CA Managerial Accounting & Budgeting 4 — Questions and Answers
Question 1: The net present value (NPV) method accepts a project when NPV is:
- Equal to zero
- Greater than or equal to zero (Correct answer)
- Greater than the internal rate of return
- Less than the payback period
Correct answer: Greater than or equal to zero
A non-negative NPV means the project returns at least the required rate of return, so it creates value or at minimum breaks even on a present-value basis.
Question 2: Which of the following costs is most likely a sunk cost when deciding whether to replace old equipment?
- Annual maintenance costs of the new machine
- Disposal value of the old machine
- Original purchase price of the old machine (Correct answer)
- Training costs for operating the new machine
Correct answer: Original purchase price of the old machine
The original purchase price of existing equipment is a sunk cost—it has already been paid and cannot be recovered regardless of the decision made.
Question 3: In the balanced scorecard framework, the 'internal business processes' perspective focuses on:
- How shareholders view financial performance
- How customers perceive products and services
- The processes at which the company must excel to satisfy customers (Correct answer)
- Employee learning, training, and growth initiatives
Correct answer: The processes at which the company must excel to satisfy customers
The internal business process perspective identifies critical operations that must perform well to deliver customer value and achieve financial objectives.
Question 4: A company's return on investment (ROI) can be improved by:
- Increasing invested assets while holding income constant
- Reducing sales while reducing expenses proportionally
- Increasing net operating income while reducing invested assets (Correct answer)
- Increasing both operating income and invested assets by the same percentage
Correct answer: Increasing net operating income while reducing invested assets
ROI = Net operating income / Invested assets, so ROI rises when income increases and/or invested assets decrease.
Question 5: Which costing method is most appropriate for a law firm that tracks costs per client engagement?
- Process costing
- Job-order costing (Correct answer)
- Backflush costing
- Operation costing
Correct answer: Job-order costing
Job-order costing accumulates costs for individual jobs or engagements, making it ideal for service firms like law firms with distinct client matters.
Question 6: Residual income differs from ROI as a performance measure because residual income:
- Cannot be used to compare divisions of different sizes
- Deducts a minimum required return on invested assets from operating income (Correct answer)
- Is expressed as a percentage rather than a dollar amount
- Ignores the cost of capital when evaluating divisional performance
Correct answer: Deducts a minimum required return on invested assets from operating income
Residual income = Net operating income minus (Required rate of return × Invested assets), directly penalizing divisions that fail to earn the minimum required return.
Question 7: The high-low method estimates a cost function using:
- A regression line fitted to all observed data points
- Only the highest and lowest activity levels from the data set (Correct answer)
- The average of all cost observations divided by average activity
- A scatter plot reviewed visually by the analyst
Correct answer: Only the highest and lowest activity levels from the data set
The high-low method uses only the highest and lowest activity data points to estimate variable cost per unit and total fixed costs.
CA Managerial Accounting & Budgeting 4
The net present value (NPV) method accepts a project when NPV is: