CIA Management Accounting 3 — Questions and Answers
Question 1: Which variance measures the difference between the actual quantity of direct materials purchased and the standard quantity, multiplied by the standard price?
- Material price variance
- Material quantity variance (Correct answer)
- Material mix variance
- Material yield variance
Correct answer: Material quantity variance
The material quantity (or usage) variance = (Actual Quantity Used − Standard Quantity Allowed) × Standard Price.
Question 2: A company with a target ROI of 15% is evaluating a $400,000 investment. What minimum annual operating income must the investment generate?
- $40,000
- $60,000 (Correct answer)
- $80,000
- $100,000
Correct answer: $60,000
Minimum operating income = Target ROI × Investment = 15% × $400,000 = $60,000.
Question 3: In linear programming for production mix decisions, what does a shadow price (dual value) represent?
- The market price of an additional unit of product
- The increase in objective function value per additional unit of a binding constraint (Correct answer)
- The marginal cost of producing one more unit
- The maximum price to pay for outsourcing a resource
Correct answer: The increase in objective function value per additional unit of a binding constraint
A shadow price shows how much the objective function (profit) would improve if one additional unit of a constrained resource became available.
Question 4: Which inventory management model minimizes the total of ordering costs and carrying costs by solving for the optimal order quantity?
- ABC analysis
- Economic Order Quantity (EOQ) model (Correct answer)
- Material Requirements Planning (MRP)
- Just-in-Time (JIT) system
Correct answer: Economic Order Quantity (EOQ) model
The EOQ model calculates the order quantity where total ordering cost equals total carrying cost, minimizing total inventory costs.
Question 5: A product line has a contribution margin of $50,000 but causes avoidable fixed costs of $40,000 and unavoidable fixed costs of $30,000. What is the financial impact of dropping this product?
- Operating income increases by $20,000
- Operating income decreases by $10,000 (Correct answer)
- Operating income increases by $10,000
- Operating income is unchanged
Correct answer: Operating income decreases by $10,000
Dropping the line eliminates the $50,000 CM and $40,000 avoidable costs, for a net loss of $10,000; unavoidable costs remain regardless.
Question 6: Which of the following best describes a static budget?
- A budget that adjusts revenue and cost targets based on actual activity levels
- A budget prepared for a single anticipated level of activity (Correct answer)
- A budget updated monthly to reflect actual performance
- A budget that separates fixed and variable cost components
Correct answer: A budget prepared for a single anticipated level of activity
A static budget is set at one planned activity level and does not change when actual activity differs from the plan.
Question 7: Process costing uses equivalent units of production primarily to:
- Allocate overhead costs to specific jobs
- Calculate cost per unit when partially complete units exist at period end (Correct answer)
- Determine the break-even point for each process
- Identify bottleneck resources in the production flow
Correct answer: Calculate cost per unit when partially complete units exist at period end
Equivalent units convert partially completed units into a whole-unit basis so that unit costs can be accurately calculated.
CIA Management Accounting 3
Which variance measures the difference between the actual quantity of direct materials purchased and the standard quantity, multiplied by the standard price?