Certified Management Accountant Certified Management Accountant 3 — Questions and Answers
Question 1: Which capital budgeting technique accounts for the time value of money and expresses results as a percentage return?
- Payback period
- Accounting rate of return
- Internal rate of return (Correct answer)
- Net present value
Correct answer: Internal rate of return
IRR is the discount rate that makes NPV equal to zero, expressed as a percentage, and explicitly incorporates the time value of money.
Question 2: Under responsibility accounting, a cost center manager is evaluated primarily on:
- Return on investment
- Residual income
- Controllable costs incurred (Correct answer)
- Revenue generated
Correct answer: Controllable costs incurred
Cost center managers control only costs, so they are held accountable for keeping costs within budgeted or standard amounts.
Question 3: A firm's Days Sales Outstanding (DSO) increased from 30 to 45 days. This most likely indicates:
- Faster inventory turnover
- Customers are taking longer to pay (Correct answer)
- The company collected receivables more efficiently
- Credit sales decreased
Correct answer: Customers are taking longer to pay
Rising DSO means receivables are outstanding longer, signaling that customers are slower to pay or credit terms have loosened.
Question 4: Which budgeting approach requires managers to justify every dollar of expenditure from zero each period?
- Incremental budgeting
- Rolling budget
- Zero-based budgeting (Correct answer)
- Flexible budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from a base of zero and requires justification for all planned expenses, eliminating automatic carry-forward of prior budgets.
Question 5: Residual income is best defined as:
- Net income after taxes
- Operating income minus a required return on invested capital (Correct answer)
- Sales minus all variable costs
- EBITDA divided by total assets
Correct answer: Operating income minus a required return on invested capital
Residual income = Operating income − (Required rate of return × Invested capital), measuring value created above the minimum required return.
Question 6: In a make-or-buy decision, which cost is most likely irrelevant?
- Direct materials saved if the part is purchased
- Avoidable direct labor if outsourced
- Allocated fixed overhead that will continue regardless (Correct answer)
- Incremental machine costs to manufacture internally
Correct answer: Allocated fixed overhead that will continue regardless
Allocated fixed overhead that will not be avoided whether the company makes or buys is irrelevant because it does not differ between alternatives.
Question 7: The Balanced Scorecard's 'Learning and Growth' perspective primarily focuses on:
- Customer satisfaction scores and retention rates
- Cash flow and profitability metrics
- Employee capabilities, information systems, and organizational culture (Correct answer)
- Internal process cycle times and defect rates
Correct answer: Employee capabilities, information systems, and organizational culture
The Learning and Growth perspective addresses the foundation of strategy: employee skills, enabling technology, and the culture needed to execute improvements.
Certified Management Accountant Certified Management Accountant 3
Which capital budgeting technique accounts for the time value of money and expresses results as a percentage return?