A prerequisite for budget development is a strategic analysis that matches an entity's
capabilities with available marketplace opportunities. Strategy addresses the objectives of the
organization; locates potential markets; considers the impact of events, competitors, and the
economy; addresses the structure of the organization; and evaluates the risks of alternative
strategies

Question 8:

P.C. Programs Inc. produces software for individual users and small businesses. Rita Morgan
manages the customer hot line department for the firm and is responsible for answering
customer questions related to software products produced by all divisions of the firm. For
purposes of promoting goal congruence, which one of the following would be the least
appropriate measure of her performance?

a. Number of calls to the hot line for each new release of software.

b. Average time to provide an answer or solution to a customer.

c. Average time a customer is on hold.

d. Number of customer complaints due to incorrect responses given to customers.

Answer: the correct answer is a

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

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number of calls to the hot line for each new release of software would not motivate or improve
performance.

Question 9:

Listed below are selected line items from the Cost of Quality Report for Watson Products for last
month.

What is Watson's total prevention and appraisal cost for last month?

a. $1,940.

b. $1,154.

c. $2,665.

d. $786.

Answer: the correct answer is a

Prevention costs are incurred to prevent problems before they happen. Examples of prevention
costs are systems design, quality planning, training, maintenance, and supplier development
costs. Appraisal (detection) costs are incurred to detect problems in time to make needed
corrections. Appraisal costs include the costs of incoming, in-process, and final inspections,
testing, and quality audits.

Watson's prevention costs consist of equipment maintenance costs of $1,154. Their appraisal
costs are $786, which consists of product testing costs. The total of prevention and appraisal
costs for Watson is $1,940.

Question 10:

The following information is available for Matthews Holdings Inc.:

Net sales $25,000

Depreciation 2,000
Cost of goods sold 3,500
Gain on sale of asset 3,000
Loss from discontinued operations 5,400
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Gain from extraordinary items 500

Calculate the income from continuing operations.

a. $22,500

b. $17,100

c. $17,600

d. $23,000

Answer: the correct answer is a

Net sales $25,000

Less: Cost of goods sold 3,500
Less: Depreciation 2,000
Add: Gain on sale of asset 3,000
$22,500

Question 11:

Render Inc. has four support departments (maintenance, power, human resources, and legal)
and three operating departments. The support departments provide services to the operating
departments as well as to the other support departments. The method of allocating the costs of
the support departments that best recognizes the mutual services rendered by support
departments to other support departments is the

a. direct allocation method.

b. step-down allocation method.

c. dual-rate allocation method.

d. reciprocal allocation method.

Answer: the correct answer is d

The method of allocating the costs of the support departments that best recognizes the mutual
services rendered by support department to other support departments is the reciprocal
allocation method

Question 12:

Merlene Company uses a standard cost accounting system. Data for the last fiscal year are:

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There were no price, efficiency, or spending variances for the year, and actual selling and
administrative expenses equaled the budget amount. Any volume variance is written off to cost
of goods sold in the year incurred. There are no work-in-process inventories.
The amount of operating income earned by Merlene for the last fiscal year using variable
costing was:

a. $22,500.

b. $31,000.

c. $21,500.

d. $28,000.

Answer: the correct answer is a

The variable costing operating income is calculated as:

Variable costing operating income = (sales) (variable costs) (fixed manufacturing costs)
(fixed selling and administrative costs)
Sales = (750 units)($200 per unit) = $150,000
Variable costs = (750 units)($90 each) = $67,500
Fixed manufacturing costs = $20(denominator level of 750) = $15,000
Fixed selling and administrative costs = $45,000
Variable costing operating income = $150,000 $67,500 $15,000 $45,000 = $22,500

Question 13:

A company is using process costing with Weighted average inventory valuation and all costs
are added evenly throughout the manufacturing process. For a period with 5,000 units in
beginning Work-in-process (WIP) inventory (30% complete), 10,000 units in ending WIP
inventory (60% complete) and 25,000 units started in the process, how many equipvalent units
are there for this period?

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 a. 25,000 units
b. 24,500 units
c. 26,000 units
d. 22,500 units

Answer: the correct answer is c

Start & Completed in period = Started in process – End WIP = 25,000 – 10,000 = 15,000
Equipvalent units = Begin WIP + started & completed + End WIP = 5,000 +15,000+10,000*0.6 =
26,000

Question 14:

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?

a. Outcome measures.

b. Critical success factors.

c. Motivating factors.

d. Performance drivers.

Answer: the correct answer is a

Without an outcome measure (a specific financial measure), an initiative such as total quality
management can become an end in itself.

Question 15:

The chief audit executive (CAE) is required to confirm annually the organizational independence
of the internal audit activity. Which of the following receives that confirmation?

a. Governance committee.

b. Chief executive officer.

c. Finance committee.

d. Board of directors.

Answer: the correct answer is d

The CAE is required to confirm annually to the full board of directors the organizational
independence of the internal audit activity
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Question 16:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the
mining industry. The following information pertains to operations for the month of May.

The beginning inventory was 60% complete for materials and 20% complete for conversion
costs. The ending inventory was 90% complete for materials and 40% complete for conversion
costs.

Costs pertaining to the month of May are:

• Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory
overhead, $15,240.
• Costs incurred during May are: materials used, $468,000; direct labor, $182,880;
and factory overhead, $391,160.

Using the first-in, first-out (FIFO) method, the equivalent units of production for materials are:

a. 113,600 units.

b. 104,000 units.

c. 97,600 units.

d. 106,000 units.

Answer: the correct answer is b

The FIFO approach follows the production flow and assumes that units will be sold in the order
in which they were placed in inventory.

To calculate the equivalent units of production for materials using FIFO, calculate the equivalent
units for materials for: 1. units in beginning inventory,
2. products started into production during the month, and,
3. units in ending inventory.

First, the 16,000 units in the beginning inventory would be completed, requiring the addition of
6,400 [(16,000)(1 – 0.6)] equivalent units for materials.

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Next, of the 100,000 units started during the month, 76,000 would be completed, requiring
76,000 equivalent units for materials.
(92,000 units completed during month 16,000 units from beginning inventory = 76,000 units)

Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 90% complete with
respect to materials, requiring 21,600 [(0.90)(24,000)] equivalent units for materials.

Therefore, the total equivalent units for materials would be 6,400 + 76,000 + 21,600 = 104,000

Question 17:

Which of the following is true?

a. A firewall system guarantees that unauthorized users will not be able to access the
backup data.

b. Data backups should be regularly stored off site for recovery in the event of the loss of
the facility in which the data resides.

c. Disaster recovery will be effective only for firms with subsidiaries in a different region.

d. Automated backup systems are often ineffective; backups should be instituted every
day by an authorized computer manager.

Answer: the correct answer is b

Data backup tapes should be regularly transferred to off-site storage so that recovery
procedures can be instituted in case a disaster destroys the data center. Automated backup
systems work fine. Nothing guarantees that hackers will not be able to access the system.
Disaster recovery can be effective for many types and sizes of businesses

Question 18:

Stumphouse Cheese is in the process of implementing a cost improvement system with kaizen
costing as the basis for budgeting all manufacturing activities. This will be utilized over the next
four years in an attempt to become more profitable. The target reduction rate has been set at
5% of fixed overhead costs. Total fixed overhead costs for this year were $900,000. What is the
budgeted amount for the next two years using kaizen costing?

a. Current Year +1 = $900,000, Current Year +2 = $855,000.

b. Current Year +1 = $855,000, Current Year +2 = Unable to determine.

c. Current Year +1 = $855,000, Current Year +2 = $810,000.

d. Current Year +1 = $855,000, Current Year +2 = $812,250.

Answer: the correct answer is d

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Using Kaizen costing, the targeted overhead for each new year will be 95% (100% 5%) of the
previous year. Therefore, the budget for next year (called the current year + 1) would be
calculated as:

Current year + 1 = 0.95($900,000) = $855,000

The budget for the year after that (current year + 2) would be calculated as:

Current year + 2 = 0.95($855,000) = $812,250

Question 19:

Tucariz Company processes Duo into two joint products, Big and Mini. Duo is purchased in
1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000 gallons of Duo
into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon for Big and $4
per gallon for Mini. The 800 gallons of Big can be processed further into 600 gallons of Giant if
$1,000 of additional processing costs are incurred. Giant can be sold for $17 per gallon.
If the net-realizable-value method were used to allocate costs to the joint products, the total
cost of producing Giant would be:

a. $4,600.

b. $5,600.

c. $5,520.

d. $5,564.

Answer: the correct answer is b

The NRV of a product at split-off is its market value less the costs to complete and dispose
of the product.
NRV of Giant at split-off = (market value) (separable processing costs)
Market value of Giant = (600 gallons)($17 each) = $10,200
NRV of Giant at split-off = ($10,200) ($1,000) = $9,200

The NRV of Mini at split-off is calculated as follows:

NRV of Mini at split-off = (market value) (separable processing costs)
NRV of Mini at split-off = (200 gallons)($4 each) = $800
The NRV of Giant and Mini = $9,200 + $800 = $10,000

Therefore, Giant's share of the joint costs is ($9,200 / $10,000)($5,000) = $4,600

Cost of using NRV at split-off, Giant = (separable costs) + (share of joint processing costs)
Cost of using NRV at split-off, Giant = ($1,000) + ($4,600) = $5,600

Question 20:

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When attempting to restore computing facilities at an alternate site following a disaster, which
one of the following should be restored first?

a. Online system.

b. Batch system.

c. Decision support system.

d. Operating system.

Answer: the correct answer is d

The first step in restoring computing facilities at an alternative site following a disaster should be
restoring the operating system. The operating system will allow all other computing operations
to be restored subsequently

Question 21:

If the standard for direct materials (DM) is $70 per unit and each unit requires 10 lbs. at $7 per
pound and the flexible budget at actual unit production calls for 200,000 lbs. of material but
190,000 lbs. were actually purchased and used at a price of $9 per pound, what is the price
variance for DM?

a. $400,000 unfavorable.

b. $380,000 unfavorable.

c. $70,000 unfavorable.

d. $20,000 unfavorable.

Answer: the correct answer is b

The price variance is the difference between the actual input and the standard input prices times
the actual quantity of input units (pounds): ($9/lb. $7/lb.) × 190,000 lbs. = $380,000

Question 22:

The most appropriate control to verify that a user is authorized to execute a particular on-line
transaction is a:

a. password

b. challenge/ response system.

c. closed-loop verification.

d. compatibility check.

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Answer: the correct answer is d
The most appropriate control to verify that a user is authorized to execute a particular online
transaction is through the use of a compatibility check

Question 23:

If a firm's desired ending direct materials (DM) inventory is 20% of the upcoming month's DM
usage, then which of the following is likely to be false, assuming no change in DM cost?

a. When sales are increasing and decreasing in alternating months, the volatility in the
DM purchases budget will be greater than the volatility in the DM usage budget.

b. When sales are rising each month, the DM purchases budget will be increasing each
month.

c. When sales are rising each month, the DM purchases budget will be greater than the
DM usage budget.

d. The DM purchases budget will be less than the DM usage budget if sales are declining
each month.

Answer: the correct answer is a

Recall that budgeted DM purchases = budgeted DM usage + desired ending DM inventory
beginning DM inventory. If sales rise (and then proceed to fall), DM usage rises but desired
ending DM inventory falls (so we're adding a smaller number) and then we subtract a larger
beginning inventory (because of the higher current month's sales). This pattern will result in less
variability in DM purchases compared to DM usage.

Question 24:

The major disadvantage of a top-down budgeting process is:

a. Lack of involvement by upper-level management.

b. Inconsistencies of goals with strategic plans.

c. Lack of buy-in by middle and lower-level management.

d. The introduction of budgetary slack.

Answer: the correct answer is c

In a top-down approach, upper-level management creates the budget and communicates goals
to managers at lower levels. Two advantages of this method are lack of budgetary slack and
consistency of goals with strategic plans. One disadvantage is lack of buy-in from lower-level
managers

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Question 25:

At the beginning of the year, Douglas Company prepared the following monthly budget for direct
materials:

At the end of the month, the company's records showed that 12,000 units were produced and
sold and $20,000 was spent for direct materials. The variance for direct materials is:

a. $2,000 favorable.

b. $5,000 favorable.

c. $2,000 unfavorable.

d. $5,000 unfavorable.

Answer: the correct answer is c

The variance for direct materials is calculated as:
Variance for direct materials = (actual direct material cost) (budgeted direct material cost at
actual level of production)

Variance for direct materials = ($20,000) (12,000 units)($15,000 / 10,000) Variance

for direct materials = $20,000 $18,000 = $2,000 unfavorable

Question 26:

Dawson Manufacturing developed the following multiple regression equation, utilizing many
years of data, and uses it to model, or estimate, the cost of its product.

Cost = FC + a × L + b × M Where:
FC = fixed costs
L = labor rate per hour
M = material cost per pound

Which one of the following changes would have the greatest impact on invalidating the results
of this model?

a. Renegotiation of the union contract calling for much higher wage rates.

b. Large drop in material costs, as a result of purchasing the material from a foreign
source.

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 c. A significant change in labor productivity.

d. A significant reduction in factory overheads, which are a component of fixed costs.

Answer: the correct answer is c

In a costing model, all fixed costs, labor costs, and material costs associated with the product
are considered. In this case, a significant change in labor productivity will have the greatest
impact on invalidating the results of the model as it would cause the model to fluctuate at a
higher rate than the other variables

Question 27:

Which of the following methods is generally considered the most acceptable method of
allocating service department costs?

a. Reciprocal method.

b. Step-down method.

c. Activity-based method.

d. Direct method.

Answer: the correct answer is a

The reciprocal method fully recognizes all interdepartmental service costs, allocating all costs to
other affected departments using complex algorithms

Question 28:

After performing a thorough study of Michigan Company's operations, an independent

consultant determined that the firm's labor standards were probably too tight. Which one of the
following facts would be inconsistent with the consultant's conclusion?

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

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

c. Production supervisors found several significant fluctuations in manufacturing volume,

with short-term increases on output being followed by rapid, sustained declines.

d. A review of performance reports revealed the presence of many unfavorable efficiency

variances.

Answer: the correct answer is a

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,

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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

Question 29:

Comprehensive income for a period is the:

a. Sum of other comprehensive income items for the period.

b. Change in total owners' equity from all sources, other than from transactions with
owners acting as owners.

c. Sum of net income and other comprehensive income for the period.

d. Change in total owners' equity for the period.

