CA Management Accounting 3 — Questions and Answers
Question 1: A company is considering dropping a product line that shows a net loss. Which cost is most relevant to this decision?
- Allocated corporate overhead
- Avoidable fixed costs of the product line (Correct answer)
- Historical cost of equipment used by the line
- Depreciation expense on shared assets
Correct answer: Avoidable fixed costs of the product line
Avoidable fixed costs that would be eliminated if the product line is dropped are the most relevant costs in the decision.
Question 2: What is the margin of safety?
- The difference between the contribution margin and fixed costs
- The excess of actual or budgeted sales over break-even sales (Correct answer)
- The ratio of fixed costs to total costs
- The minimum acceptable profit margin
Correct answer: The excess of actual or budgeted sales over break-even sales
The margin of safety measures how much sales can decline before the company reaches break-even, expressed as a dollar amount or percentage.
Question 3: Which transfer pricing method uses the market price of the transferred good or service?
- Cost-based transfer pricing
- Negotiated transfer pricing
- Market-based transfer pricing (Correct answer)
- Standard cost transfer pricing
Correct answer: Market-based transfer pricing
Market-based transfer pricing uses the external market price as the internal transfer price, which is generally considered the most objective method.
Question 4: What does Economic Value Added (EVA) measure?
- The change in a company's stock price over a period
- Net operating profit after tax minus the cost of capital employed (Correct answer)
- The ratio of earnings to total assets
- Revenue growth adjusted for inflation
Correct answer: Net operating profit after tax minus the cost of capital employed
EVA = NOPAT − (Invested Capital × WACC), measuring whether the company earns more than its cost of capital.
Question 5: In capital budgeting, what does the profitability index measure?
- The payback period divided by the project life
- The ratio of the present value of future cash flows to the initial investment (Correct answer)
- The internal rate of return minus the cost of capital
- Net income divided by total project cost
Correct answer: The ratio of the present value of future cash flows to the initial investment
The profitability index (PI) = PV of future cash inflows ÷ Initial investment; a PI greater than 1.0 indicates an acceptable project.
Question 6: Which variance measures the efficiency of labor usage?
- Direct labor rate variance
- Direct labor efficiency variance (Correct answer)
- Direct labor mix variance
- Fixed overhead volume variance
Correct answer: Direct labor efficiency variance
The direct labor efficiency variance = (Standard hours for actual output − Actual hours) × Standard rate, measuring hours saved or wasted.
Question 7: A manufacturing company uses process costing. What are equivalent units used for?
- Allocating joint costs to co-products
- Expressing partially completed units in terms of fully completed units (Correct answer)
- Determining the break-even point for a production process
- Measuring labor efficiency across departments
Correct answer: Expressing partially completed units in terms of fully completed units
Equivalent units convert work-in-process inventory into units that are effectively complete, enabling cost per unit calculations.
CA Management Accounting 3
A company is considering dropping a product line that shows a net loss.
Which cost is most relevant to this decision?