CIMA Management Accounting 3 — Questions and Answers
Question 1: Which budgeting approach starts from a zero base each period and requires all expenditures to be justified?
- Rolling budget
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Flexible budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) requires managers to justify every expense from scratch each period rather than adjusting prior-year figures.
Question 2: A flexible budget is most useful for:
- Long-term strategic planning
- Comparing actual costs to expected costs at actual activity level (Correct answer)
- Setting fixed spending limits for departments
- Calculating the breakeven point
Correct answer: Comparing actual costs to expected costs at actual activity level
A flexible budget adjusts budgeted costs to the actual level of activity achieved, providing a like-for-like comparison with actual results.
Question 3: In a job costing system, overhead is typically applied using:
- Actual overhead costs as they are incurred
- A predetermined overhead absorption rate (Correct answer)
- The marginal cost of the job only
- Direct material cost as the sole basis
Correct answer: A predetermined overhead absorption rate
A predetermined overhead absorption rate (OAR) is calculated before the period begins and applied to jobs based on a chosen activity base.
Question 4: When a machine hour rate is used to absorb production overhead, the rate is calculated as:
- Budgeted overhead ÷ Actual machine hours
- Actual overhead ÷ Budgeted machine hours
- Budgeted overhead ÷ Budgeted machine hours (Correct answer)
- Actual overhead ÷ Actual machine hours
Correct answer: Budgeted overhead ÷ Budgeted machine hours
The predetermined overhead absorption rate = Budgeted overhead ÷ Budgeted machine hours, both established at the start of the period.
Question 5: Which variance measures the difference between the actual hours worked and the standard hours allowed for actual output, valued at the standard labor rate?
- Labor rate variance
- Labor efficiency variance (Correct answer)
- Labor mix variance
- Labor yield variance
Correct answer: Labor efficiency variance
The labor efficiency variance = (Standard hours for actual output − Actual hours worked) × Standard rate.
Question 6: The net present value (NPV) method of investment appraisal discounts cash flows at:
- The accounting rate of return
- The internal rate of return
- The company's cost of capital (Correct answer)
- The risk-free rate of return
Correct answer: The company's cost of capital
NPV discounts future cash flows at the company's cost of capital (required rate of return) to determine whether the investment creates value.
Question 7: Under throughput accounting, 'totally variable costs' typically refers to:
- Direct labor and variable overhead only
- Direct materials only (Correct answer)
- All variable manufacturing costs
- Variable selling and distribution costs
Correct answer: Direct materials only
Throughput accounting treats direct materials as the only truly variable cost; labor is considered fixed in the short term.
CIMA Management Accounting 3
Which budgeting approach starts from a zero base each period and requires all expenditures to be justified?