Answer: the correct answer is c

Comprehensive income includes net income to yield a broader measure of income, compared
with the earnings figure reported in the Income Statement and other comprehensive income for
the period

Question 30:

When evaluating the cost of quality in an organization, which one of the following would be
considered an internal failure cost?

a. The warranty repair costs.

b. The cost to rework defective units.

c. Product testing.

d. The cost to inspect units produced.

Answer: the correct answer is b

Internal failure costs are those costs that could be avoided if internal operations were effective.
In this case, the cost to rework defective units is an internal failure cost.

Question 31:

Which of the following are provisions of the Sarbanes-Oxley Act?

I. The board of directors of an issuer must appoint an audit committee. II.
Management must certify financial statements.

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III. Management must provide a written report on the effectiveness of internal control
procedures within 90 days of the publication of the annual report.
IV. A public accounting firm may not audit the books of an issuer of public securities if any
officer or director of the issuer was employed by the public accounting firm and participated in
any audit activity with the issuer within one year.

a. I, II, and IV only.

b. I, II, III, and IV.

c. II and IV only.

d. IV only.

Answer: the correct answer is b

All of the listed requirements are provisions of the Sarbanes-Oxley Act.

Question 32:

Which one of the following factors may influence financial forecasts in the future:

a. Like-kind exchange of equipment today.

b. Current year's wages.

c. Last year's production level.

d. Pending litigation against the organization.

Answer: the correct answer is d

In preparing a financial forecast, it is important to include the items that are most likely to occur
so the organization can effectively anticipate any cash flow changes in the future.

Question 33:

Which of the following industries faces the least threat of competition and profitability from the
entry of a new competitor?

a. Automobile industry

b. Apparel industry

c. Restaurant chain industry

d. Online shopping industry

Answer: the correct answer is a

Among the listed industries, it is difficult for a new entrant to establish business in the
automobile industry

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Question 34:

Berwick Enterprises uses the percentage of sales method to forecast its pro forma financial
statements. Based on historical financial statements, the following relationships can be
established between several items and sales:

Cost of Goods Sold (COGS) is 70% of sales

Selling and administrative (S&A) Expense is 10% of sales
Cash and equivalents is 4% of sales

Accounts receivable is 20% of sales

Inventories are 23% of sales
Net fixed assets are 32% of sales
Accounts payable is 15% of sales
Accruals are 10% of sales

Berwick Enterprises is projecting a sales revenue growth of 15% in the upcoming year. The
company currently has 15,000 shares of common stock outstanding and it plans on maintaining
its dividend policy of paying out 35% of its net income as dividends. It is currently paying 7%
interest on its notes payable ($4,000 note) and 10% on its long-term debt ($17,500 bond). The
company has a 35% tax rate.

Based on the above information, assume current year sales are $100,000, which of the
following amounts will be represented as COGS on the upcoming year's pro forma income
statement?

a. $70,000.

b. $73,500.

c. $92,000.

d. $80,500.

Answer: the correct answer is d

For the current year, sales are $100,000, and the projected growth rate in sales is 15%, thus
$100,000 × 1.15 = $115,000. Since COGS is 70% of sales, the projected COGS would be
$80,500 ($115,000 × 70%)

Question 35:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the
mining industry. The following information pertains to operations for the month of May.

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The beginning inventory was 60% complete for materials and 20% complete for conversion
costs. The ending inventory was 90% complete for materials and 40% complete for conversion
costs.

Costs pertaining to the month of May are:

• Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory
overhead, $15,240.

• Costs incurred during May are: materials used, $468,000; direct labor, $182,880;
and factory overhead, $391,160.

Using the first-in, first-out (FIFO) method, the cost per equivalent unit of materials for May is:

a. $4.12.

b. $4.60.

c. $5.03.

d. $4.50.

Answer: the correct answer is d

The FIFO approach follows the production flow and assumes that units will be sold in the order
in which they were placed in inventory.

In order to compute the cost per equivalent unit for materials, it is first necessary to calculate the
number of equivalent units with respect to materials.

To calculate the equivalent units of production for materials using FIFO, calculate the equivalent
units for materials for: 1. units in beginning inventory,
2. products started into production during the month, and,
3. units in ending inventory.

First, the 16,000 units in the beginning inventory would be completed, requiring the addition of
6,400 [(16,000)(1 0.6)] equivalent units for materials.

Next, of the 100,000 units started during the month, 76,000 would be completed, requiring
76,000 equivalent units for materials. (92,000 units completed during month 16,000 units from
beginning inventory = 76,000 units)

Lastly, of the 100,000 units started, 24,000 would be in the ending inventory, 90% complete with
respect to materials, requiring 21,600 [(0.90)(24,000)] equivalent units for materials.

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The total equivalent units for materials would be 6,400 + 76,000 + 21,600 = 104,000.

The cost of materials used is $468,000.

Therefore, the equivalent unit cost for materials = ($468,000 material cost) / (104,000 equivalent
units for materials) = $4.50 per unit.

Question 36:

Karmee Company has been accumulating operating data in order to prepare an annual profit
plan. Details regarding Karmee's sales for the first six months of the coming year are:

Karmee's cost of goods sold averages 40% of the sales value. Karmee's objective is to maintain
a target inventory equal to 30% of the next month's sales. Purchases of merchandise for resale
are paid for in the month following the sale.

The variable operating expenses (other than cost of goods sold) for Karmee are 10% of sales
and are paid for in the month following the sale. The annual fixed operating expenses are
presented below. All of these are incurred uniformly throughout the year and paid monthly
except for insurance and property taxes. Insurance is paid quarterly in January, April, July, and
October. Property taxes are paid twice a year in April and October.

The amount of cash collected in March for Karmee Company from the sales made during March
will be:

a. $350,000.

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 b. $308,000.

c. $210,000.

d. $140,000.

Answer: the correct answer is b

Monthly sales are comprised of 20% cash sales and 80% credit sales. Collections on credit
sales are 30% in the month of sale, which means that of the 80% credit sales amount, only 30%
of that amount is collected in the month of sale.

March collections from sales made in March = (March cash sales) + (March credit sales)

March collections from sales made in March = (0.20)($700,000) + (0.30)(0.80)($700,000) =

$140,000 + $168,000 = $308,000

Question 37:

A fully approved internal audit plan for the current year is already in place for a large internal
auditing department. Which of the following offers a final approval of the specific scope of an
internal audit engagement?

a. Audit director.

b. Senior auditor.

c. Audit supervisor.

d. Audit manager.

Answer: the correct answer is d

The audit manager can approve the scope of a specific audit engagement because he or she
might be managing the audit supervisor, senior auditor, and audit staff assigned to the specific
audit. The audit manager is responsible and accountable for the successful completion of the
specific audit engagement work.

Question 38:

Kimbeth Manufacturing uses a process cost system to manufacture dust density sensors for the
mining industry. The following information pertains to operations for the month of May.

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The beginning inventory was 60% complete for materials and 20% complete for conversion
costs. The ending inventory was 90% complete for materials and 40% complete for conversion
costs.

Costs pertaining to the month of May are:

• Beginning inventory costs are: materials, $54,560; direct labor, $20,320; and factory
overhead, $15,240.
• Costs incurred during May are: materials used, $468,000; direct labor, $182,880;
and factory overhead, $391,160.

