CPA CFE Management Accounting 3

Question 1

A company is considering outsourcing a component currently manufactured in-house. Which costs are relevant to this make-or-buy decision?

Accepted Answer

Only the avoidable costs of manufacturing compared to the purchase price

Answer

In a make-or-buy decision, only avoidable costs (those that would be eliminated by outsourcing) are relevant. Unavoidable allocated overhead and sunk costs of existing equipment are irrelevant because they will continue regardless of the decision.

Question 2

What does the economic order quantity (EOQ) model minimize?

Accepted Answer

Total of ordering costs and carrying costs

Answer

The EOQ model determines the order quantity that minimizes the total of ordering costs (costs per order × number of orders) and carrying costs (cost per unit per year × average inventory). As order size increases, ordering costs decrease but carrying costs increase.

Question 3

In cost-volume-profit (CVP) analysis, what is the margin of safety?

Accepted Answer

The excess of actual or budgeted sales over the break-even point

Answer

The margin of safety represents how much sales can decline from the current or budgeted level before the company reaches its break-even point. It can be expressed in dollars, units, or as a percentage of current sales.

Question 4

Under the theory of constraints (TOC), what is the recommended approach to maximize throughput?

Accepted Answer

Identify and exploit the bottleneck resource, subordinating all other resources to the constraint

Answer

TOC focuses on identifying the system's constraint (bottleneck) and managing it effectively. The five-step process is: identify, exploit, subordinate, elevate, and repeat. Non-bottleneck resources should be subordinated to support the bottleneck's pace.

Question 5

A responsibility center manager is evaluated on return on investment (ROI). What is a potential problem with using ROI as the sole performance measure?

Accepted Answer

Managers may reject projects that earn above the company's cost of capital but below the division's current ROI

Answer

A key weakness of ROI is that division managers may reject profitable projects (ones earning above the cost of capital) if those projects would lower the division's current ROI. This suboptimal behavior can be mitigated by using residual income instead.

CPA CFE Practice Test

CPA CFE Practice Test

CPA CFE Management Accounting 3