CA Managerial Accounting & Budgeting 3 — Questions and Answers
Question 1: The margin of safety represents:
- The excess of budgeted sales over break-even sales (Correct answer)
- The difference between fixed and variable costs
- The contribution margin ratio minus the profit margin
- The percentage by which actual costs exceed standard costs
Correct answer: The excess of budgeted sales over break-even sales
Margin of safety = Budgeted (or actual) sales minus break-even sales, showing how much sales can decline before losses occur.
Question 2: When using activity-based costing (ABC), overhead costs are assigned to products based on:
- Direct labor hours used by each product
- The number of cost drivers consumed by each product (Correct answer)
- Each product's share of total direct material cost
- Machine hours allocated equally across all products
Correct answer: The number of cost drivers consumed by each product
ABC assigns overhead costs using multiple cost drivers that reflect the actual activities consuming resources, providing more accurate product costing.
Question 3: A favorable materials price variance combined with an unfavorable materials quantity variance most likely indicates:
- Lower-quality materials were purchased at a discount but wasted more in production (Correct answer)
- More material was purchased than needed at standard price
- Workers were inefficient but used premium materials
- The standard was set incorrectly for both price and quantity
Correct answer: Lower-quality materials were purchased at a discount but wasted more in production
Buying cheaper, lower-quality materials saves on price but often leads to higher waste or defects, causing an unfavorable quantity variance.
Question 4: In capital budgeting, the payback period method is criticized primarily because it:
- Requires estimation of the cost of capital
- Ignores cash flows occurring after the payback period (Correct answer)
- Cannot be applied to mutually exclusive projects
- Overstates the time value of money
Correct answer: Ignores cash flows occurring after the payback period
The payback period ignores all cash flows beyond the payback cutoff date, potentially rejecting projects with large long-term returns.
Question 5: Which transfer pricing method sets the internal price equal to what the selling division would charge an external customer?
- Cost-based transfer pricing
- Negotiated transfer pricing
- Market-based transfer pricing (Correct answer)
- Dual transfer pricing
Correct answer: Market-based transfer pricing
Market-based transfer pricing uses the external market price as the internal charge, encouraging divisions to operate as if dealing with outside parties.
Question 6: A company is operating at full capacity. The relevant cost to consider when accepting a special order that requires using existing capacity is:
- Variable manufacturing cost only
- Variable cost plus the contribution margin foregone from displaced sales (Correct answer)
- Total fixed cost divided by total units produced
- Standard cost per unit as recorded in the cost system
Correct answer: Variable cost plus the contribution margin foregone from displaced sales
At full capacity, accepting a special order displaces regular sales, so the relevant cost includes variable costs plus the opportunity cost of lost contribution margin.
Question 7: Responsibility accounting holds managers accountable for:
- All costs incurred in their department regardless of controllability
- Only costs and revenues they can directly influence and control (Correct answer)
- The full absorption cost of all products manufactured
- Costs allocated by top management from the corporate office
Correct answer: Only costs and revenues they can directly influence and control
Responsibility accounting evaluates managers only on items they can actually control, ensuring fair performance measurement.
CA Managerial Accounting & Budgeting 3
The margin of safety represents: