CPA CFE Management Accounting 1 — Questions and Answers
Question 1: A company uses activity-based costing (ABC). Which of the following best describes a cost driver in an ABC system?
- The total overhead cost allocated to a product
- A factor that causes a change in the cost of an activity (Correct answer)
- The profit margin on each unit sold
- The fixed cost per unit of production
Correct answer: A factor that causes a change in the cost of an activity
In ABC, a cost driver is a factor that causes or drives the cost of an activity. Examples include number of machine setups, purchase orders, or inspection hours. The cost driver is the basis used to assign activity costs to cost objects.
Question 2: What is the primary purpose of a flexible budget?
- To set a fixed spending limit for each department
- To adjust budgeted amounts for the actual level of activity achieved (Correct answer)
- To forecast next year's capital expenditures
- To eliminate all budget variances
Correct answer: To adjust budgeted amounts for the actual level of activity achieved
A flexible budget adjusts budgeted revenues and costs for the actual level of output or activity achieved. This allows meaningful comparison of actual results against what should have been expected at that volume level, isolating efficiency and spending variances.
Question 3: In a standard costing system, a favorable labor efficiency variance indicates that:
- Workers were paid less than the standard wage rate
- Fewer labor hours were used than standard for the actual output (Correct answer)
- More units were produced than budgeted
- Material costs were lower than expected
Correct answer: Fewer labor hours were used than standard for the actual output
A favorable labor efficiency variance means that actual hours worked were less than the standard hours allowed for the actual output achieved. It measures the productivity of labor, not the wage rate paid.
Question 4: Which of the following is a characteristic of a relevant cost for decision-making purposes?
- It is a sunk cost that has already been incurred
- It is a future cost that differs between decision alternatives (Correct answer)
- It is a fixed cost that remains unchanged regardless of the decision
- It is a historical cost recorded in the accounting records
Correct answer: It is a future cost that differs between decision alternatives
Relevant costs for decision-making are future costs that differ between alternatives. Sunk costs (already incurred) and costs that do not change between alternatives are irrelevant and should be excluded from the analysis.
Question 5: A company is operating below capacity and receives a special order at a price below normal selling price. The order should be accepted if:
- The special order price exceeds total cost per unit including allocated fixed overhead
- The special order price exceeds the variable cost per unit and no other qualitative factors override (Correct answer)
- The special order price equals the normal selling price
- The company has no excess capacity
Correct answer: The special order price exceeds the variable cost per unit and no other qualitative factors override
When a company has excess capacity, a special order should generally be accepted if the price exceeds the incremental (variable) cost per unit, as this contributes to covering fixed costs and generating additional profit, assuming no negative qualitative impacts.
Question 6: What does the contribution margin ratio represent?
- Net income as a percentage of sales
- The percentage of each sales dollar available to cover fixed costs and generate profit (Correct answer)
- Total variable costs as a percentage of total costs
- Gross margin divided by operating expenses
Correct answer: The percentage of each sales dollar available to cover fixed costs and generate profit
The contribution margin ratio is contribution margin divided by sales revenue. It represents the percentage of each sales dollar that remains after covering variable costs and is available to cover fixed costs and contribute to profit.
CPA CFE Management Accounting 1
A company uses activity-based costing (ABC).
Which of the following best describes a cost driver in an ABC system?