CA Management Accounting 5 — Questions and Answers
Question 1: Which type of cost center is evaluated solely on its ability to control costs without revenue responsibility?
- Profit center
- Investment center
- Expense center (cost center) (Correct answer)
- Revenue center
Correct answer: Expense center (cost center)
A cost center manager is held responsible only for controlling costs; no revenue or asset decisions fall within their authority.
Question 2: What is target costing?
- Setting costs equal to the industry average
- Working backward from a target selling price to determine an allowable product cost (Correct answer)
- Estimating costs based on historical data adjusted for inflation
- A method of allocating overhead using predetermined rates
Correct answer: Working backward from a target selling price to determine an allowable product cost
Target costing = Target selling price − Desired profit margin; it drives design and engineering teams to achieve the required cost structure.
Question 3: In a make-or-buy decision, which of the following is NOT relevant?
- Variable costs of making the component
- Avoidable fixed costs if the component is outsourced
- Sunk costs already spent on existing equipment (Correct answer)
- Purchase price from the external supplier
Correct answer: Sunk costs already spent on existing equipment
Sunk costs have already been incurred and cannot be changed by any future decision, making them irrelevant to make-or-buy analysis.
Question 4: What does a balanced scorecard measure beyond traditional financial metrics?
- Only cash flows and liquidity ratios
- Performance across financial, customer, internal process, and learning/growth perspectives (Correct answer)
- Market share and competitor pricing only
- Variance from standard costs across all departments
Correct answer: Performance across financial, customer, internal process, and learning/growth perspectives
The balanced scorecard (Kaplan & Norton) translates strategy into four perspectives: financial, customer, internal business processes, and learning & growth.
Question 5: When using the high-low method to estimate a cost function, which data points are used?
- The first and last observations in the data set
- The observations with the highest and lowest activity levels (Correct answer)
- The mean and median observations
- The observations closest to the regression line
Correct answer: The observations with the highest and lowest activity levels
The high-low method uses only the highest and lowest activity-level data points to calculate variable cost per unit and total fixed costs.
Question 6: A fixed overhead volume variance arises because:
- Actual variable costs exceeded budgeted variable costs
- Actual production volume differed from the denominator volume used to set the fixed overhead rate (Correct answer)
- The standard price of materials changed during the period
- Labor worked more hours than standard
Correct answer: Actual production volume differed from the denominator volume used to set the fixed overhead rate
The fixed overhead volume variance reflects the difference between budgeted fixed overhead and applied fixed overhead due to actual output differing from planned output.
Question 7: What is kaizen costing?
- A method of allocating joint costs to by-products
- A continuous cost reduction approach applied during the production phase (Correct answer)
- Setting standard costs using engineering studies
- Variance analysis comparing actual to budget
Correct answer: A continuous cost reduction approach applied during the production phase
Kaizen costing focuses on achieving small, continuous improvements in production costs after a product has been launched, unlike target costing which focuses on the design phase.
CA Management Accounting 5
Which type of cost center is evaluated solely on its ability to control costs without revenue responsibility?