Using the weighted-average method, the cost per equivalent unit for conversion costs for May
is:

a. $5.83.

b. $6.00.

c. $6.41.

d. $5.65.

Answer: the correct answer is b

The weighted-average method assumes that there is no beginning inventory. In other words, all
units are started in the current period and all costs are incurred in the current period.

Therefore, the assumption is that 116,000 units were added in the period, of which 92,000 were
completed and 24,000 are in the ending inventory. The 24,000 units in ending inventory are
40% complete with respect to conversion costs.

The equivalent units for conversion costs = (units completed during the period) + (equivalent
units in ending inventory)

Equivalent units for conversion costs = 92,000 + 0.4(24,000) = 101,600

Total conversion costs for the period = $182,880 + $20,320 + $391,160 + $15,240 Total
conversion costs for the period = $609,600

Equivalent unit cost for conversion = (total conversion costs for the period) / (total equivalent
units for conversion costs)
Equivalent unit cost for conversion = ($609,600) / (101,600) = $6.00

Question 39:

Fashion Inc. manufactures women's dresses using cotton and polyester. Since the same style
dresses are made out of both fabrics, Fashions uses operation costing. During June, 1,000

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cotton dresses were completely produced. Also during June, 1,500 polyester dresses were
started by adding all materials at the beginning of the process. Of these 1,500 dresses, 700
were completely finished and the remainder were 25 percent complete by the end of the month.
There was no work-in-process inventory at the beginning of June. Costs incurred during June
were as follows.

The cost per unit to manufacture one polyester dress during June was:

a. $20.32.

b. $32.00.

c. $22.00.

d. $18.32.

Answer: the correct answer is c

The cost to manufacture one polyester dress in June is calculated as follows
Cost to manufacture, one dress = (raw material cost per dress) + (conversion cost per dress)
Raw material cost per dress = ($22,500/1,500 dresses) = $15
Conversion cost per dress = ($13,300) / (equivalent unit of conversion incurred in June)

Equivalent units of conversion in June = (1,700 dresses started and finished comprise 1,000 of
cotton and 700 polyester) + (800 started multiplied by a 25% completion rate 1,500 – 700
polyester finished)
Equivalent units of conversion in June = (1,700) + (200) = 1,900 dresses
Therefore, the conversion cost per polyester dress = ($13,300) / 1,900 dresses = $7 per dress
Cost to manufacture, one dress = ($15 + $7) = $22

Question 40:

Under which of the following circumstances can a budget be considered a pressure or blame
device rather than a planning, communication, and coordinating tool?

a. When it includes technically incorrect and unrealistic targets.

b. When it is seen as an internal control device.

c. When the budget is prepared by higher authorities.

d. When management fully endorses the budget.

Answer: the correct answer is a

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A budget must contain technically correct and reasonably accurate numbers and facts. If the
targets set in the budget are unrealistic, employees may not strive to achieve them. In those
situations, the budget will be considered as a pressure or blame device

Question 41:

For cost estimation simple regression differs from multiple regression in that simple regression
uses only:

a. dependent variables, while multiple regression can use both dependent and
independent variables.

b. one independent variable, while multiple regression uses more than one independent
variable.

c. one dependent variable, while multiple regression uses more than one dependent
variable.

d. one dependent variable, while multiple regression uses all available data to estimate the
cost function.

Answer: the correct answer is b

From a definition standpoint, the statistical methodology of simple regression uses only one
independent variable, and multiple regression uses more than one independent variable.

Question 42:

A company has a method of collecting and organizing cost information in an accounting system,
called (1)_______. This system performs (2)_______, which (3)_______ indirect costs and
(4)_______ direct costs.

a. (1) cost assignment, (2) cost accumulation, (3) allocates, (4) traces.

b. (1) cost assignment, (2) cost accumulation, (3) traces, (4) allocates.

c. (1) cost accumulation, (2) cost assignment, (3) allocates, (4) traces.

d. (1) cost accumulation, (2) cost assignment, (3) traces, (4) allocates.

Answer: the correct answer is c

Cost accumulation collects and organizes cost information in an accounting system. Cost
assignment uses both allocation and tracing to assign accumulated costs to a cost object.
Indirect relationship costs are allocated and direct relationship costs are traced.

Question 43:

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The following information is from the accounting records of St. Charles Enterprises.

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?

a. The conclusion is incorrect, but the variance calculation is informative.

b. The conclusion is correct, but the variance calculation could be more informative.

c. The conclusion is incorrect and the variance calculation is correct.

d. Both the conclusion and the variance calculation are incorrect.

Answer: the correct answer is b

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.

Question 44:

A budgeting approach that requires a manager to justify the entire budget for each budget
period is known as:

a. program budgeting.

b. incremental budgeting.

c. zero-base budgeting.

d. performance budgeting.

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Answer: the correct answer is c
Per the definition of zero-based budgeting, it is a budgeting approach that requires a manager
to justify the entire budget for each budget period.

Question 45:

Consider the following manufacturing-related activities.

I. Conducting the final assembly of wooden furniture.

II. Moving completed production to the finished goods warehouse.
III. Painting newly-manufactured automobiles.
IV. Setting up a machine related to a new production run.
V. Reworking defective goods to bring them up to quality standards.

The activities that would be classified as value-added activities are.

a. I, IV and V only.

b. II, III, IV, and V only.

c. I, III, and V only.

d. I and III only.

Answer: the correct answer is d

Value-added activities include those activities which add value to a product throughout its
complete production. Of the above items, conducting the final assembly of wooden furniture and
painting newly-manufactured automobiles are all value-added activities.

Question 46:

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?

a. $100,000 favorable.

b. $220,000 favorable.

c. $220,000 unfavorable.

d. $100,000 unfavorable.

Answer: the correct answer is c

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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.

Question 47:

Lynn is entering a transaction on the screen and receives an error message telling her the
account number does not match the customer name. This is an example of:

a. a program access control.

b. an output control.

c. an input control.

d. a processing control.

Answer: the correct answer is c

This is an example of an input control, which processes validity checks to help avoid input of
transactions with inaccurate information.

Question 48:

The objective of a disaster recovery plan is to:

a. set forth procedures to follow if the building needs to be evacuated in the event of a
disaster.

b. provide protection against losses during times of severe recession.

c. provide for continuing business in the event of an emergency that results in the inability
to use the facility or the data center.

d. provide a plan in the event of a union strike when there are no operators for the data and
processing systems.

Answer: the correct answer is c

The objective of a disaster recovery plan is to provide for continuing business in the event of an
emergency that results in the inability to use the facility or the data center.

Question 49:

Larry Mitchell, Bailey Company's controller, is gathering data for the Statement of Cash Flows
for the most recent year end. Mitchell is planning to use the direct method to prepare this
statement, and has made the following list of cash inflows for the period.

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— Collections of $100,000 for goods sold to customers.
— Securities purchased for investment purposes with an original cost of $100,000 sold for
$125,000.
— Proceeds from the issuance of additional company stock totaling $10,000.

The correct amount to be shown as cash inflows from operating activities is:

a. $225,000.

b. $135,000.

c. $100,000.

d. $235,000.

Answer: the correct answer is c

When using the direct method, collections of $100,000 for goods sold to customers would be
classified as an operating activity. The cash sale of securities is an investing activity. The
issuance of stock for cash is a financing activity.

Question 50:

Myers Company uses a calendar-year and prepares a cash budget for each month of the year.
Which one of the following items should be considered when developing July's cash budget?

a. Recognition that 0.5% of the July sales on account will be uncollectible.

b. Quarterly cash dividends scheduled to be declared on July 15 and paid on August 6 to

shareholders of record as of July 25.

c. Property taxes levied in the last calendar year scheduled to be paid quarterly in the
coming year during the last month of each calendar quarter.

d. Federal income tax and social security tax withheld from employee's June paychecks to
be remitted to the Internal Revenue Service in July.

Answer: the correct answer is d

When preparing a cash budget for the following month, those cash items that are to be received
or made payable in the following month should be only those items included in the cash budget.
In this problems, the only item that will affect cash in the month of July are those Federal
income and social security taxes withheld from employee's paychecks in June that will be
required to be paid in July.

Question 51:

Performance results for four geographic divisions of a manufacturing company are as follows:

P a g e 28 | 52
The division with the best performance is:

a. Division C.

b. Division B.

c. Division A.

d. Division D.

Answer: the correct answer is 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.

Question 52:

Which of the following best describe the interrelated components of a system of internal
control?

a. organizational structure, management philosophy, and planning.

b. control environment, risk assessment, control activities, information and communication

systems, and monitoring.

c. risk assessment, backup facilities, responsibility accounting, and natural laws.

d. personnel practices and policies, authorization, and segregation of duties.

Answer: the correct answer is b

The five interrelated components or elements of internal control as defined in the 1992
Committee of Sponsoring Organizations Model are the control environment, risk assessment,
control activities, information and communication, and monitoring.

Question 53:
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Waller Co. uses a weighted-average process-costing system. Material B is added at two
different points in the production of shirts, 40% is added when the units are 20% completed, and
the remaining 60% of Material B is added when the units are 80% completed. At the end of the
quarter, there are 22,000 shirts in process, all of which are 50% completed. With respect to
Material B, the ending shirts in process represent how many equivalent units?

a. 8,800 units.

b. 4,400 units.

c. 11,000 units.

d. 22,000 units.

Answer: the correct answer is a

The ending inventory of 22,000 shirts is only 50% complete. Therefore, the inventory units have
only 40% of the Material B.
This equates to 8,800 equivalent units, which is calculated by multiplying the number of units in
ending inventory (22,000) by the percent of Material B (40%). Equivalent units, shirts = (22,000
units)(0.4) = 8,800 units.

Question 54:

What is the most effective approach to a budgeting process:

a. Participative approach.

b. Authoritative approach.

c. Non-qualitative approach.

d. Combination approach.

Answer: the correct answer is d

In an authoritative budget (top-down budget), top management sets everything from strategic
goals down to the individual items of the budget for each department and expects lower
managers and employees to adhere to the budget and meet the goals. In a participative budget
(bottom-up or self-imposed budget), managers at all levels and certain key employees
cooperate to set budgets for their areas, and top management usually retains final approval.
The ideal process combines the features of each and falls somewhere between these methods.

Question 55:

The use of activity-based costing (ABC) normally results in:

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 a. decreased set-up costs being charged to low-volume products.

b. substantially greater unit costs for low-volume products than is reported by traditional
product costing.

c. equalizing set-up costs for all product lines.

d. lower unit costs for low-volume products than is reported by traditional product costing.

Answer: the correct answer is b

Traditional costing systems are volume-based systems. They normally allocate overhead by
either direct labor hours (costs) or machine hours.
ABC allocates overhead based upon the activities driving the overhead. Therefore, traditional
costing tends to apply too much overhead to the high volume products and too little to low
volume products. The use of ABC normally results in greater unit costs for low-volume products
than is reported by traditional product costing, since the lower volume products will receive their
“fair share” of overhead costs using ABC.

Question 56:

Regarding plant-wide overhead rates, departmental overhead rates, and activity-based costing
(ABC) overhead costing, which of the following is true?

a. ABC overhead rates are the best selection for processes that are very homogeneous.

b. Cost drivers (allocation base) for all three methods are selected because of assumed or
determined cause-and-effect relationships with costs.

c. Each method uses only one cost driver (allocation base) but multiple cost pools.

d. Departmental overhead is the most accurate of the methods.

Answer: the correct answer is b

Cost drivers (allocation base) should have a cause-and-effect relationship on costs. Obviously,
the plant-wide overhead rate will have the most difficulty with this goal.

Question 57:

A toy company has four product lines: stuffed animals (contribution margin $200,000), balls
($50,000), action figures ($70,000), and plastic horses ($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?

a. Balls.

b. Stuffed animals.

c. Action figures.
P a g e 31 | 52
 d. Plastic horses.

Answer: the correct answer is c

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.

Question 58:

Which of the following is a benefit of a materials requirement planning (MRP) system?

a. Predictable raw materials needs and the ability to take advantage of bulk purchasing
and other price breaks

b. Potential inventory accumulations

c. More coordination required between functional areas, which will increase interaction and
communication

d. Possibility that manufacturing cells may receive parts they are not ready to process

Answer: the correct answer is a

MRP is used to set production and purchasing schedules. It facilitates the coordination of
purchasing activities to take advantage of bulk purchasing and quantity discounts.

Question 59:

Learning curve analysis is a method for:

a. estimating declining costs based on increased learning.

b. calculating the learning rate of individuals based on previous work and educational
experiences.

c. estimating increasing costs based on the limit in the amount of learning an individual can
accomplish.

d. determining how many workers to hire based on education levels.

Answer: the correct answer is a

Learning curve analysis is a systematic method for estimating declining costs based on
increased learning by the business, group, or individual. As experience is gained, the worker or
business becomes more efficient at production, which decreases costs.

Question 60:

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Using the information from Exhibit A, what is budgeted cost of goods manufactured for the
three-month period of January, February, and March?

a. $2,183,100.

b. $2,208,750.

c. $2,194,500.

d. $2,184,525.

Answer: the correct answer is b

The number of units to be sold in this three-month period is 15,400 units, calculated as the sum
of the sales for the period (5,000 units + 5,100 units + 5,300 units).

To determine the number of units to be produced, adjust the number of units to be sold (15,400)
by adding desired ending finished goods inventory for March of 600 (6,000 units × 10%) and
subtracting beginning finished goods inventory for January of 500 (5,000 units × 10%), leaving
15,500 units to be produced in the three-month period.

Budgeted cost of goods manufactured is 15,500 × $142.50 = $2,208,750.

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Question 61:

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
marketbased transfer price?

a. Routine sales commissions and collection costs would be avoided.

b. The selling unit is operating at full capacity.

c. The profit centers' managers are evaluated on the basis of unit operating income.

d. The buying unit has excess capacity.

Answer: the correct answer is a

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.

Question 62:

From its facility in Raleigh, North Carolina, TMC Corp. manufactures and sells a small electric
car under the brand name of Quinoa. Quinoa is the first and only electric car in the market and
is a bestseller owing to its low price. Which of the following is a threat that is most likely to
reduce the competitive advantage Quinoa has due to its low price?

a. The price of gasoline increases sharply.

b. The government places import restrictions on electric cars and other vehicles.

c. New environmental regulations are imposed on fossil fuel–based vehicles.

d. The government withdraws the subsidies it had extended to the electric car segment.

