CA Management Accounting 4 — Questions and Answers
Question 1: Which method of joint cost allocation uses the relative sales value of each product at the split-off point?
- Physical units method
- Net realizable value method
- Constant gross margin NRV method
- Sales value at split-off method (Correct answer)
Correct answer: Sales value at split-off method
The sales value at split-off method allocates joint costs based on each product's proportional market value at the point where products separate.
Question 2: What is the primary advantage of using standard costs in a manufacturing environment?
- They eliminate the need for a budget
- They provide a benchmark for measuring performance and controlling costs (Correct answer)
- They guarantee actual costs will match standards
- They replace financial accounting records
Correct answer: They provide a benchmark for measuring performance and controlling costs
Standard costs provide a predetermined benchmark that allows management to identify and investigate variances from expected performance.
Question 3: Under the weighted-average method of process costing, how are beginning WIP costs treated?
- They are excluded from the cost per equivalent unit calculation
- They are combined with current period costs and spread over all equivalent units (Correct answer)
- They are written off as period costs
- They are assigned entirely to units transferred out
Correct answer: They are combined with current period costs and spread over all equivalent units
The weighted-average method blends beginning WIP costs with current period costs, then divides by total equivalent units (completed + ending WIP).
Question 4: What is residual income in the context of divisional performance evaluation?
- Net income remaining after paying dividends
- Operating income minus a minimum required return on invested assets (Correct answer)
- Revenue minus variable costs for a segment
- Cash flow after capital expenditures
Correct answer: Operating income minus a minimum required return on invested assets
Residual income = Operating income − (Minimum required rate of return × Invested assets), measuring profit in excess of the capital charge.
Question 5: Which budgeting approach requires managers to justify every expenditure from zero each period?
- Incremental budgeting
- Rolling budget
- Zero-based budgeting (Correct answer)
- Flexible budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) starts from a zero base each period, requiring justification for all spending rather than just changes from prior year.
Question 6: A company manufactures two products on the same machine. How should the opportunity cost be considered when one product requires more machine time?
- Ignore machine time since it is a fixed cost
- Maximize contribution margin per unit of the constrained resource (Correct answer)
- Produce equal quantities of each product
- Prioritize the product with the higher selling price
Correct answer: Maximize contribution margin per unit of the constrained resource
When a resource is constrained, managers should rank products by their contribution margin per unit of the bottleneck resource to maximize profit.
Question 7: What is the formula for Return on Investment (ROI) in divisional performance measurement?
- Net income ÷ Total sales
- Operating income ÷ Invested assets (Correct answer)
- EBITDA ÷ Total equity
- Gross profit ÷ Total assets
Correct answer: Operating income ÷ Invested assets
ROI = Operating income ÷ Invested assets, measuring how effectively a division uses its assets to generate profit.
CA Management Accounting 4
Which method of joint cost allocation uses the relative sales value of each product at the split-off point?