CA Managerial Accounting & Budgeting 3

Question 1

The margin of safety represents:

Accepted Answer

The excess of budgeted sales over break-even sales

Answer

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:

Accepted Answer

The number of cost drivers consumed by each product

Answer

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:

Accepted Answer

Lower-quality materials were purchased at a discount but wasted more in production

Answer

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:

Accepted Answer

Ignores cash flows occurring after the payback period

Answer

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?

Accepted Answer

Market-based transfer pricing

Answer

Market-based transfer pricing uses the external market price as the internal charge, encouraging divisions to operate as if dealing with outside parties.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Managerial Accounting & Budgeting 3