Answer: the correct answer is d

The withdrawal of government subsidies extended to the electric car segment is likely to
increase costs and reduce Quinoa's competitive advantage.

Question 63:

ABC Company has run a regression analysis and determined that sales are related to marketing
costs. The regression formula the analysts have calculated is Y = $5,000,000 + $125(x), where

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Y = sales and x = marketing costs. Use the regression formula to determine what the annual
sales will be if marketing expenditures are $1,000,000.

a. $1,625,000

b. $5,000,000,000

c. $130,000,000

d. $125,005,000

Answer: the correct answer is c

The regression formula states that Y
= $5,000,000 + $125X
where Y = sales and X = marketing costs
Y = $5,000,000 + $125($1,000,000)
Y = $5,000,000 + $125,000,000
Y = $130,000,000

Question 64:

If the budgeted fixed overhead costs are $400,000 for 50,000 budgeted direct labor hours
(DLH), and the actual direct labor standard or earned hours was 48,000 DLH, what was the
actual fixed overhead cost if the underapplied overhead was $8,000?

a. $384,000.

b. $408,000.

c. $392,000.

d. $376,000.

Answer: the correct answer is c

Overhead (OH) application rate is $8/DLH, applied OH = $8/DLH × 48,000 DLH or $384,000.
Actual OH is ($384,000 + $8,000) = $392,000.

Question 65:

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 not beginning
finished good 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:

P a g e 35 | 52
The contribution margin earned by Gridiron Sporting Goods Manufacturing Company for the
prior year was:

a. $24,700.

b. $19,200.

c. $18,200.

d. $10,400.

Answer: the correct answer is c

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.

Question 66:

In order to determine how its in-house training program is affecting its employees' performance
rating, Maxis Tech performed a regression analysis with the following results:

Performance rating = 0.2 + 0.05 hours of training

R2 = 0.1

Given the above information, Maxis Tech can conclude that:

a. An employee's performance rating will be 0.35 if the employee receives only one hour of
training.

b. The number of training hours received has a significant impact on an employee's

performance rating.

c. There are factors other than number of training hours received that can better explain an
employee's performance rating.

P a g e 36 | 52
 d. For every hour of training received, an employee's performance rating will decrease by
0.05.

Answer: the correct answer is c

The R2 of 0.1 means that the number of training hours received can explain only 10% of the
variation in an employee's performance rating (according to the regression analysis). Other
factors can explain the remaining 90% of the variation in an employee's performance rating. As
a result, the firm should have performed a multiple regression analysis (with multiple
independent variables) rather than a simple regression analysis (with just one independent
variable).

Question 67:

For a given time period, a company had a favourable material quantity variance, a favorable
direct labor efficiency variance and a favorable fixed OVH volume variance. Of the following, the
on factor that could not have caused all three variances is:

a. The purchase of higher quality materials

b. The user of lower-skilled workers
c. The purchase of more efficient machinery
d. An increase in production supervision

Answer: the correct answer is b

Question 68:

How does a budget slack affect the master budget?

a. Budget slack hinders ease of communication of organizational goals.

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 b.

Presence of budget slack can lead to decreased commitment from the employees.

Cumulative budget slack at each sublevel can result in an inaccurate master budget.

d. Strategic goals do not receive priority in the budgetary process due to existence of
budget slack.

Answer: the correct answer is c

Budget slack occurs when budgeted performance differs from actual performance because
managers tend to build in some extra money for their budget to deal with the unexpected.
Budget slack is built-in freedom to fail, and cumulative budget slack at each sublevel can result
in a very inaccurate master budget.

Question 69:

The management accountant of Kathryn Software decided to alter the financial statements due
to an event. Which of the following is the most likely reason for her decision?

a. The event provides evidence about a loss of expected income due to inefficient
collection efforts.

b. The company has decided to shift the company's headquarters to a country that follows
IFRS in the next year.

c. The event provides additional evidence about conditions that existed as of the balance
sheet date and alters the estimates used.

d. There is a sharp decline in the stock price.

Answer: the correct answer is c

If a subsequent event provides additional evidence about conditions that existed as of the
balance sheet date and alters the estimates used in preparing the financial statements, then the
financial statements should be adjusted.

Question 70:

A company has outstanding accounts payable of $30,000 and a short-term construction loan in
the amount of $100,000 at year end. The loan was refinanced through issuance of long-term
bonds after year end but before issuance of financial statements. How should these liabilities be
recorded in the balance sheet?

a. Long-term liabilities of $130,000.

b. Current liabilities of $130,000

c. Current liabilities of $30,000, long-term liabilities of $100,000

d. Current liabilities of $130,000, with required footnote disclosure of the refinancing of the
loan
P a g e 38 | 52
Answer: the correct answer is c
The firm complied with the requirements for reclassification of current debt on a long-term basis.
As long as the refinancing takes place before the financial statements are issued, the
construction loan is reclassified as noncurrent. Thus, $100,000 of noncurrent liabilities are
reported.

Question 71:

Which of the following statements is true concerning fixed costs, variable costs, and total costs?
Within the relevant range:

a. fixed costs per unit increases as the number of units produced increases.

b. total cost per unit decreases as the number of units produced increases.

c. variable cost per unit increases as the number of units produced increases.

d. fixed costs per unit does not change as the number of units produced increases.

Answer: the correct answer is b

While fixed costs (in total) stay constant over the relevant range, as output increases, fixed
costs per unit declines. Since variable costs per unit is a constant, then total costs per unit must
decline as the number of units produced increases.

Question 72:

Which contemporary productivity approach would a firm most likely use to prevent or overcome
mismatches between supply and demand?

a. Flexible manufacturing

b. Concurrent engineering

c. Computer-aided design

d. Capacity planning

Answer: the correct answer is d

Capacity planning determines the maximum amount that can be produced in a given period and
attempts to match the capacity as closely as possible to projected demand.

Question 73:

Which of the following is not a step in the budgeting process?

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 a. Budget Negotiation.

Budget Standard.

Budgeting Review and Approval.

d. Budget Proposal.

Answer: the correct answer is b

The steps that responsibility centers take in preparing their budgets include: the initial budget
proposal, budget negotiation, review and approval, and revision.

Question 74:

The basic purpose of a responsibility accounting system of reporting is:

a. Motivation
b. Authority
c. Variance analysis
d. Budgeting

Answer: the correct answer is a

Question 75:

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.

The Plastics Division sells its commercial products at full cost plus a 25 percent 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.

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Assume that the Entertainment Division is able to purchase a large quantity of video cards from
an outside source at $8.70 per unit. The Video Cards Division, having excess capacity, agrees
to lower its transfer price to $8.70 per unit. This action would:

a. optimize the profit goals of the Entertainment Division while subverting the profit goals of
Parkside Inc.

b. allow evaluation of both divisions on the same basis.

c. subvert the profit goals of the Video Cards Division while optimizing the profit goals of
the Entertainment Division.

d. optimize the overall profit goals of Parkside Inc.

Answer: the correct answer is d.

Since the Video Cards Division has excess capacity, the cost to manufacture the video cards is
calculated by taking its unit variable cost of $6.90 ($2.40 in direct material + $3.00 in direct labor
+ $1.50 in variable overhead). The outside purchase price for the video cards is $8.70.
Therefore, Parkside, Inc. will optimize profit by having the Video Card Division manufacture the
video cards and transfer them to the Entertainment Division. The transfer price used is
irrelevant to Parkside, Inc.

Question 76:

When management of the sales department has the opportunity to override the system of
internal controls of the accounting department, a weakness exists in:

a. information and communication.

b. monitoring.

c. risk management.

d. the control environment.

Answer: the correct answer is d

The control environment includes the attitude of management toward the concept of controls.

Question 77:

Infinity Enterprises, a large organization with seven business units, recently prepared a BCG
Growth-Share Matrix to evaluate whether it has a balanced portfolio of businesses. Upon
analysis, its three large business units were identified as stars, two medium-size business units
were identified as question marks, and one small business unit each was identified as a cash
cow and a dog. Which of the following is a conclusion you can draw upon evaluating the data?

a. The company needs to set up more business units that operate in high-growth markets.

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 The company is probably facing a shortage of funds to fuel its growth.

The company should sell off the business unit identified as a dog as it offers low-growth
prospects.

d. The company is probably generating excess cash that can be used to start new
business units.

Answer: the correct answer is b

Most of Infinity's business units are either stars or question marks. These operate in high-growth
markets and require cash inputs to grow, which usually are provided by cash cows or dogs.
Since Infinity has only two business units in these two quadrants, the company is likely to be
facing a cash crunch.

Question 78:

Which of the following will not help in identifying the overall risks to the internal audit function?

a. Barrier analysis.

b. Root-cause analysis.

c. Assurance maps.

d. Risk maps.

Answer: the correct answer is a

Barrier analysis, as it relates to the business activity of organizational change, identifies key
determinants of (barriers to) human behavioral change in employees to help focus on their
behaviors that have not changed, despite repeated management's efforts to change. The four
key determinants of human behavior are self-efficacy, social norms, positive consequences,
and negative consequences. Hence, barrier analysis will not help in identifying the overall risks
to the internal audit function.

Question 79:

Which of the following is not a potential drawback of using zero-based budgeting?

a. Such budgets can have an expensive and time-consuming review process.

b. Review is often cursory and inadequate.

c. Major changes may be ignored in place of incremental improvements.

d. Budget slack can exaggerate waste in a zero-based budget.

Answer: the correct answer is c

Zero-based budgeting is primarily focused on major changes, not incremental improvements.

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Question 80:

ANNCO sells products on account, and experiences the following collection schedule.

At December 31, ANNCO reports accounts receivable of $211,500. Of that amount, $162,000 is
due from December sales, and $49,500 from November sales. ANNCO is budgeting $170,000
of sales for January. If so, what amount of cash should be collected in January?

a. $129,050.

b. $174,500.

c. $211,500.

d. $228,500.

Answer: the correct answer is b

The amount of cash that should be collected in January is calculated as follows:
Cash collections, January = (accounts receivable collected from November sales) + (accounts
receivable collected from December sales) + (accounts receivable collected from January sales)
Accounts receivable collected during January from December sales = (60%)(December sales)
Accounts receivable collected during January from December sales = (60%)($180,000) =
$108,000

Where December sales is calculated as follows:

At the end of December, $162,000 is due from December sales. Since 10% was collected
during December, $162,000 must be 90% of December sales.

(90%) (December Sales) = $162,000

(0.9) (December Sales) = $162,000
December sales = $162,000 / 0.9 = $180,000

Accounts receivable collected during January from January sales = (10%)(January sales)
Accounts receivable collected during January from January sales = (10%)($170,000) = $17,000

Cash collections, January = ($49,500) + ($162,000) + ($17,000)

Cash collections, January = $49,500 + $108,000 + $17,000 = $174,500

Question 81:

Which one of the following represents a lack of internal control in a computer-based system?

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Routines that use the computer to check the validity and accuracy of transaction data during
input are called:

a. Operating systems
b. Edit programs
c. Complier programs
d. Integrated test facilities

Answer: the correct answer is b: special programs validate (edit) input data for completeness,
validity and accuracy.The edited data are then used in processing.

Question 82:

Which of the following would a merchandising company use in place of cost of goods
manufactured on a statement of cost of goods sold?

a. Net purchases.

b. Prime costs.

c. Materials inventory.

d. Conversion costs.

Answer: the correct answer is a

The income statement for a merchandising company looks similar to that of a manufacturing
company, except that it uses net purchases instead of cost of goods manufactured

Question 83:

Huron Company plans to bid on a special project that calls for a total of 24,000 units. The units
will be produced in lots with the first lot consisting of 750 units. Based on prior experience, the
direct labor time needed per unit of product will be progressively smaller by a constant
percentage rate as experience is gained in the manufacturing process. The quantitative method
that would best estimate Huron's total cost for the project is:

a. learning curve techniques.

b. differential calculus.

c. linear programming.

d. cost-volume-profit analysis.

Answer: the correct answer is a

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Learning curve analysis is a systematic method for estimating costs when a learning process is
involved. Calculations for the analysis are based upon a learning rate. The learning rate is the
rate at which the cumulative average time per lot produced decreases as cumulative output
doubles

Question 84:

All of the following are likely to be used as a cost allocation base in activity-based costing
except the:

a. Units of materials used to manufacture the product

b. Cost of materials used to manufacture the product
c. Number of vendors supplying the materials used to manufacture the product
d. Number of different materials used to manufacture the product

Answer: the correct answer is b

Question 85:

An organization will directly gain all of the following benefits from the theory of constraints (TOC)
methodology except:

a. reduced bottlenecks.

b. increased profitability.

c. improved quality of products and services.

d. assessment of long-term product profitability.

Answer: the correct answer is d

The TOC attempts to improve throughput in an organization's processes. TOC considers how to
improve short-term profitability by focusing on production constraints and plausible short-term
product-mix adjustments. TOC, with its short-term orientation, does not focus on long-term
costing and profitability.

Question 86:

Rogers Electronics is planning to make a market in the company's stock. The company's CFO
suggests the reacquisition of shares. Which of the following is most likely to happen if the
CFO's suggestion is implemented?

a. The risk of takeovers by competitors will increase.

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 b. This will hinder exercise of employee stock options.

c. The stock price will increase.

d. This could serve as an indication of the company's negative outlook about its future
performance.

Answer: the correct answer is c

Reacquisition reduces the number of shares a company has outstanding without altering the
value of the company. Therefore, the stock price of the company will increase.

Question 87:

Wagner Corporation applies factory overhead based upon machine hours. At the beginning of
the year, Wagner budgeted factory overhead at $250,000 and estimated that 100,000 machine
hours would be used to make 50,000 units of product. During the year, the company produced
48,000 units, using 97,000 machine hours. Actual overhead for the year was $252,000. Under a
standard cost system, the amount of factory overhead applied during the year was:

a. $250,000.

b. $240,000.

c. $242,500.

d. $252,000.

Answer: the correct answer is b

To calculate the predetermined overhead rate, take the budgeted overhead cost and divide it by
the budgeted machine hours: $250,000 overhead/100,000 machine hours = $2.50 per machine
hour.

Next, calculate the number of machine hours needed to produce 50,000 units: 100,000
hours/50,000 units = 2 hours per unit $2.50 × 2 hours × 48,000 units = $240,000

Question 88:

The basic concepts implicit in internal accounting controls include the following:

• The cost of the system should not exceed benefits expected to be attained.
• The overall impact of the control procedure should not hinder operating efficiency.

