CPA CFE Management Accounting 6 — Questions and Answers
Question 1: What is the key assumption underlying cost-volume-profit (CVP) analysis?
- All costs are variable
- Costs can be accurately separated into fixed and variable components, and the relationship is linear within the relevant range (Correct answer)
- Selling price increases proportionally with volume
- Fixed costs change with each unit produced
Correct answer: Costs can be accurately separated into fixed and variable components, and the relationship is linear within the relevant range
CVP analysis assumes costs can be classified as either fixed or variable, and that the cost-volume relationship is linear within the relevant range. Other assumptions include constant selling price, constant sales mix (for multi-product), and that the only factor affecting costs is volume.
Question 2: A company uses the reciprocal method for allocating service department costs. What makes this method different from the step-down method?
- It ignores inter-service department services entirely
- It fully recognizes the mutual services provided between all service departments simultaneously (Correct answer)
- It allocates costs in a predetermined sequential order
- It only allocates variable costs
Correct answer: It fully recognizes the mutual services provided between all service departments simultaneously
The reciprocal method uses simultaneous equations (or matrix algebra) to fully recognize the mutual services that service departments provide to each other. This produces the most accurate allocation but is more complex to implement than the direct or step-down methods.
Question 3: In a just-in-time (JIT) manufacturing environment, which of the following is a primary goal?
- Maintaining large safety stock to prevent stockouts
- Eliminating waste and reducing inventory to near-zero levels (Correct answer)
- Maximizing batch sizes to achieve economies of scale
- Centralizing all purchasing decisions at the corporate level
Correct answer: Eliminating waste and reducing inventory to near-zero levels
JIT manufacturing aims to produce goods only as needed, reducing inventory levels to near zero and eliminating waste in all forms (overproduction, waiting, transportation, over-processing, inventory, motion, and defects). It relies on reliable suppliers and efficient processes.
Question 4: What is the purpose of a master budget?
- To prepare only the cash budget for the upcoming year
- To provide a comprehensive financial plan integrating all operating and financial budgets for the planning period (Correct answer)
- To calculate the break-even point for each product
- To allocate overhead costs to individual products
Correct answer: To provide a comprehensive financial plan integrating all operating and financial budgets for the planning period
A master budget is a comprehensive financial plan that integrates all individual budgets (sales, production, materials, labor, overhead, selling and administrative, capital, and cash budgets) into pro forma financial statements for the planning period.
Question 5: Which of the following is an example of a leading indicator in a balanced scorecard?
- Revenue growth rate
- Return on equity
- Employee training hours (Correct answer)
- Net income
Correct answer: Employee training hours
Employee training hours is a leading indicator because it measures an investment that is expected to drive future performance improvements. Revenue, ROE, and net income are lagging indicators that measure results of past actions. Leading indicators predict future outcomes.
Question 6: A company is deciding whether to process a joint product further beyond the split-off point. Which information is relevant to this decision?
- Joint costs incurred before the split-off point
- Incremental revenue and incremental costs of further processing beyond the split-off point (Correct answer)
- The total cost of all joint products
- The method used to allocate joint costs
Correct answer: Incremental revenue and incremental costs of further processing beyond the split-off point
Joint costs incurred before the split-off point are sunk costs and irrelevant to the sell-or-process-further decision. Only the incremental revenue from further processing compared to the incremental costs of further processing should be considered.
CPA CFE Management Accounting 6
What is the key assumption underlying cost-volume-profit (CVP) analysis?