CFM Cost Accounting & Management 2 — Questions and Answers
Question 1: A favorable variance in standard costing means:
- Actual costs exceeded standard costs
- Actual costs were less than standard costs, resulting in better-than-expected performance (Correct answer)
- The budget was not achieved
- The company spent more than planned on fixed overhead
Correct answer: Actual costs were less than standard costs, resulting in better-than-expected performance
A favorable variance occurs when actual costs are lower than standard costs (or actual revenues exceed budgeted revenues), indicating better-than-planned financial performance.
Question 2: What is the purpose of a flexible budget?
- To allow managers to spend any amount needed
- To adjust budgeted amounts based on actual activity levels, enabling meaningful performance comparisons (Correct answer)
- To replace the master budget after the period ends
- To eliminate fixed cost allocations from the budget
Correct answer: To adjust budgeted amounts based on actual activity levels, enabling meaningful performance comparisons
A flexible budget adjusts cost expectations to the actual volume achieved, allowing management to isolate spending variances from volume variances.
Question 3: What is the direct material price variance?
- The difference between actual and budgeted production quantity
- The difference between actual price paid and standard price, multiplied by actual quantity purchased (Correct answer)
- The difference between standard and actual material usage
- The total material cost overrun for the period
Correct answer: The difference between actual price paid and standard price, multiplied by actual quantity purchased
The direct material price variance = (Actual Price − Standard Price) × Actual Quantity purchased, measuring the cost impact of paying a different price than planned.
Question 4: What does return on investment (ROI) measure in divisional performance?
- Revenue growth rate of a business unit
- Net operating income divided by average invested assets, measuring how efficiently assets generate profit (Correct answer)
- Total assets divided by total revenue
- The payback period for a division's capital budget
Correct answer: Net operating income divided by average invested assets, measuring how efficiently assets generate profit
ROI measures divisional efficiency by comparing net operating income to the average assets employed, indicating how effectively the division uses its asset base.
Question 5: What is economic value added (EVA)?
- Revenue minus variable costs
- Net operating profit after tax minus a capital charge (WACC × invested capital) (Correct answer)
- EBITDA minus capital expenditures
- Gross profit minus selling expenses
Correct answer: Net operating profit after tax minus a capital charge (WACC × invested capital)
EVA measures economic profit by subtracting the cost of capital (WACC × invested capital) from NOPAT, showing whether a company earns more than its cost of capital.
Question 6: What is a transfer price?
- The price charged by a company to external customers
- The internal price charged when one division of a company sells goods or services to another division (Correct answer)
- The acquisition price paid in a corporate merger
- The market price of goods sourced from foreign suppliers
Correct answer: The internal price charged when one division of a company sells goods or services to another division
Transfer prices govern internal transactions between divisions, affecting each division's reported profitability and may be set at market price, cost, or a negotiated amount.
CFM Cost Accounting & Management 2
A favorable variance in standard costing means: