Certified Management Accountant Cost Management 5 — Questions and Answers
Question 1: The variable overhead spending variance measures:
- The difference between actual variable OH rate and standard rate, applied to actual hours worked (Correct answer)
- The efficiency with which inputs were used relative to standard inputs allowed
- The total under- or over-applied variable overhead for the period
- The difference between budgeted fixed OH and actual fixed OH incurred
Correct answer: The difference between actual variable OH rate and standard rate, applied to actual hours worked
Variable OH spending variance = (Actual rate − Standard rate) × Actual hours, reflecting price-level differences.
Question 2: A company's actual fixed overhead is $180,000, budgeted fixed overhead is $175,000, and applied fixed overhead is $168,000. The fixed overhead volume variance is:
- $7,000 unfavorable (Correct answer)
- $12,000 unfavorable
- $5,000 unfavorable
- $7,000 favorable
Correct answer: $7,000 unfavorable
Fixed OH volume variance = Budgeted fixed OH − Applied fixed OH = $175,000 − $168,000 = $7,000 unfavorable.
Question 3: Which of the following best describes throughput costing?
- Only direct materials are treated as product costs; all other costs are period costs (Correct answer)
- All manufacturing costs including fixed overhead are inventoried as product costs
- Variable manufacturing costs are inventoried; fixed costs are expensed as period costs
- Overhead is allocated based on throughput time rather than direct labor hours
Correct answer: Only direct materials are treated as product costs; all other costs are period costs
Throughput costing (super-variable costing) treats only direct materials as product costs; everything else is a period cost.
Question 4: A company is deciding whether to make or buy a component. The relevant costs to 'make' include all of the following EXCEPT:
- Allocated corporate overhead that will not change if production ceases (Correct answer)
- Direct materials required for component production
- Variable manufacturing overhead directly caused by production
- Opportunity cost of capacity used for the component
Correct answer: Allocated corporate overhead that will not change if production ceases
Allocated overhead that does not change with the decision is a sunk/unavoidable cost and is irrelevant.
Question 5: In lean manufacturing environments, which cost management tool is primarily used to reduce waste and improve value delivery?
- Value stream mapping to identify and eliminate non-value-added activities (Correct answer)
- Standard costing variance analysis to control departmental spending
- Activity-based costing to precisely allocate overhead to products
- Transfer pricing to optimize inter-divisional resource flows
Correct answer: Value stream mapping to identify and eliminate non-value-added activities
Value stream mapping visualizes the entire production flow to identify and eliminate non-value-added (waste) steps.
Question 6: Which statement correctly describes the relationship between operating leverage and risk?
- Higher operating leverage means greater sensitivity to sales volume changes and higher business risk (Correct answer)
- Lower operating leverage results in higher fixed costs as a proportion of total costs
- Operating leverage is highest when variable costs dominate the cost structure
- Higher operating leverage always leads to lower break-even points
Correct answer: Higher operating leverage means greater sensitivity to sales volume changes and higher business risk
High operating leverage (high fixed costs) amplifies the effect of volume changes on profit, increasing business risk.
Question 7: When a division manager is evaluated as a profit center rather than a cost center, which decision-making authority does the manager gain?
- Control over both revenues and costs, but not capital investment decisions (Correct answer)
- Control over capital investment decisions and long-term asset acquisition
- Responsibility for only the controllable costs within the division
- Authority to set transfer prices for all inter-company transactions
Correct answer: Control over both revenues and costs, but not capital investment decisions
A profit center manager controls revenues and costs but not capital investment, which is reserved for investment centers.
Certified Management Accountant Cost Management 5
The variable overhead spending variance measures: