Certified Management Accountant Cost Management 3 — Questions and Answers
Question 1: Joint product costs incurred before the split-off point are best allocated using which of the following methods for decision-making purposes?
- They are irrelevant for sell-or-process-further decisions (Correct answer)
- Net realizable value method for all management decisions
- Physical measure method as it is most objective
- Sales value at split-off as required by GAAP
Correct answer: They are irrelevant for sell-or-process-further decisions
Joint costs are sunk at the split-off point and irrelevant to sell-or-process-further decisions.
Question 2: A firm applies overhead at $8 per direct labor hour. Actual overhead was $96,000 and actual direct labor hours were 11,500. Applied overhead was $92,000. The overhead variance is:
- $4,000 underapplied (Correct answer)
- $4,000 overapplied
- $8,000 underapplied
- $8,000 overapplied
Correct answer: $4,000 underapplied
Actual OH $96,000 − Applied OH $92,000 = $4,000 underapplied (actual > applied).
Question 3: Under kaizen costing, cost reduction targets are applied to:
- Existing products during the manufacturing phase (Correct answer)
- New products during the design and development phase
- Capital budgeting decisions for new equipment
- Overhead allocation rates set at the start of the year
Correct answer: Existing products during the manufacturing phase
Kaizen costing focuses on continuous incremental cost reductions during ongoing production of existing products.
Question 4: Which cost behavior pattern describes a cost that remains constant per unit but varies in total as output changes?
- Variable cost (Correct answer)
- Fixed cost
- Step-fixed cost
- Mixed cost
Correct answer: Variable cost
Variable costs are constant per unit but increase in total proportionally with production volume.
Question 5: A company's margin of safety is $150,000 and its break-even sales are $600,000. What is the margin of safety ratio?
- 20% (Correct answer)
- 25%
- 15%
- 33%
Correct answer: 20%
Margin of safety ratio = $150,000 ÷ ($600,000 + $150,000) = $150,000 ÷ $750,000 = 20%.
Question 6: Life-cycle costing differs from traditional costing primarily because it:
- Tracks costs from product inception through disposal, including R&D and post-sale costs (Correct answer)
- Allocates costs only to the production phase of the product life cycle
- Uses target pricing exclusively to determine per-unit cost allowances
- Focuses on reducing variable costs in the growth stage of the product
Correct answer: Tracks costs from product inception through disposal, including R&D and post-sale costs
Life-cycle costing captures all costs across a product's entire life, from design to end-of-life.
Question 7: When evaluating a special order that would use idle capacity, which costs are most relevant?
- Incremental variable costs and any incremental fixed costs for the order (Correct answer)
- Full absorption unit cost including allocated fixed overhead
- Sunk costs associated with existing machinery
- Average historical cost per unit across all prior production runs
Correct answer: Incremental variable costs and any incremental fixed costs for the order
Only incremental costs that change as a result of accepting the special order are relevant to the decision.
Certified Management Accountant Cost Management 3
Joint product costs incurred before the split-off point are best allocated using which of the following methods for decision-making purposes?