Which one of the following recognizes these two factors?

a. Reasonable assurance.

b. Limitations.

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 c. Management responsibility.

d. Methods of data processing.

Answer: the correct answer is a

Reasonable assurance recognizes that the cost of the system should not exceed the benefits
expected to be attained, and the overall impact of the control procedure should not hinder
operating efficiency.

Question 89:

Appraisal costs include all of the following except:

a. Process inspection
b. Inspection
c. Spoilage
d. Product testing

Answer: the correct answer is c

Question 90:

Stanford Company leased some special-purpose equipment from Vincent Inc. under a long-term
lease that was treated as an operating lease by Stanford. After the financial statements for the
year had been issued, it was discovered that the lease should have been treated as a capital
lease by Stanford. All of the following measures relating to Stanford would be affected by this
discovery except the:

a. accounts receivable turnover.

b. net income percentage.

c. debt/equity ratio.

d. fixed asset turnover.

Answer: the correct answer is a

The accounts receivable turnover is sales divided by the average accounts receivable balance.
The classification of a lease would not affect either sales or accounts receivable.

Question 91:

How can stakeholder analysis be linked to strategic planning?

a. Stakeholder analysis helps an organization identify the capabilities to be gained.

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 b. Stakeholder analysis describes an organization's migration to international operations.

c. Insights gained from stakeholder analysis evolve into an organizational technology

strategy.

d. Stakeholder analysis helps an organization frame its corporate social responsibility.

Answer: the correct answer is d

Stakeholder analysis helps an organization frame its corporate social responsibility. It identifies
the role good citizenship plays in a business.

Question 92:

Which of the following is included in other comprehensive income?

a. Unrealized holding gains and losses on trading securities.

b. Unrealized holding gains and losses that result from a transfer of a security from
available-for-sale category to the trading category.

c. Foreign currency translation adjustments.

d. The difference between the accumulated benefit obligation and the fair value of pension
plan assets.

Answer: the correct answer is c

Unrealized holding gains and losses related to a security transferred into the trading category
would be recognized in net income. The general rule is to account for the unrealized gains or
losses in accordance with the accounting requirements for the category in which the security is
transferred to. In this case the transfer is to trading and the gains and losses related to the
adjustment to fair value would be recorded in earnings and not in other comprehensive income.

Question 93:

Three of the basic measurements used by the theory of constraints (TOC) are:

a. throughput (or throughput contribution), inventory (or investments), and operational

expense.

b. gross margin (or gross profit), return on assets, and total sales.

c. fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross
margin (or gross profit).

d. number of constraints (or subordinates), number of non-constraints, and operating

leverage.

Answer: the correct answer is a

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The TOC uses three measurements: Throughput contribution, investments, and operating costs.

Question 94:

Using the following budget data for Valley Corporation, which produces only one product,
calculate the company's predetermined factory overhead application rate for variable overhead.

a. $2.30.

b. $4.73.

c. $2.09.

d. $5.20.

Answer: the correct answer is c

The variable overhead rate per unit is calculated by taking the expected variable overhead and
dividing it by the expected production in units. The expected variable overhead consists of
indirect materials, indirect labor, and utilities, and is calculated as follows:

Variable overhead = ($1,000 + $10,000 + $12,000)

Variable overhead = $23,000

Since expected production is 11,000 units, the variable overhead rate = $23,000 / 11,000 units
= $2.09 per unit.

Question 95:

The primary purpose for allocating common costs to joint products is to determine:

a. the variance between budgeted and actual common costs.

b. the inventory cost of joint products for financial reporting.

c. the selling price of a by-product.

d. whether or not one of the joint products should be discontinued.

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Answer: the correct answer is b
The primary purpose for allocating common costs to joint products is to determine the inventory
cost of joint products for financial reporting.

Question 96:

The latest financial statements of Darlene Properties show 140,000 outstanding shares, par
value $10. The current market value per share is $25. At the beginning of current year, the
company reacquired 10,000 shares at $4 per share. The company follows the cost method for
the accounting of treasury stock. The current year's books of accounts show the value of
outstanding shares as follows:

Common stock, $10 par $1,400,000

Less: Treasury stock 100,000
Net common stock, $10 par $1,300,000

The company's CFO did not approve the financial statements. The most likely reason for CFO's
disapproval is that:

The treasury stock is incorrectly valued based on par value instead of being valued at the
acquisition price.

The treasury stock is incorrectly valued based on par value instead of being valued at the
current market rate.

The par value of the treasury stock should be presented as a deduction from par value of
issued shares of the same class.

The treasury stock should be reported as an asset.

Answer: the correct answer is a

In the cost method, the treasury stock account is debited for the cost of the shares reacquired.
Therefore, the value of treasury stocks should be $40,000 (10,000 shares × $4), valued at the
acquisition price.

Question 97:

An advantage of using a flexible budget compared to a static budget is that in a flexible budget:

a. standards can easily be changed to adjust to changing circumstances.

b. fixed cost variances are more clearly presented.

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 c. budgeted costs for a given output level can be compared with actual costs for that same
level of output.

d. shortfalls in planned production are clearly presented.

Answer: the correct answer is c

When using a flexible budgeting system, the activity levels for all costs are adjusted according
to that activity level. Unlike a static budget, in a flexible budget, fixed cost variances are more
clearly presented as those fixed costs are related directly to the activity level of the given period.

Question 98:

Which one of the following items would most likely not be incorporated into the calculation of a
division's investment base when using the residual income approach for performance
measurement and evaluation?

a. Division inventories when division management exercises control over the inventory
levels

b. Division accounts receivable when division management exercises control over credit
policy and credit terms

c. Land being held by the division as a site for a new plant

d. Fixed assets employed in division operations

Answer: the correct answer is c

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.

Question 99:

Which of the following refers to a quantitative expression of proposed management actions for a
set period of time?

a. Budgets.

b. Cost of goods manufactured statements.

c. Cost of goods sold statements.

d. Financial statements.

Answer: the correct answer is a

A budget is a plan, expressed in financial terms, and is for a set period of time.

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Question 100:

Adam Corporation manufactures computer tables and has the following budgeted indirect
manufacturing cost information for next year.

Support Departments Operating Departments TOTAL

Maintenance Systems Machining Fabrication
Budget Overhead $360,000 $95,000 $200,000 $300,000 $955,000
Support Work Furnished
From Maintenance 10% 50% 40% 100%
From Systems 5% 45% 50% 100%

If Adam uses the direct method to allocate support department costs to production departments,
the total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its
products would be which of the following?

a. $422,750.

b. $445,000.

c. $418,000.

d. $442,053.

Answer: the correct answer is b

The direct method of cost allocation assumes service departments serve production only. There
are no inter-service department services. Therefore, the total overhead for the Machining
Department to allocate to its products is calculated as:

Total overhead, Machining Dept. = (Machining Dept. overhead) + (Machining Dept. share of
Maintenance overhead) + (Machining Dept. share of Systems' overhead)
Total overhead, Machining Dept. = ($200,000) + [(0.50) / (0.50+0. 40)]($360,000) + [(0.45) /
(0.45 + 0.50)]($95,000)
Total overhead, Machining Dept. = $200,000 + $200,000 + $45,000 = $445,000.

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