CA Managerial Accounting & Budgeting 5 — Questions and Answers
Question 1: Which variance measures the difference between the actual overhead incurred and the overhead applied to production?
- Spending variance
- Efficiency variance
- Volume variance
- Overall overhead variance (Correct answer)
Correct answer: Overall overhead variance
The overall (total) overhead variance is the difference between actual overhead costs incurred and overhead applied to units produced at the standard rate.
Question 2: A company uses process costing. Equivalent units of production (EUP) are calculated to:
- Convert partially completed units into a meaningful whole-unit measure (Correct answer)
- Determine the number of units sold during the period
- Allocate joint costs to co-products at the split-off point
- Identify idle capacity in the production process
Correct answer: Convert partially completed units into a meaningful whole-unit measure
EUP translates partially completed work-in-process units into an equivalent number of fully completed units for cost-per-unit calculations.
Question 3: When a product line is being considered for elimination, which of the following is LEAST relevant to the decision?
- Avoidable fixed costs directly traceable to the product line
- Contribution margin generated by the product line
- Historical allocated corporate overhead charged to the line (Correct answer)
- Sales revenue that would be lost if the line is dropped
Correct answer: Historical allocated corporate overhead charged to the line
Allocated corporate overhead is a common fixed cost that will continue regardless of whether the product line is dropped, making it irrelevant to the decision.
Question 4: The cash budget is most important for:
- Determining the gross profit percentage for financial reporting
- Planning to ensure the company has sufficient liquidity to meet obligations (Correct answer)
- Calculating the standard cost of each unit produced
- Establishing transfer prices between divisions
Correct answer: Planning to ensure the company has sufficient liquidity to meet obligations
The cash budget forecasts cash inflows and outflows to ensure the company can meet its short-term financial obligations and plan for borrowing or investing excess cash.
Question 5: In a make-or-buy decision, qualitative factors that favor making a component in-house include:
- Lower variable cost per unit from the external supplier
- Desire to maintain proprietary control over production technology (Correct answer)
- Availability of idle capacity with no alternative use
- Reduction in direct labor headcount
Correct answer: Desire to maintain proprietary control over production technology
Maintaining proprietary control and protecting trade secrets are key qualitative reasons a company might choose to manufacture a component internally rather than outsource it.
Question 6: Economic value added (EVA) is calculated as:
- Net income minus dividends paid to shareholders
- Net operating profit after tax minus (WACC × invested capital) (Correct answer)
- Gross profit minus selling, general, and administrative expenses
- Operating income plus depreciation and amortization
Correct answer: Net operating profit after tax minus (WACC × invested capital)
EVA = NOPAT minus (Weighted average cost of capital × Invested capital), measuring value created above and beyond investors' required return.
Question 7: A company produces two products sharing a common resource. To maximize profit, it should prioritize the product with the higher:
- Selling price per unit
- Gross profit margin percentage
- Contribution margin per unit of the constrained resource (Correct answer)
- Total fixed cost absorbed per unit
Correct answer: Contribution margin per unit of the constrained resource
When a resource is constrained, profit is maximized by producing the product that generates the highest contribution margin per unit of the scarce resource consumed.
CA Managerial Accounting & Budgeting 5
Which variance measures the difference between the actual overhead incurred and the overhead applied to production?