CGA Management Accounting & Strategy 3 — Questions and Answers
Question 1: Which of the following best describes a 'sunk cost'?
- A cost that will be incurred in the future regardless of the decision made
- A cost that has already been incurred and cannot be recovered (Correct answer)
- A cost that varies proportionally with production volume
- A cost relevant to a make-or-buy decision
Correct answer: A cost that has already been incurred and cannot be recovered
Sunk costs have already been spent and are unrecoverable, so they should be excluded from future decision analysis.
Question 2: In transfer pricing, the minimum transfer price a selling division should accept is generally:
- The market price of the product
- The full absorption cost of the product
- The variable cost plus any lost contribution margin on external sales (Correct answer)
- The budgeted cost plus a markup for profit
Correct answer: The variable cost plus any lost contribution margin on external sales
The selling division's minimum acceptable price covers its variable cost plus any opportunity cost from foregone external sales.
Question 3: Which capital budgeting technique explicitly accounts for the time value of money?
- Payback period
- Accounting rate of return (ARR)
- Net present value (NPV) (Correct answer)
- Gross margin analysis
Correct answer: Net present value (NPV)
NPV discounts future cash flows at the required rate of return, directly incorporating the time value of money.
Question 4: Under a differentiation strategy, a company primarily creates competitive advantage by:
- Achieving the lowest cost structure in the industry
- Offering products or services perceived as unique and worth a premium (Correct answer)
- Focusing exclusively on a narrow customer segment
- Minimizing investment in marketing and branding
Correct answer: Offering products or services perceived as unique and worth a premium
Differentiation strategy builds competitive advantage by delivering unique value that customers are willing to pay a premium for.
Question 5: A company's operating leverage ratio is 4. If sales increase by 10%, what is the expected percentage increase in operating income?
- 4%
- 10%
- 40% (Correct answer)
- 14%
Correct answer: 40%
Percentage change in operating income = Operating leverage × Percentage change in sales = 4 × 10% = 40%.
Question 6: Which of the following is a non-financial performance measure commonly used in management accounting?
- Return on investment (ROI)
- Economic value added (EVA)
- Customer defect rate (Correct answer)
- Gross profit margin
Correct answer: Customer defect rate
Customer defect rate is a non-financial quality metric that provides operational insight beyond what financial statements reveal.
Question 7: Which budgeting approach starts from zero each period and requires all expenditures to be re-justified?
- Incremental budgeting
- Flexible budgeting
- Zero-based budgeting (ZBB) (Correct answer)
- Rolling budget
Correct answer: Zero-based budgeting (ZBB)
Zero-based budgeting requires every cost to be justified from scratch each cycle, eliminating the assumption that prior-year spending is automatically approved.
CGA Management Accounting & Strategy 3
Which of the following best describes a 'sunk cost'?