CPA CPA Cost Accounting & Budgeting 2 — Questions and Answers
Question 1: Which budgeting approach requires managers to justify every expenditure from a zero base each period, rather than using prior-year spending as a baseline?
- Incremental budgeting
- Rolling budget
- Zero-based budgeting (ZBB) (Correct answer)
- Kaizen budgeting
Correct answer: Zero-based budgeting (ZBB)
Zero-based budgeting requires every expense to be justified and approved for each new period without reference to prior budgets.
Question 2: The break-even point in units is calculated as:
- Fixed costs divided by contribution margin per unit (Correct answer)
- Total costs divided by selling price per unit
- Fixed costs divided by selling price per unit
- Variable costs divided by contribution margin ratio
Correct answer: Fixed costs divided by contribution margin per unit
Break-even units equal total fixed costs divided by the contribution margin per unit (selling price minus variable cost per unit).
Question 3: A favorable materials price variance combined with an unfavorable materials quantity variance most likely indicates:
- Purchase of higher-quality materials at a premium price
- Purchase of lower-quality materials that caused more waste (Correct answer)
- An increase in the standard material price
- Fewer units produced than budgeted
Correct answer: Purchase of lower-quality materials that caused more waste
Purchasing lower-quality materials at a cheaper price (favorable price) often results in more waste or defects, causing an unfavorable quantity variance.
Question 4: In process costing, 'equivalent units of production' are used to:
- Convert actual units started into a common measure accounting for completion percentage (Correct answer)
- Track individual job costs across departments
- Allocate joint costs to co-products
- Measure factory capacity utilization
Correct answer: Convert actual units started into a common measure accounting for completion percentage
Equivalent units convert partially completed units into a whole-unit measure so that costs can be assigned accurately to units at various stages of completion.
Question 5: Which of the following is an example of a capital budgeting decision?
- Determining the optimal inventory reorder point
- Deciding whether to purchase new manufacturing equipment (Correct answer)
- Setting the annual advertising budget
- Choosing between FIFO and LIFO inventory methods
Correct answer: Deciding whether to purchase new manufacturing equipment
Capital budgeting involves evaluating long-term investment decisions such as purchasing equipment, facilities, or other long-lived assets.
Question 6: The master budget is BEST described as:
- A budget covering only production and manufacturing costs
- A comprehensive set of budgets culminating in pro forma financial statements (Correct answer)
- The long-range strategic plan extending 5–10 years
- A budget prepared using zero-based methodology
Correct answer: A comprehensive set of budgets culminating in pro forma financial statements
The master budget is a comprehensive planning document that integrates all functional budgets and culminates in pro forma income statements, balance sheets, and cash flow statements.
CPA CPA Cost Accounting & Budgeting 2
Which budgeting approach requires managers to justify every expenditure from a zero base each period, rather than using prior-year spending as a baseline?